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pryderi
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"
MSNBC.com
Oil industry awash in record levels of cash
But a smaller portion of profits is going to find new oil discoveries

By John W. Schoen
Senior Producer
MSNBC
Updated: 9:12 a.m. ET July 21, 2005


When major oil companies report their quarterly profits next week, they're once again expected to post record numbers. With crude trading around $60 a barrel, the oil industry is enjoying one of the biggest windfalls in its history. But as the industry looks for places to put that cash, it's finding it harder and harder to put funds to work finding new deposits of oil and natural gas.

By just about any measure, the past three years have produced one of the biggest cash gushers in the oil industry’s history. Since January of 2002, the price of crude has tripled, leaving oil producers awash in profits. During that period, the top 10 major public oil companies have sold some $1.5 trillion worth of crude, pocketing profits of more than $125 billion.

“This is the mother of all booms,” said Oppenheimer & Co. oil analyst Fadel Gheit. “They have so much profit, it’s almost an embarrassment of riches. They don’t know what to do with it.

The reason for the boom is simple. Much of the investment in finding that oil -- and developing the wells and pipelines needed to produce it -- has already been made. So an oil field that was profitable with oil selling for $20 a barrel is much more profitable with oil trading around $60.

That’s left the industry with a happy problem -- what to do with enough cash to fill a supertanker. Many publicly traded oil companies have been busy buying back their own stock, which helps drive up the price of the rest of the shares left on the open market. Since January 2002, stocks of major oil companies have gained 88 percent; during that period the Standard and Poor’s 500 index has gained less than half as much.

Oil producers have also given investors a raise by gradually increasing the dividends paid out to shareholders. And they’ve paid down their debts to record low levels. ExxonMobil, for example, is virtually debt-free -– with a cash pile of more than $25 billion.

All of this industry good fortune has not escaped the notice of consumers, whose anger at higher gasoline prices has been rising in lock step with the price of crude. The energy bill recently enacted by both houses of Congress provides little relief for U.S. energy consumers. But a continued rise in prices could bring increased political pressure to find ways to lower the cost of energy, according to Tom Kloka at the Oil Price Information Service.

"This is something that Americans regard as their birth right," he said. "If gasoline prices are still north of $2.25 (a gallon) when we reach the midterm election, there's going to be an awful lot of outrage."

Even as their overall profits have soared, major oil companies are earning a relatively modest 8.7 percent profit margin -- the portion of the sale of each barrel that hits the bottom line. Major banks and drug makers, for example, enjoy profits margins that are twice as big.


Keeping the oil flowing
Not all of the proceeds from the surge in oil prices has gone straight to the industry’s bottom line. As oil prices rise, so do oil companies' costs. For starters, they pay royalties to governments that lease the rights to drill -– a payment that ranges as high as 18 percent in the U.S. Domestic oil producers also pay taxes of about 40 percent, according to Gheit. So as the price of oil rises, so does the bill for royalties and taxes.

Oil producers also have to spend money to keep oil flowing from aging fields, by drilling more holes in the ground to squeeze fewer and fewer barrels out of the same fields. The cost of these oilfield services, everything from drilling rigs to pipelines, has risen by as much as 50 percent over the past five years, according to Gheit. So the cost of maintaining existing levels of production is now consuming more than half of the industry’s annual capital outlays, most of which used to go to discovering new oil fields.

That means a smaller portion of oil industry profits are being put to work to find more oil. One big reason is that finding promising areas to develop new reserves has become increasingly difficult. In part, that's because the bulk of the world’s oil reserves sit in the ground controlled by authoritarian regimes. The higher the price of oil goes, the easier it is for those regimes to maintain power and the less they need to turn to outside oil companies for investment, said A.G. Edwards futures analyst Bill O’Grady.

“Foreign investment brings in foreigners and their ideas,” he said. “OPEC countries and Russia have worked vigorously not let that happen.”

Despite pledges to increase output, most OPEC countries are pumping at full capacity already. And if oil prices are headed higher, those countries with the ability to boost output now have little incentive to do so if they wait and get more money for the same oil in the future.

