Exploration versus Share Buybacks ?

"Exxon Mobil spent more money in 2005 buying
back stock than it did on capital spending, exploration and research
and development."


I don’t believe in windfall profit taxes; No one subsidized my major integrated oil holdings when they did diddly for years other than pay a nice dividend.

Sheesh. When you read quotes like the above, you gotta think to yourself: "What the Hell were these idiots thinking?" They are just begging for Congress — and both sides of the aisle — to whack them, and good.

Goodbye oil subsidies, hello alternative energy tax cuts.

Lee Raymond has a good rap re: his stewardship of XOM — although it was kinda hard not to make money in the energy business the past few years.

Can we talk about having a tin ear for public sentiment and political realities . . .


Floyd Norris of the NYT reports:

in the wake of Exxon Mobil’s report last week that in 2005 it spent more money buying back stock than it did on capital spending, exploration and research and development.

If money is not invested in oil and alternative energies, then high oil prices are far more likely to continue as fewer resources become available. They are likely to continue in any case unless growth halts in India and China.

Exxon Mobil’s reluctance to invest may simply reflect its conviction that the current high oil prices cannot last, that they are sure to come down soon. If that happens, those who invest now may look foolish as projects that take years to complete become uneconomical before they begin producing.

But it may also reflect the way its chief executive’s compensation assures that he will become very wealthy so long as the company does not collapse. Rising share prices are nice, but not necessary.

Exxon Mobil has not yet released total 2005 compensation figures for Mr. Raymond, who stepped down as Exxon’s chief executive at the end of the year. But we know he earned $38.1 million in 2004, with 550,000 shares of stock accounting for 74 percent of that.

Instead of windfall profit taxes, expect to see some sort of tax penalty for when share buybacks or dividends exceeds  exploration and R&D.


Disclosure: Long BP, COP  (and for long enough that the ownership came via Amoco (BP took them over) and Phillips (Conoco took them over) 


Perhaps Exxon Really Needs Stock Options
Published: February 10, 2006

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  1. mh497 commented on Feb 10

    ExxonMobil has nowhere to invest that would make a difference for them anymore. The opportunities are not out there.

    They wanted to buy into Yukos in a major way, but we know what happened there.

    Their last hope is that a global recession ensues and they pick up some smaller companies on the cheap. But even then, they probably be more natural gas focused than oil.

  2. me2 commented on Feb 10

    There are lots of places to invest. The Canadian oil companies are going gangbusters. The problem, and we are just beginning to see this, is that the world has more than enough oil. Gasoline stockpiles are building every week, the EIA just lowered their demand forecast, there are tons of new oil projects coming on. In a year oil will be $30. XOM knows this. Their partner in Canada, Imperial Oil declined to build a new refinery because they didn’t see the price of oil lasting. And they are right.

    Anyone recall my forecast about 3 weeks ago about the price of crude falling ? Barry, can you make that article appear again ?

  3. me2 commented on Feb 10

    Here is the crack spread for February.


    The price of crude isn’t going to hold and wholesale gasoline is still falling. Why spend billions of dollars for a return that will be gone before the project gets completed ?

  4. calmo commented on Feb 10

    Brave call me2. And that is why GM stuck with the SUV and hybridized it: Wagoneer only looks and sounds stupid. Behind that sloping forehead that has been chasing permanently parked GM cars, there lies a nimble (if slashed in half -like his salary) mind that sees the Future: cheap oil and Kenworth-sized SUVs plowing along the freeways.
    That is why we have an energy policy that reads like the oil companies’ prospectus.
    So I don’t think there’s a popsicle’s chance in hell that $30 oil will be tolerated by the energy companies (–the less brave call).

  5. me2 commented on Feb 10

    I don’t think that oil companies are going to be able to do anything about it. It is strictly supply and demand and the $60-70 oil we’ve seen lately has spurred a lot of supply.

    Oil company CEOs are going to do anything they can to keep their stock up. That means pumping more oil at whatever the price.

