It was the best of times, it was the worst of times.
That's how oil companies may be looking back at the last several years, especially after the latest round of earnings from some of the oil majors.
Let's take Exxon (NYSE: XOM), for example. On Friday, the company reported another set of record profits. The company's net income rose approximately 14% during the fourth quarter of 2007. The $11.6 billion earned last quarter broke their previous record of $10.7 billion set back in 2005.
Not too shabby. So how did others perform?
Chevron (NYSE: CVX) also put up some big numbers. Revenue at the U.S. oil company jumped up 29.2% last quarter to $61.41 billion, up from $47.75 billion.
Before we start handing out gold stars, should we really be surprised by these record numbers?
Absolutely not.
But watching the big oil companies making windfall profits isn't anything new, especially considering the price of oil is still hovering around $90 a barrel (nearly double the price compared to last year). In the last two months, prices have spiked around $100 a barrel twice.
With all the U.S. oil companies making profits recently, you'd expect to feel pretty good about the future of these companies.
Unfortunately, that's not the case.
U.S. Oil Companies: Making Profits, Losing Profits
As soon as people see that oil companies are making huge profits, they immediately feel cheated. This means that governments are going to want a piece, leading to a number of taxes designed to cut into those profits.
That could be a huge problem, however, because extracting the oil is getting more expensive.
In other words, these companies need to invest a lot more money to keep up oil production. That's assuming, of course, they can even develop new fields. Remember, the world is running out of (or may already have) the easy to get oil. Many of the new discoveries you hear about are deep water fields, which are costlier to produce.
For a minute, let's forget about the difficulty of finding and developing new fields. The fact is that many of the big oil companies are getting pushed out of the major discoveries. Countries like Russia and Venezuela are quickly nationalizing their resources and demanding a bigger cut in the profits.
But nationalizing resources is a double-edged sword. Venezuelan President Hugo Chavez is finding that out the hard way. Ever since booting foreign oil companies from the country, there's a serious question of whether Venezuela will be able to effectively develop its oil resource.
With the government taking away investment money and state-run oil companies keeping a tight leash on reserves, I can help but wonder how much longer these oil companies can hold on.
U.S. Oil Companies: On the Road to Energy Security
I've found myself becoming more restless over the last few weeks. In fact, the last time I felt like this was almost six months ago. That led me on a week long trip to the home of the Canadian oil sands—Fort McMurray.
Being stuck in a car for more than forty hours should have taught me to not rush my decisions. Hopping a plane would have been easier. But if taking the easy route would have meant missing the adventure of racing across the country, then it's a lesson I'll never learn.
This time, however, it isn't the massive oil deposits under the Alberta soil. Rather, I've been obsessed with how our country will deal with the upcoming energy crisis. Stopping our addiction to Middle Eastern oil means we're going to have to make up that demand somewhere else.
Since oil production from the Canadian oil sands can only supply so much of that demand, the U.S. is going to have to turn somewhere else.
Until next time,
Keith Kohl
P.S. For investors, the door is still wide open, and many of my Energy and Capital readers are already making some serious gains. If you're interested, feel free to find out more at the $20 Trillion Report.
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I'm really curious if driving in a personal motor vehicle is a better use of a scarce and valuable resource than flying. One of the railroads is advertizing how far they can move a ton of cargo on one gallon of fuel.
What about moving people? Is it better to fly or drive?
Grant Johnston
Big oil says they need those huge profits to explore for more oil, but a huge amount of it is going into buying back their own stock, acquiring other businesses, and buying or leasing huge tracks of farm land for ethanol production, etc. Of course the public feels like Big Oil is yanking their pants down.
I believe as this energy situation gets worse, and gasoline hits over $4.00 a gallon this spring, we'll see legislation aimed at stopping runaway speculation. Excess profits tax, profit capping, I don't know what form but it's going to happen. Eventually, some safeguards have to be implemented because gasoline and many other petroleum derivitives are not subject to the normal market forces. You have to drive the kids to school, go to work, heat your home, and eat no matter what it costs. My total energy costs have trippled in 10 years,even with conservation efforts. I don't know about you, but my salary hasn't trippled. There's money to be made by some of us who are fleet-of-foot, but the average man is taking a shellacking, and it won't last
Thanks
Wayne
Experts debate the actual effect of all this newfound investor interest. Some say it's marginal, adding maybe $10 to the price of a barrel of oil and providing much-needed liquidity to oil markets. Others say it has added at least $30 or $40 to the price. My research over the last seven year indicates that banks and hedge funds are adding as much as 34% to a barrel of crude.
You keep harping on "Peck Oil". You need to do more research and stop depending on the media, and rumors. Its Racketeering that is driving oil price right. Our lap-dog legislator have been ignoring the RICO Laws, and has allowed the racketeers to take control of crude prices, and your fear mongering only adds more fuel that drives crude prices. The commodities markets have been unregulated since 1983 (thank to Ragan). Also the nationalization of oil fields around the world are leaving some counties without the skilled labor and experts needed to get the oil to the pipelines & tankers. Its the nationalization & speculators that are driving prices NOT the lack of oil.
Lee Raymond ( former EXXON CEO) said it all in his interview with Charlie Rose back in 04. "There is enough crude in the ground to last another 250 Years" ...... and with the new drilling technology it is getting easier to get it to the refineriey.
The problem with crude prices is that we've hit "Peck Bull".
http://money.cnn.com/2008/02/08/news/economy/oil_conference/index.htm
Greyfox