January 31, 2006
Are the oil companies earning enough profits yet?
"Drivers Upset By Record Oil Company Profits", reports CBS3 News in Philadelphia, and quotes one driver as describing the oil companies as: "Robbers, thieves, taking advantage of the people."
Green Car Congress reported these details on exactly what some of the robbers and thieves in Canada are up to:
Annual profits at Canadian Oil Sands Trust (COST) jumped 63 per cent to C$831 million and cash flow topped the C$1 billion mark in 2005. COST is the largest owner in the Syncrude joint venture....
Shell Canada and partners in the oil-sands joint venture said last August they would spend C$7.3 billion to expand by 2010 the project's production and refining capacity to 280,000 barrels a day.
Oil sands may be one of the most promising sources for new oil production over the next few decades, but will require a huge commitment of resources. So how could we ensure that's really going to happen? Plan A is to have our elected government officials make a wise decision about what's the best source of energy for the years ahead, find the tax dollars to pay for it all, and make sure it all gets produced and delivered on schedule.
Plan B is to imagine that the desire to make a profit is so powerful that companies would be willing to invest billions of dollars trying to make oil out of sand.
If you go with Plan A, you get to give an inspirational speech communicating your vision for the future, such as President Bush did in his State of the Union address. If you go with Plan B, all you can say is, capitalists, go make even more money!
I guess that's why he's the president and I just have a blog. But those greedy oil companies seem to be trying to earn even more money just the same.
Posted by James Hamilton at January 31, 2006 10:24 PMdigg this | reddit
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Tracked on February 1, 2006 02:05 PM
Posted by: M1EK at February 1, 2006 06:06 AM
Unfortunately political discourse has--and perhaps always has been--polarized. And pandering.
The painting of oil companies as bogeyman is maddening.
Here's a thought though: shouldn't the Julian Simon brand of cornucopians, the editorial page of the WSJ, and similar ideologues take at least a portion of the blame? Because they've hinted if not outright stated that nirvana is just around the corner if markets are unleashed. It's a religious belief when taken to the extreme. When, in fact, markets sometimes send an ugly message and deliver a result that many don't want--but must accept because they're going to get it in the end, whether govt interferes or not.
To sell libertarian free market economics, haven't they also sold the public a false interpretation of reality? Setting an expectation that oil prices, or more generally energy prices, should be cheap?
I think they have. And though I'm speaking as someone who has studied only a smidgeon of economics, and am not familiar at with economists as a professional group, it seems to be that economists have allowed this false view of reality to persist.
Economists cannot control the SOTU. But they have a better chance at controlling unrealistic expectations. I think there is a not insignificant group of economists--perhaps on the fringes and in think tanks more than academic positions--who are doing as such.
But I would gladly stand corrected if I'm in error.
Posted by: T.R. Elliott at February 1, 2006 07:30 AM
We grant credits with one hand, while we tax with the other. That really is awful, but I think it is riding a wider wave of congressional micromanagement more than anything specific to energy.
With respect to tar sands, I'm sure with a hands off policy we'd still see a lot of economic activity and profit (from an investor standpoint), but I doubt we'd see enough to influence retail energy prices.
The thing that makes these things a great investment is really that they never will be in danger of flooding the market. Like COST now, their profits will jump when wider conditions move the market.
Posted by: odograph at February 1, 2006 07:56 AM
I think the subject of "expectations" broached by T.R. is an important one as well. I can't decide this morning though whether the Whitehouse's new Advanced Energy Initiative is missing a "conservation" element because they are clueless, afraid to use the "c" word ... or at the worst case "micromanaging" just the way Exxon asks them to.
Posted by: odograph at February 1, 2006 08:08 AM
Energy prices have been going down for 5000 years. We have the misfortune to have been born in an unrepresentive time, is all. But energy prices certainly should be cheap and will be. There is more energy than we can use in a hundred years in the wind (if you build your windmills high enough), more energy than we can use in a hundred years in the oceans (temperature differentials, tides), more energy than we can use in a hundred years in the geology (temperature differentials), more energy than we can use in a hundred years in the solar constant, and more energy than we could use in a hundred years in the uranium scattered through the earth's crust. And it is unlikely in the extreme that we are going to have to wait a hundred years for fusion to come online. We just picked the wrong half century to be alive.
Posted by: Fred Hapgood at February 1, 2006 08:15 AM
Unfortunately Fred, I'm old enough to remember people saying that 30 years ago ... that half century is almost up ;-)
Posted by: odograph at February 1, 2006 08:20 AM
Fred: You are exhibiting the exact behavior that is supportive of the pandering (as I describe in my earlier post). You are using a sample size of about 6 (which is just about the number of energy source transitions humans have undergone, if you include biomass, biological oils, coal, oil, nuclear).