    The wholesale price of gasoline fell by 12% this week, from $1.675 to $1.475 per gallon. It was touching $1.80 for a while last week, an 18% drop from that. Oil has fallen by only 9%ish and most oil companies by about the same. And gasoline inventories continue to build and build. And we are no where near the summer driving season yet.

    Crude and oil stocks are WAY overpriced right now. Crude is overpriced by at least $10 a barrel (16%) vis a vis the price of gasoline. And oil companies are thus over priced by 24 to 32%. (1% difference in the commodity price = 1.5 to 2% difference in earnings.)

    Look out for a sell off shortly in both crude and oil company stocks.

    GM being smart ? I dunno. I think consumers saw enough that they are changing their ways. I also think big SUVs are going out of style.

  6. David Silb commented on Feb 10

    I’d agree with the commentary here to a point, I think something else may be at play. I have theory, its probably not that exclusive, that money, power, fame, and immortality in the last part of the twentieth century going forward have created a collective psyche in the mind of world business leaders who feel they’ve achieved nothing if they are not a household name. Or carry with them the point of view from nineteenth century that this is my money and I will do with it as I please. In either case, I am baffled by the lack of reproach these men are given in the news and by legislators.

    The statement as presented here confounds me. Actions by Exxonmobile confuse me. I can only imagine that the Board of Directors and the Senior Executives have some plan they may not wish to announce at this time. It would be a safe bet their really is not any strategy going forward by this move other than the accumulation of wealth. So, now as oil is in the $60 range and economic indicators point to slowdowns and corrections I can only speculate as too what this means.

    If my first premise holds true, that these men want to be remembered as a Rockefeller, Carnegie, or Vanderbilt, and the second premise is also true they want to accumulate wealth to achieve this goal I can only say history will remember them as the men who opposed the next entrepreneur who comes along and finds a new innovative way of providing reliable energy.

    As the economist Joseph Schumpeter describes Governments collect taxes, Capitalists collect rents, but Entrepreneurs collect profits. I would say that these men fall into Capitalists collecting rents on otherwise free resources found. (The costs of finding those resources, collecting and transporting the crude oil while staying in the black is a testament to their ability to inject efficiencies into the system.) It will be the next entrepreneur who discovers an alternative and collects profits who will be remembered. And when that chapter, or probably the paragraph in a future history book is writtern he or she be presented as the protagonist and these execs as the Antagonists, Richard the III types in business suits. William Shakespeare best described these men. These men of power, of fortune, of place and of conviction only to be undone by the very things that make them great.

  7. YH commented on Feb 10

    I have a different perspective. Why not just take away the tax breaks given to oil companies in the last energy bill?

  8. Laurent GUERBY commented on Feb 10

    What is the tax treatment of share buybacks? Against, say dividends?

  9. zanzibar commented on Feb 10

    me2, in the prognostication business its best not to gloat.

    Supply and demand for crude are generally pretty well balanced at 84 mbpd.

    Don’t be too surprised if oil just turns back up instead of declining another 20%.

  10. Anonymous commented on Feb 10

    While I have no idea about the supply and demand of oil or gas, I do know that the very critical (to the Republicans & esp. Bush) mid-term elections are coming up. Thus I wouldn’t be surprised to see big oil do everything they can to keep gas prices down leading into November’s campaigning season. Say what you will about the stock-buying-back oil execs, but they do know politics.

  11. Paul commented on Feb 10

    Most of the world has been prettly well explored, so the likelihood of a large find is pretty small. So, we’re talking about developing smaller fields, further offshore and in countries with more unstable political environments. At the same time, rates for rigs are at all time highs – everyone wants them, but the supply is inelastic because they take a long time to build ship and get set up.

    Would you pay all time high rates to explore Nigeria, or buy back shares?

    Forget $30 a barrel. Too many countries are now interested in starting a strategic patroleum reserve or adding to theirs. The US will be adding 300 million barrels next year and China wants a SPR.

  12. me2 commented on Feb 10

    “Supply and demand for crude are generally pretty well balanced at 84 mbpd. ”

    Supply and demand are not balanced. Even with the loss of the Gulf Coast production and refining we’ve got/had building inventories. Way more than anyone is admitting. Gasoline and heating oil inventories are +12% over last year and +17% over the 5 year average. There was absolutely no call for $60 oil.