As a result, Western oil producers have been forced to look for new reserves by shopping for other oil companies that have already found and developed deposits of oil and natural gas. As oil prices have risen, so has the value of another oil company's reserves. The current bidding war between Chevron and China’s state-owned CNOOC is just the latest example.

But none of that investment in other oil companies is increasing the world’s supply of oil. And without new discoveries, the price of oil will likely continue to rise.

"Basically, it's musical chairs, and every time you have fewer and fewer companies,” said Gheit. “The people who are slicing pie among themselves -- the number is shrinking, but the pie itself is not growing. The pie is shrinking."

© 2005 MSNBC Interactive
© 2005 MSNBC.com

http://www.msnbc.msn.com/id/8646744/
"


When are we going to be getting some of that Iraqi oil?

7/22/2005 8:59:51 AM

30thAnnZ
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i fucking HATE the oil industry and OPEC

[Edited on July 22, 2005 at 9:22 AM. Reason : *]

7/22/2005 9:22:00 AM

marko
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i'm awash in record levels of johnny cash

7/22/2005 9:22:44 AM

Shaggy
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^ haha!

7/22/2005 9:25:39 AM

Grapehead
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when they suck an oil field dry, does the ground crumble into a giant sinkhole?

7/22/2005 9:26:43 AM

30thAnnZ
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no, they fill it with jelly beans

7/22/2005 9:30:30 AM

marko
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aha

that would be great

to "strike crude jellybean"

7/22/2005 9:46:26 AM

Shaggy
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NO WAR FOR JELLY BEANS!

7/22/2005 9:48:49 AM

LoneSnark
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JELLY BEAN FUTURES HIT RECORD HIGH! CONSUMERS WORRIED!

"The US Association of Dentistal hygienists has called on the president to tap the STRATEGIC JELLY PRESERVES to restore sanity to the market."

[Edited on July 22, 2005 at 10:10 AM. Reason : I have been corrected! ]

7/22/2005 10:05:22 AM

Shaggy
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more like strategic jelly PRESERVES!!


AM I RITE?

7/22/2005 10:06:17 AM

30thAnnZ
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haha

7/22/2005 10:20:44 AM

Mr. Joshua
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So why don't you stop bitching and buy some oil company stock?

7/22/2005 10:39:27 AM

Fuel
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This is good news for investors.

Congress should lift some of the restrictions on exploratory drilling so that these oil companies can invest some of those profits into more domestic oil production.

7/22/2005 5:39:44 PM

Mr. Joshua
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i wish that i had kept my conoco and valero energy stock

7/22/2005 5:44:10 PM

LoneSnark
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^ Don't we all. Well, it's too late now. The high price of oil has already been factored into the market.

7/22/2005 5:49:57 PM

Fuel
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If you agree with some projections that predict a spike to $100 a barrel by the winter, you should buy back in and cash out in 6 months.

I doubt that we will see $100 a barrel anytime soon, though.

7/22/2005 5:59:14 PM

aaronburro
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listen to Fuel. he's knows his oil!

but here's something I don't understand. If the oil companies in the US purchasing the crude are having to pay a higher price for the oil, then how are they raking in the dough like this? i understand that you try and maintain a certain profit margin, However, even when the price increases and you maintain that same margin, you shouldn't see a huge spike in profits like this article claims has happened.

I understand why the price has increased for american consumers, but not why we are sitting here taking it in the ass while the oil companies are getting crazy rich. Seems to me someone would have stepped up by now *cough*democrats*cough* and said "hey, wtf, mate?" and done something about this.

Another rationale I've heard for the higher gas prices is "ITS NOT A SHORTAGE OF CRUDE SUPPLY!!! OUR REFINERIES CAN'T KEEP PACE WITH US DEMAND!!!" but this, too, is illogical. assuming that we have the same relative number of refineries today that we had three or four years ago and they are all operating at the same capacity as they were three or four years ago, then the refineries should be having little trouble keeping up with the marginal increase in demand for gasoline in the past three or four years. Even if we did eclipse the refineries' processing capacity in those years, the small nature of the deficit between supply and demand should not have caused such a large increase in gas prices.

