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Gold9472
07-22-2005, 08:45 AM
Oil industry awash in record levels of cash
But a smaller portion of profits is going to find new oil discoveries

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

(Gold9472: Hmmmmm... the oil companies have SO MUCH profit... Hey wait a second... I thought the rise in gas prices was legitimate? I thought there was a need for them to be so high because of the war? Where's all this profit coming from?)

By John W. Schoen
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