    “Don’t be too surprised if oil just turns back up instead of declining another 20%.”

    Unless production drops are demand spikes, it ain’t going to happen. Crack spreads are razor thin and crude product inventories are building. Consumers have way more oil than they need. The only way crude can go higher is if refiners want to take losses. Supply and demand settles all markets and this one is no different.

    “Most of the world has been prettly well explored, so the likelihood of a large find is pretty small.”

    The world doesn’t need a huge find. We aren’t 20% short of oil. We have enough right now. And there are lots of smaller fields coming on. You have to remember that oil companies were dogs since the 1980s and not much investment was done.

    “So, we’re talking about developing smaller fields, further offshore and in countries with more unstable political environments.”

    There is still a lot of oil everywhere. There was a big discovery by Chevron in the Gulf.

    “At the same time, rates for rigs are at all time highs – everyone wants them, but the supply is inelastic because they take a long time to build ship and get set up.”

    Not that long. The industry will catch up in the next year. Remember the late 70s ? Same thing happened then.

    “Forget $30 a barrel. Too many countries are now interested in starting a strategic patroleum reserve or adding to theirs. The US will be adding 300 million barrels next year and China wants a SPR.”

    They won’t do it if it drives up the world price. Besides, I think the governments are seeing that the inventory of crude products is doing this for them. I think the build in inventory is about 50 million barrels in the last year, without trying and without the use of Gulf production due to the hurricane.

    And consumers are starting to cut back too.

    Oil people ALWAYS forget that there is a customer involved. The story is always the same. $100 oil, here tomorrow. They always forget that for us to reach $100 oil, someone has to pay $150-200 to fill up the SUV. That is not a sustainable situation.

  13. me2 commented on Feb 10

    And I haven’t even brought the housing bubble into this discussion. Why do you think copper dropped today ? How much less gas and fuel do you think we will need when we aren’t building record number of houses ?

  14. Eric A. commented on Feb 11

    I think me2 is right about some things, but there are a lot of different factors at play, some short term, some long term, some pushing supply or demand one way, some pushing them the other way.

    The refining bottleneck makes petroleum product supply a different thing from crude supply numbers; the pumping bottleneck makes the crude supply numbers again a different thing from reserve numbers. Gasoline supplies are relatively shorter term; reserve numbers are relatively longer term. A glut of gasoline supplies can drive down the price of gasoline in the short term; the long term price of gasoline depends in a delayed fashion on what happens further up the chain, among other things.

    The production level at each stage of the chain is driven by different factors: petroleum product supplies are strongly driven by consumer demand, while crude production depends in many important places on political stability. There is also the issue of declining production capacity of older fields— Thursday’s WSJ has an article on Mexico’s Cantarell field for example:
    Finally, crude production depends on prior discoveries, which have notoriously been lagging production by a wider margin all the time. Declining fields and lack of discoveries take their toll on crude production on the longest time horizon.

    So just talking about whether we have enough “oil” tends to conflate different issues, some of them driven by the economy, some by politics, some by geology, and thus conflates the very different time horizons as well.

    Another ambiguity of language: whether we have “enough” oil also depends on demand, which declines whenever there is an economic slowdown. Then we could easily have “more than enough”. On the other hand, there’s never “enough” for those who can’t afford current prices. There wouldn’t be “enough” if the whole world insisted on growing at all costs. Indeed, for now, supply levels seem to be putting implicit limits on growth, for example consumers don’t currently seem to like $3 gas. If we are below $3 and people are willing to pay more, then there’s “enough” gas. If we get over $3 and people aren’t willing to pay, then at that time there won’t be “enough”.

    So just talking about whether we have “enough” or “not enough” also conflates the demand and supply issues, which are driven by many independent factors. Of course there also is a familiar dependence which can be described roughly as follows: changes in demand have a delayed effect on supply; changes in supply have little effect on demand, up to the point where they are equal; if supply and demand are close, small decreases in supply can have large negative effects on demand with a relatively short delay.