Somebody's getting fucked in the ass here, and I'm pretty fucking certain its the American consumer...

7/22/2005 6:14:02 PM

nerdBoy
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I have an idea for what they should do with the extra money: DEVELOP NEW ENERGY TECHNOLOGIES

duh

7/22/2005 6:20:02 PM

Fuel
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Demand for oil has gone up, while supply of really cheap crude, particularly from Saudi Arabia, has gone down slightly. The market shift has driven up prices, and there is really not much that US oil companies can do to change it.


^there are a lot of companies dumping a lot of money into alternative energy research, but until these energy sources become economically feasible, you are not gonna see any major paradigm shift in the energy industry.

[Edited on July 22, 2005 at 6:28 PM. Reason : !]

7/22/2005 6:24:56 PM

Woodfoot
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^yes, we get that
their supply is down
SO HOW COME THEY STILL PROFIT?

7/22/2005 6:32:30 PM

Fuel
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because they aren't paying for the oil. They are pumping it. The cost of extraction is not rising nearly as fast as the price, which increases their profit margins.

[Edited on July 22, 2005 at 6:47 PM. Reason : they don't set the prices, but they profit when the price goes up]

7/22/2005 6:44:28 PM

aaronburro
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i've already asked why, though. Again, even trying to maintain the same profit margin after a price increase does not yield such a substantial increase in profits, unless my math is wrong...

7/22/2005 6:59:56 PM

LoneSnark
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aaronburro, your math is wrong. You recognize that when the price of oil goes up because of a demand/supply crunch, then all the producers of oil receive windfall profits far in excess of their expected margin. You recognize that Saudi Arabia, the world's largest oil producer, is reaping such profits. What you fail to take into account is that the United States is the World's second largest oil producer (as of 2001) and thus we too are reaping similar profits.

http://www.capitals.com/rankorder/2173rank.html

[Edited on July 22, 2005 at 7:43 PM. Reason : .]

7/22/2005 7:39:02 PM

aaronburro
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this is true, but should it not be the case that our oil should be "cheaper" than foreign oil? I am assuming that what you mean by saying that the US is a "producer of oil" that we pump oil from within our borders (no A, socks``). Based on this assumption, our oil should not have the same price increasing problems associated with it that are currently associated with the increase in price of middle east oil. Our oil and oil transporting methods are not under attack from sabateour, nor are all of our oil workers also under threat of attack.
Thus, it would seem logical that our oil should remain at the same price, while the middle east's oil would increase in price. The only reason it wouldn't stay the same is if the oil companies were engaged in price fixing/matching with OPEC.

7/22/2005 7:56:09 PM

Fuel
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The price of oil is 'fixed' by the market, since it is a scarce resource and it is publicly traded by exchanges like NYMEX and IPE. This is supply and demand at its most basic, albeit with a multitude of factors involved.

If OPEC restricts supply, scarcity forces the price up. Likewise, if an emerging market such as China increases its oil consumption at a rapid rate, increased demand forces price increases.

It just so happens that both of these are occuring at the same time. For those of you looking for a scapegoat, blame China and OPEC.

7/22/2005 10:43:33 PM

aaronburro
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or we could blame the price fixing...

7/23/2005 12:10:49 AM

LoneSnark
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"The only reason it wouldn't stay the same is if the oil companies were engaged in price fixing/matching with OPEC."

It is not price fixing, it is price matching. So let us truely understand the situation by putting yourself in someone elses shoes.

Let us pretend that you own a small drilling operation in Colorado. You only produce a few thousand barrells of oil a day, but after it is out of the ground you own it. Once out of the ground, you take the oil (figuratively) down to the New York Mercantile exchange to sell it. At time same time, companies are bringing oil from Saudi Arabia. Once the oil is there, it is all treated the same. Often times the seller doesn't even know where the oil came from, much less the buyer, because it all goes into the same pipeline network. So how would it be even possible for native oil to sell at a different price than imported oil?

Also, American's are not the only people which shop in New York. If, in fact, American crude was somehow selling at a lower price than the world price, then China would pull up a tanker and fill up, leaving us with only imported crude.