The first rule of markets. Past performance does not predict future performance.
There is good reason to think the cheap energy may become a thing of the past. This is not doom and gloom. That's the problem. People automatically jump to the extremes: cornucopia or doom/gloom. I say there is a not insignificant probability that energy will become more dear, notwithstanding all that energy surrounding us.
Posted by: T.R. Elliott at February 1, 2006 08:36 AM
I own a little farmland not far from the dealership. You better believe I'm gonna be plantin some switchgrass this year. Rock on.
Posted by: Rick at February 1, 2006 09:25 AM
Rick, do you really have local buyers? My understanding was that current cellulosic projects were in pilot stage (and not that common). Switchgrass heating pellets are also another tantalizing possibility ... but also in the pilot stage.
But I I like switchgrass and have a link for you
Posted by: odograph at February 1, 2006 09:34 AM
There's no question energy will be cheap in the long run. It's the transition during the next 30 years that is the problem.
I'd like to arrive in 2035 with: the US not deeply in debt to the rest of the world; the 3rd world not deeply poor; the rest of the world not hating the US; and oceans not covering most of Florida.
Posted by: Nick at February 1, 2006 11:03 AM
Would the "greedy oil companies" be making such profits but for the materialistic nature of the American consumer colluding with the profligate monetary policy of the Federal Reserve and the equally profligate fiscal policy of the federal government?
Prices increase until demand is reduced to meet supply. The Federal Reserve's monetary policy and the federal government's fiscal policy have inhibited the normal reduction in demand. So, we should naturally expect prices to continue to rise.
Posted by: Suresh at February 1, 2006 11:15 AM
Odograph, thanks for the link. I have no idea whether there are any current markets for switchgrass, but the land is just sitting idle so for fun I want to see how it will grow. By the way as it relates to recent conversations, in the North Central region for Chevrolet we saw increases in sales compared to Jan '05. Chevy truck +2.4% Chevy Car +9.8% Cadillac Car +269%!
Posted by: Rick at February 1, 2006 11:32 AM
If we are trading stories, I'll mention that I did have to buy gas for my Prius three weeks ago ;-)
Posted by: odograph at February 1, 2006 11:55 AM
Suresh, I'm not sure I'd say "materialistic" these days, because we've gone beyond mere material to mass consumption of services and everything else.
But yes, American consumer culture has been on a jag the last couple decades. It would be possible to branch off here to all kinds of "hedonic treadmills" and "happiness economics" ... but it boils down to partying like it is 1999 ... since 1999 at least.
Posted by: odograph at February 1, 2006 12:06 PM
The role of Canadian politics in the development of the oil sands should not be ignored. The recent election of a Conservative government with its power base in Western Canada will hasten the already frantic pace of investment in capital and infrastructure. Twenty-five years ago, a Liberal government under Trudeau created a national energy policy which Albertans basically saw as expropriation by the Federal Government. Thus the catch-phrase of the day "Let the Eastern bastards freeze in the dark". From then to now, the Federal government has been viewed as benign at best and hostile at worst.
The Harper Government(he is an economist) believes in free markets, rewarding enterpreneurs, and getting government out of the way. This could lead to the overheating of an already hot economy in northern Alberta, but that's okay unless you need to buy a house in Ft. McMurray. For the rest of North America, its good news.
American investors may want to look at peripheral ways to play the oil sands boom, since the direct participants are now pretty expensive, and facing huge cost overruns as labour and materials skyrocket in price due to scarcity. Think about heavy equipment (Caterpillar, Finning International) industrial suppliers (Wajax, Toromont, Enerflex) and pipelines (Transcanada, Enbridge).
Posted by: David Baskin at February 1, 2006 03:47 PM
To those who say energy will be cheap in the future: Maybe. Maybe not. You don't know. Neither do I. I highly recommend studying the material of the late Richard Smalley. Solar is probably the only way to go, as he argues. And the energy is there but, as smalley said, we need maybe ten miracles to tap into it at the levels necessary.
It's very easy to form sentences such as "energy will be cheap" but very difficult to make it happen.
Posted by: T.R. Elliott at February 1, 2006 04:20 PM
If an entity manipulated supply to raise prices (Hunt Brothers & Sliver) we would prosecute them, oil companies & refineries seem to have protection from a few areas of prosecution!