    Now me2 seems to be right about one thing at the moment: the price of gas and the stock prices of oil companies are both going down at the moment. The question is why. Allow me to ask some leading questions: If we have enough oil, why did prices become so high in the first place? And if prices decline, shouldn’t that stimulate demand, eventually swinging us back towards where we started (i.e., high prices)? If not, wouldn’t that suggest that demand has declined in a fundamental way, providing a totally different explanation for lower prices than oversupply?

  15. me2 commented on Feb 11

    “the price of gas and the stock prices of oil companies are both going down at the moment. The question is why. Allow me to ask some leading questions: If we have enough oil, why did prices become so high in the first place?”

    I struggle with that one myself. I don’t know how the fear of something happening (hurricane, Iran, etc.) can cause price increases if the volume supplied and demanded stays the same. Unless the speculators somehow create artificial demand by getting in between the seller and the ultimate consumer. That must be what happens.

    “And if prices decline, shouldn’t that stimulate demand, eventually swinging us back towards where we started (i.e., high prices)?”

    Gasoline demand pretty much stays the same. It might go +/- 5% with the price swings we’ve seen thus far. But if it goes to $4-5 then we could see some real demand destruction. Actually, I think the gas prices we saw this fall were enough to make a lot of people change their car purchase habits.

    “If not, wouldn’t that suggest that demand has declined in a fundamental way, providing a totally different explanation for lower prices than oversupply?”

    See, we never were undersupplied with crude. Bush opened the SPR and the Saudis offered crude to anyone who wanted it from their reserves but very, very little was taken. There was a temporary refining problem for a few weeks in September, but that was about it. All the rest of the price premium was FEAR that we would run out in the winter. Basically we paid $20 a barrel in fear premium. If you look at the actual supply and demand, supply stayed just about the same and demand went down a bit.

    Now the speculators are leaving the market because I think they are either

    1) cutting into each others profits (it is a zero sum game after all…) or

    2) too much crude makes it to the market by means other than the NYMEX (ie integrateds go from wellhead to gas pump and bypass the NYMEX) for the speculators to corner the market or

    3) supply is now just too robust for them to do anything. It doesn’t help to buy futures for $65/bbl, if the refiners will only pay $45/bbl for them because they are brimming with gasoline and can’t move what they got.

    I’d like to know how the fear premium works into the price of crude when the supply/demand volumes don’t change .

    One thing is that everyone except the consumer makes more money when the prices are higher. I wonder how much incentive all the oil traders have to keep prices low. Once the consumer has enough gasoline and the inventories build then the refiners get squeezed out of the game and it goes up the chain.

    Anyway, I think the back of the oil “crisis” is broken.

  16. mh497 commented on Feb 11

    In terms of oil prices being too high right now and that geopolitical concerns are driving them up, I agree.

    But you are going to miss an important piece of the story if you focus on inventories (which are almost just in time these days).

    ChevronTexaco would have had roughly 0% reserves replacement if it had not bought Unocal. Shell’s replacement ratio was also poor. It’s due to a combination of factors, true, but this is going to be a big problem in not too many years for these companies, and for us also.

  17. Harper Capital commented on Feb 11

    If we are at the inflection point for peak oil, you 30$ oil people are way wrong.

    I think we see 45$ oil before 85$ due to many of the reasons above. BUT, as an investor who has studied and been long Oil for the past 3+ years there are SERIOUS long-term supply issues that have not been addressed.
    1-Majors have been terrible at reserve replacement. XOM was at -5% last year +/-. Oil goes to 30$ next year- they can not possibly acquire/drill enough to replace the 10% hole they are in. Simmons talked about this in Barrons last few weeks. XOM will have to cut reserve numbers if prices stay high. Dammed if you do, dammed if you dont.
    2-Piddly oil finds dont replace current decline curve. You need to bring on multi-MM bbl projects to replace the decline. Somebody please NAME ONE? There is nothing like Cantarell or North Slope even in the planning stages right now.
    3-Whoever said that drilling equip problems would be solved next year is mistaken. Had drinks with a major engineering shop treasurer from the gulf last week. Their backlog is to 2009, has been for past year. You going to weld a new rig in your garage?
    4-I have been told that the average age of oil major employees is over 55. Personal experience verifies this. It takes a long time to equip and hire new skilled employees.
    Oil is tight due to serious underinvestment in equip/manpower the past 20 years (for good economic reasons). It will stay that way for several more years, with higher prices to encourage development. 30$ oil does nothing to get fresh $ invested.