Let us use your imaginary universe and pretend that you, once again an American oil producer, have two options, take the oil to an American refiner and sell it for $30 a barrell or export it to china for $60 a barrell. On what grounds are you going to do the former instead of the latter? Is it your civic duty? Then what about all those companies in Canada which export oil to the US, are they being immoral? Of course not, it is your oil and obviously China needs it more than America does.

So, what happens in the oil in America gets reallocated to China with its higher bid price. As such, there is no longer enough oil in America so American refineries are forced to bid higher to re-capture their oil supply. Pretty soon, the American price is the world price.

7/23/2005 9:19:11 AM

nerdBoy
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THIS IS NOT PRICE FIXING!!!

It is the market relatively appropriately responding to risks in the oil market. The price per barrel is at this point pretty much being set by the free market, since OPEC and everyone else is pumping as much oil as they can. The oil companies SHOULD be making a ton of money on the oil they are selling right now because there is such a risk that the oil supply will be disrupted and they won't be able to sell any or much of it for an extended period of time (that is why the price is so high, remember)

you fucking morons

7/23/2005 10:12:43 AM

pryderi
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"THIS IS NOT PRICE FIXING!!!"


You're right. It's price gouging.

7/24/2005 8:14:39 AM

nerdBoy
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no its not.

if there's a danger of no more oranges this season, watch the price of them skyrocket.

7/24/2005 8:17:33 AM

GGMon
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Making a profit is EVIL.

7/24/2005 10:09:15 AM

Wlfpk4Life
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You mean people go into business to make a profit? Dang that evil capitalist system.

7/24/2005 10:46:35 AM

GGMon
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No blood for oil.

7/24/2005 11:05:40 AM

AVON
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^ People get hurt drilling for oil all the time... blood happens.

7/24/2005 5:27:36 PM

GGMon
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NO BLOOD FOR OIL!

7/24/2005 8:25:41 PM

LoneSnark
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"You're right. It's price gouging."

Yep. The capitalist system is fundamentally based upon price gouging. That 8% profit margin you didn't seem to be-grudge them came from the same price gouging. Just as it is price gouging when a worker receives a salary in excess of what is just required to sustain them. If the employer protests, the worker just says "see if you can find someone else to do this job for less... I doubt it."

Just as it is with oil companies, "see if you find someone else to give you oil for less... I doubt it."

7/24/2005 11:38:35 PM

pryderi
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TOO BAD THEY NEED BILLIONS OF GOV'T SUBSIDIES ON TOP OF RECORD PROFITS!!!!!!!!!!!!!!!

Quote :
"
Exxon to Post Surge in Profit on Record Oil Prices, New Fields in Africa

U.S. Energy Industry's Lobbying Pays Off With $11.6 Bln in Aid

July 27 (Bloomberg) -- Oil and utility companies such as Exxon Mobil Corp. and Southern Co. spent $367 million over the last two years pushing the U.S. Congress to pass energy legislation. For many, the money was a good investment: lawmakers are poised to pass a measure providing about $11.6 billion in taxpayer subsidies.

House and Senate negotiators approved compromise legislation yesterday and President George W. Bush, who has been seeking an energy bill since the start of his first term, will have it on his desk by July 29, Senator Charles Grassley said. Supporters said the measure, the Energy Policy Act, would help secure energy supplies and ultimately lead to lower fuel prices.

The legislation includes subsidies for oil and gas exploration that benefit companies such as Irving, Texas-based Exxon Mobil, which contributed $935,266 to federal candidates for the 2004 elections, more than any other oil company. Southern, which contributed $1.1 million to candidates in 2004, more than any other utility, won repeal of a 1935 law prohibiting utility holding companies from using revenue from customers to subsidize non-regulated businesses. "


http://www.bloomberg.com/apps/news?pid=10000103&sid=agbeVimf04Ec&refer=us

7/27/2005 7:51:41 AM

LoneSnark
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"TOO BAD THEY NEED BILLIONS OF GOV'T SUBSIDIES ON TOP OF RECORD PROFITS!!!!!!!!!!!!!!!
"

But whose fault is that? Obviously it is not the industry's fault that they want free money and protection from competition, both of which can only come from government. It is not the industry that is broken, but our government. The government should stay out of the marketplace ENTIRELY, not throw subsidies at any industry nor attempt to regulate away honestly earned profits, even if they are setting records.