    My thoughts…..

  18. Eric A. commented on Feb 12

    “I’d like to know how the fear premium works into the price of crude when the supply/demand volumes don’t change .”

    Here’s how I tend to conflate language when it comes to the definition of “supply”.

    First, an example with no fear factor. Say you have two wells, each containing 1 million barrels, and say you want to extract 1 million barrels total. You can either take 1 million out of one well, or 0.5 million out of each of the two wells. The first option costs much more than the second, even though the final produced amounts are the same. Slightly more realistically, the oil company has only so much money at a time to spend producing the oil, so if they choose the first option, they will produce less oil presently than if they choose the second option. Once they have produced the first part of each well, they are only left with more expensive production options. Conclusion: more expensive supply is equivalent to less supply, at least as far as the effect on price is concerned.

    Second example: now instead of mechanical problems, let’s say there are risk issues. Let’s say the oil company loses X percent of all the oil they produce to accidents or disasters. They could try to make up the money spent producing the lost oil from sales of the oil they do have. It might be cheaper to spend money trying to prevent losses, and let’s say they do this and are successful— then the final produced amount is again the same, but more money was spent producing it. Conclusion/conflation: risky supply is equivalent either to less supply or to more expensive supply.

    Finally, the fear factor. Certain kinds of risk are difficult to quantify, especially the risk of large, rare events. For frequent small events, you can just measure how much you lose from them on average, and incorporate the cost of loss or prevention into your prices. For large rare events, there is still a strong need to incorporate potential future losses into the present price, but far more uncertainty and guesswork is involved.

    So perhaps we can interpret “fear premium” to mean, not just a risk premium, but a premium associated with the uncertain risk of a large rare event. If the event doesn’t materialize, consumers may feel cheated, and the oil producers may reap windfall profits, and solar power here we come— but the oil producers will probably say they made the best decision they could with what they knew. The final amount of product may stay stable, but we pay a lot more for it. Conclusion: uncertain supply is equivalent to much more expensive supply (and effectively it is much more expensive for consumers).

    Now I believe oil producers have a big incentive to keep prices low— they are well aware that high prices will push consumers towards conservation or alternative energy sources, and that those kinds of changes in consumer behavior will mean long-term or permanent damage to the real value of their oil. So I doubt they are trying to gouge consumers directly, at least right now.

    If they had their desires, surely they would want to find cheap, certain, safe oil deposits to produce. So that kind of supply must be lacking. But language-wise, I guess I have to admit it is somewhat confusing to say that prices are high because cheap supply is lacking. One should simply say that supplies have become more expensive, more risky, and more uncertain, and prices have gone up for those reasons.

    Now if all that is true, i.e., prices have gone up because of the changing nature of supply, I wonder just how far declining demand could enable prices to decline. Stagflation happens after all.

  19. slg commented on Feb 12

    The only way you’re going to see $30/bbl oil again is with a serious global recession. I get amused/exasperated at the way nonprofessionals talk glibly about “new supply coming on” and “lots of exploration opportunities in oil” and how “oil’s gotta go back down in the next few years.”

    Wrong. As another poster noted, there are lots of piddly projects coming online that, while perfectly profitable for their owners, aren’t even going to cover depletion overall. A new play in the Austin Chalk or the Overthrust might bring in 5 million bbl–which runs the country for all of 6 hours. And these little bitty fields have their own problems. (Good news! Your wildcat came in. Bad news! you stepped out on all sides and came up dry–and now the (successful) wildcat won’t pay for the successive dry holes.)

    A historical example: the maximum Texas ever produced was a bit less than 3.5 Mbbl/day, back in 1972. Then the oil crunches of the 70s hit, and lots of new wells were drilled–obviously, with the incentive of higher prices. So you went from 167,951 producing wells in 1972 to 220,788 in 1985. Unfortunately, though, production dropped. Every year. Texas produced 2.288 Mbbl/day in 1985, and currently produces a bit over a million bbl/day.

    So over that baker’s dozen years 1972-1985 you drilled over 50,000 new wells to produce 2/3rds as much oil. That’s depletion, folks. It’s also why oil defies Ec 101: you find the easy stuff first, and as prices rise you find less and less. You’re caught up in a serious case of diminishing returns.

    Here’s another example:

    Q: What was the biggest oilfield ever found in the Lower 48?

    A. East Texas (about 5 billion bbl).

    Q: When was it found?

    A: >drum roll< 1930. Yeah, that's not a misprint. Q: When was the most oil ever found in the US?

    A: The 1930s.

    Q: Now, what do we call the 1930s?

    A: The Depression! The free-market price of oil would have been about $0.10 per bbl, and the glut of oil led to elaborate production restrictions that lasted for almost 40 years. (Look up Texas Railroad Commission.)

    In fact, you find oil when it’s easy to find, almost irrespective of economic incentives. That’s just the historical record. Significant new oil supplies have come online thru exploiting new areas, not thru drilling harder in old ones. Oil was cheap in the late 80s and 90s because of imports from places that were nowhere near their production peaks (like Texas before 1972). Domestic supply has been declining, steadily, at about 2% a year since 1985.

    Now those exporters have new demands for their product, even as they’re dealing with their own depletion problems. And we’ve largely run out of new areas to explore. (The reason that China, the Phillipines, and Vietnam are quarreling about the Spratlys is not because they’d be a great place for seaside condos. It’s about the last place in the world where you might be able to hide a multibillion bbl field.)

    Now, there will be demand destruction in this country as people swap H2s for Priuses, and even Harleys, and that will help temper the price increases over the next few years. Nonetheless, statements that “the market can’t sustain $100/bbl oil” are surreal. The existence of oil at a particular price is not contingent on the demands the “market” may make on it. The strongest market incentives, and the most whiz-bang technology, can’t find what isn’t there.

    It seems probable, to those of us in the field, that Exxon simply doesn’t see worthwhile places to explore, given their constraints of scale and access, and also have sensibly concluded that drilling dry holes to “look like they’re doing something” would be pretty silly. Twenty-odd years ago, an Exxon geologist told me that they had to find “Exxon-sized” deposits–small ones simply weren’t worth their while. I doubt that things have changed since.

    And yes, I’m a geologist professionally, and I spent much of the 80s working on new technology for the oil patch.

  20. me2 commented on Feb 13

    I go by fundamentals. And we seem to have all the oil we want to burn at the current prices, plus a buildup in inventories. If there was a shortage, wouldn’t we be suffering from declining inventories ?

    And that was with the loss of production from the gulf area.

    Oh yeah… I laugh at the “experts” shouting for $100 oil. Didn’t they learn anything in the 70s ? What did that teach us ? How about demand goes DOWN when price goes up ? How about new technologies/industries come on line to decrease oil dependence ?

    Gas wholesale prices are at less than $1.44 as I write this. And falling. No way that supports $100 or even $70 crude. Lookout $40, here we come.

  21. me2 commented on Feb 13

    “The current weakness in front month gasoline crack spreads is unprecedented and is sending a very strong message to refiners about the need to sharply cut production,” said Kevin Norrish, an analyst at Barclays Capital in London.
    The differential between gasoline and crude oil futures in the United States tumbled to minus $1.13 on Monday, the lowest since October 2003. It had started sinking on Friday.”


    See ? Fundamentals matter !

  22. slg commented on Feb 13

    If you’re going to look at fundamentals then you need to dig a lot deeper. Yes, things look better in the very immediate term.