This legislation is bullshit, people do not need encouragement to drill for oil and gas, high prices are wholly sufficient.

[Edited on July 27, 2005 at 10:26 AM. Reason : $]

7/27/2005 10:24:42 AM

abonorio
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Nerdboy is my new favorite TWW n00b. Nice to see someone with a sound economic foundation.

7/27/2005 10:32:33 AM

LoneSnark
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Nerdboy does rule you all.

7/27/2005 10:44:16 AM

Opstand
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Maybe so, but a n00b is still a n00b.


Now let's get back to the important topic of this thread, drilling for jelly beans.

7/27/2005 12:26:27 PM

abonorio
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BU$H LIED KID$ DIED

7/27/2005 12:32:26 PM

LoneSnark
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If only we could drill for children... That would help ensure a continued boom in the jelly bean markets.

[Edited on July 27, 2005 at 12:43 PM. Reason : j]

7/27/2005 12:43:19 PM

aaronburro
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"But whose fault is that? Obviously it is not the industry's fault that they want free money and protection from competition, both of which can only come from government. It is not the industry that is broken, but our government."


this might be a valid point if the gov't just gave the oil companies money without the companies asking. The fact that the companies spent MILLIONS of dollars trying to get the gov't to give it money, all the while knowing they are making record profits REAKS of wrongness.

Yes, its fucked up that the gov't would give them money. Its even MORE fucked up that the oil companies would ask for money amidst record breaking profits.

7/28/2005 5:15:27 PM

LoneSnark
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"Yes, its fucked up that the gov't would give them money. Its even MORE fucked up that the oil companies would ask for money amidst record breaking profits."

Maybe, but last I heard no one has EVER mailed a check back to the government because they didn't need it. The fact is, everyone is always demanding money from the government, from poor people to rich people to industrialists to foreign governments.

People may not want to appear greedy, but they damn sure do not want to be suckers. If I could get millions of dollars just for asking for it, how stupid would I be not to do so?

The oil companies did not rob the government, they did not trick the government. Therefore, there is not moral ground to condemn them. Meanwhile, the government DID steal from the tax payers, and it DID trick us into paying. As such, overwealming moral condemnation must be weighed upon the government for this miscarriage of justice.

7/28/2005 10:55:23 PM

aaronburro
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if all they did was send an email saying "please give us money," then it'd be one thing. spending millions of dollars courting politicians and buying them dinners and sending them on vacations and stuff is waaaaaaaaaaaay different than simply asking for money.

and again, to ask the gov't to give you citizen's hard earned money when you are already making record profits is wrong. if your business is struggling, then I can understand asking for help. raking in the dough? fuck no.

7/28/2005 11:36:38 PM

LoneSnark
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"if your business is struggling, then I can understand asking for help"

Here is where we differ. The crime was when government gave away the money, not who it gave it to.

It is equally a crime if our government gives our hard earned tax dollars to a bankrupt company as if it gave it to Donald Trump. Just as it is an equally immoral crime to murder a drug addict with AIDS as it is to murder Brad Pitt.

7/29/2005 12:18:35 AM

aaronburro
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so then, how much worse is it for a corporation to spur on a needless crime? at least the company that is struggling is trying to stay alive... the oil companies are just trying to pad their pockets at the expense of the tax payers... certainly one is worse than the other

7/29/2005 12:23:31 AM

Tarzan
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^^ he's got a crush on Brad Pitt

7/29/2005 1:15:36 AM

LoneSnark
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'fraid not. No one is going to die if their corporation goes out of business. Hell, they wont even be that much poorer because odds are they can sell the remains of their company at a liquidation sale, freeing up capital for other tasks and making a tidy, if final, profit.

Some would argue that the "in trouble" company getting government held greately harm society at large because it drives down our average productivity as well at trapping capital where it does no good, all the while ripping off tax payers. The well off company is only ripping off tax payers.

7/29/2005 11:43:43 AM

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