    But they look pretty grim over the next few years–again, barring serious demand destruction from a major recession. North Sea production peaked in 1999, and is now down 25%. Britain has turned into a net oil importer for the first time since the 70s. Kuwait just downgraded their reserves by about 50%–which came as no surprise to those of us who actually pay attention to such things. Mexico’s Cantarell field is peaking. The Saudis claim they can still play swing producer, but the actual state of their reservoirs is a state secret. But they wouldn’t lie to us, would they?

    All this, even as the Chinese are scrambling to secure energy supplies, with treaties with Venezuela, Kazakhstan (heard about the Kazakh pipeline?), Iran, Russia…But then, they’re looking a little farther down the pike than current inventories.

    And what we can learn from the 70s if that there are other folks with lots of oil to sell, we can buy it. (Or we can if they’ll take dollars.) That’s all. The US was fortunate that non-OPEC producers (Mexico, the North Sea) were coming online then. And Prudhoe Bay also happened to be coming online then.

    I hear this a lot, “well, look at the 70s.” Well, look at the 70s. See how much oil consumption actually changed (not a lot). We were using 17 Mbbl/day in 1973. That rose(!) to 19 Mbbl/day in 1977, from which it tapered off to 15 Mbbl/day by 1985, due to the recession of the early 80s. It’s risen ever since.

    Look also at where that oil came from. (Hint: it wasn’t from the Lower 48.)

    How about new technologies? Not in the near term. (I’m working on such things!)

    Laugh on…but I have little doubt who’s going to be laughing last. And remember that a few years ago people were laughing at $40/bbl, too.

  23. me2 commented on Feb 14

    Yeah, yeah, its grim. The world will end next week because we won’t have enough oil. We should be very scared and pay $120/bbl for our oil. NOT !

    I’m sure at some point the world will run out of oil. But until then we have more than enough to live comfortably. Supply and demand rule the day.

    I’m convinced that oil companies are NOT going to get the last laugh on this. America isn’t stupid. Given the choice between being held for ransom by oil companies or developing more effective means of using energy, they will adopt the later.

    Oil companies forget that we are a gas guzzling nation. We have not done much or anything to cure that at all. And if oil companies threaten this existence, there will be changes that dramatically reduce the amount of oil that is needed. Big changes, like the foregoing of big SUVs and the development of hybrids. It wouldn’t be that hard.

    Maybe GM and Ford don’t know how to build a fuel efficient car, but Honda and Toyota sure do. I note with very much interest that Toyota just released a new pickup to compete with G&F. Its a fuel thirsty V8 right now, but I am sure a hybrid or diesel isn’t far behind. And Honda bought a solar cell plant in Japan.

    I think the next decade is going to be very interesting.

  24. slg commented on Feb 14

    “Yeah, yeah, its grim. The world will end next week because we won’t have enough oil. We should be very scared and pay $120/bbl for our oil. NOT !”

    Not what I said…but then you don’t seem to worry too much about actual data, even though you profess to follow fundamentals. Whenever the facts intrude, you retreat to shouting generalities.

    “I’m sure at some point the world will run out of oil. But until then we have more than enough to live comfortably. Supply and demand rule the day.”

    Um…you don’t really see any inconsistencies in this statement?

    In any case, reality pays no attention whatsoever to sloganeering and ideology. The next decade will indeed be interesting.

  25. me2 commented on Feb 14

    The problem with the “end of the world” scenario investing is you have to get the timing really right or you lose. And even when you do win, the timeframe is very short.

    Oil is a commodity, just like any other. Commodity players ALWAYS think they have the consumer over a barrel at the top of the economic cycle. However, but the very nature of economic cycles, it NEVER persists for long. Sure, it is different this time. Yep. It was for the last year. But, as it has done time and again in the past, consumers will adapt. Nobody is going to spend 25% of their income on oil. They will change their habits and adapt before that happens. Who knows, GM and Ford might even start building fuel efficient vehicles !

  26. me2 commented on Feb 14

    Oh yeah… oil, natural gas and gasoline all fell today.

    There is still a huge disparity between the price of crude and gasoline. 42 gallons x 1.40 = $58.80, leaving nothing for the refiners or transportation or less than perfect yields from the barrel. (BTW: I know that the whole barrel doesn’t go to gasoline, so don’t go there…)

    Several refiners were downgraded today because there is no margin left in refining. And still the gasoline supplies build up.

    At a normal refining margin of $15/bbl and gas at $1.40/gallon, the price of crude should be $58.80 – 15 = $44.

    I’m calling for a big correction in crude prices any day now. I am talking about a drop of $5 per barrel in one day, with an ultimate drop of $10 to $15/bbl.

  27. slg commented on Feb 14

    Energy is not “just another commodity.” With enough energy, you can get any other commodity you can name–you can wrest gold from common rock, if you want, or desalinate seawater and irrigate the desert.

    With no external energy sources, you can’t do anything. You’re thrown back into the life (“nasty, brutish, and short”) of 99.99% of human history, in which the only energy available was that trapped by green plants (i.e., food and firewood.) What one writer, S.M. Stirling, has described as the “post-Neolithic norm of human history: starving peasants ruled by bandits.”

    If you don’t have oil, you need another energy source. There fundamentally is no substitute for energy. It’s fine to glibly say people won’t spend 25% of their income on oil. But tell me what they’ll be doing instead? Where will the food come from? What’s powering the tractors, the trucks, the railroads (never mind getting to work or getting to the store)? What’s powering the factories that make all those other goods? How are the other raw commodities getting extracted, getting to the factory, and how are finished products getting out? Or are people growing “victory gardens” in their back yards instead?

    All this is obvious to the point of triviality to physical scientists, but most economists still don’t get it. (A few do: e.g., Rolf Peter Sieferle, The Subterranean Forest: Energy Systems and the Industrial Revolution, 2001. It was different that time; the exploitation of fossil energy made the modern world possible.) But the physics doesn’t change whether they get it or not.

    And, btw, the wiggles in the price of oil over the timescales of a few weeks or months is just noise, as you surely must know.

  28. me2 commented on Feb 14

    Yes, it is just another commodity in that its price will be set by supply and demand. Of course we can’t live without energy. But that doesn’t mean we can’t use what is there in a smarter fashion.

    Noise ? As far as I can see the 2005 prices were “noise”. The constant “Here comes $100/bbl” was nothing but noise. Investors are learning that fear doesn’t cost $20-40/bbl when inventories are involved and investors come to their senses.

  29. me2 commented on Feb 15

    Oil drops $1.87 today as supply continues to build dramatically.

    There are 18 weeks until June 1. This week inventory built by 8M barrels. 18 x 8 = 144 million barrels of extra inventory by June1. Now that is a lot of oil.

  30. slg commented on Feb 15

    And what happens to the price when demand is high (and inelastic) and supply is limited (and also inelastic)?

    You vastly underestimate the scale of changes involved in getting away from oil–and the price of oil it will take to motivate those changes happening. That’s the inelasticity. How much wealth is obliterated when people swap their H2s and F-250s–which weren’t paid for, and for which resale value has become zilch–for hybrids? How much capital investment is needed to electrify the railroads? What happens to the obsolescent trucking fleet? And it takes time. Things always go much more easily in the ethereal world of economic theory than in the real world of engineering. (“Just make more efficient cars.” Yeah, right.)

    But time will tell.

    $100/bbl by the end of the decade. Easily. (Unless we’re in the mother of all recessions by then.) Could be a lot sooner if Iran/Saudi/Venezuela/Nigeria/etc. blows up first.

    Stand by. It’s going to be an interesting ride.

    “There are 18 weeks until June 1. This week inventory built by 8M barrels. 18 x 8 = 144 million barrels of extra inventory by June1. Now that is a lot of oil.”

    No it’s not. It’s a tad more than a week’s supply at current US consumption. And it’s significantly less than 2 days’ worth of global consumption (ca. 84 Mbbl/day). In Garfield the Cat’s immortal words, “Big, Fat, Hairy Deal.”

    And I’m not terribly concerned about weekly fluctuations. It’s the next few years that will be … interesting.

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