Posted by: george at February 1, 2006 05:30 PM
Shameless US beneficiaries of big oil profits:
20% of the US equity market value is owned by private pension plans,
10% of the US equity market value is owned by state/local pension plans,
20% of the US equity market value is owned by mutual funds (of which half is from 401k/IRA accounts),
10% of the US equity market value is owned by insurance companies to cover life insurance annuities.
Shameless California big oil profiteers:
1% of the US equity market value is owned by CALPERS (California Public Employes Retirement System),
.7% of the US equity market value is owned by the California State Teachers Retirement System.
Posted by: Big Oil at February 1, 2006 06:18 PM
oil ,energy .gold and commodities were in a 20year bear market which ended in 2002....i didnt hear anyone compaining that oil companies received too little return on capital during that long twilight period for those investors. it soesnt seem right to peanlize them now....jjj
Posted by: jjj at February 1, 2006 06:39 PM
Very poor economic analysis here by many of you. There is no "free market" with regard to oil. Government has prohibited drilling in ANWR and in many areas off of Florida....our government's behavior is good for the oil companies. Our government constricts supply and then people who know nothing about economics whine about the "failure" of "free markets". This same government gives mortgage deductions for people to own homes. (Thus creating urban sprawl which cause everyone to drive everywhere.) Again, many of you economic know nothings love your mortgage deduction but then whine about the market distortion this causes by increasing our consumption of gasoline. Nobody can build a viable rail alternative in America because you economic know nothing environmentalists don't want to kill a snail darter...then you turn around and complain that we have no high speed rail and that the "free market" isn't working....some "free market" - it is so heavily regulated it is bound to "fail". The oil companies have to love the "green" movement. No rail lines, no more oil drilling; so, the price of oil just goes up and up... I live in Chicago; the silly city government here has raised taxes so high that a lot of companies have moved out to the suburbs....more sprawl, more driving, more oil consumption....more whining by the very people who loved the tax increases and now complain by...more sprawl! Look in the mirror - the latte drinking, Volvo driving, do-gooder, yuppie liberal is the problem and the complainers!
Posted by: Jack Morrison at February 1, 2006 10:30 PM
Next,on Fox -
Posted by: biker at February 2, 2006 07:28 AM
Jack Morrison: Having a bad day?
I think folks here know a thing or two about economics. And I think folks here know that markets are constained in many ways. Govt subsidizes housing through the tax code, built highways years ago, etc. All well and good.
But let's get our facts straight. How many million barrels per day are currently inaccessible?
And, might I ask, is your point?
Posted by: T.R. Elliott at February 2, 2006 08:54 AM
Wern't there some good economic studies about a decade ago that came to the conclusion that the tax credits, rates, etc., were so complex for the oil companies that no one could actually figure out what their net tax payments were?
Posted by: spencer at February 2, 2006 09:39 AM
"smalley said, we need maybe ten miracles to tap into it at the levels necessary."
I can't find that. This seems to be a good summary of Smalley's thinking-"http://cohesion.rice.edu/NaturalSciences/Smalley/emplibrary/120204%20MRS%20Boston.pdf". What's your source for that quote?
All he really says is that it's a very big project - we already know that. Further, he exaggerates (perhaps it's an error, maybe it's for effect): we don't have 14 TW of electrical generation, we have 14TW of primary heat production. Maybe 5 of those is for electrical generation, and about 1.6 is actual electrical output.
The single most important thing he talks about is solar, and the second is storage. Both of these are on track to be solved, the problem is that growth is currently too slow for comfort. Both wind and solar are doubling every 2 years. At that rate they'll grow by about 100 times in about 14 years. Cost reductions will happen quickly enough to support that rate of growth, but still...that's 14 years away.
Local storage can come from plug-in hybrids. Unfortunately, they have roughly the same problem as nuclear: they have to be developed, used and evaluated to get people comfortable, and then we have to replace a big fraction of the existing vehicle fleet. This will take a while, probably 15 years.
This growth can and should be accelerated by an expanded committment to R&D.
Posted by: Nick at February 2, 2006 10:53 AM
Nick: I first saw him say that in one of his talks that are captured on video and available at his website.
He makes the reference here as well:
Posted by: T.R. Elliott at February 2, 2006 08:19 PM
Biker - I have a bad day when people blame free markets for the problems created by governments. You ask "How many millions of barrels are currently inaccessible? The answer: hundreds of millions - due to government control of oil in Nigeria, Mexico, Russia, Saudi Arabia, Iran, Venezuela, etc. etc. There is no "free market" with regard to oil production in this world. Because this is true, we do indeed need to come up with alternatives, but people should not blame the failure of "free markets" when, in fact, governments around the world are really to blame. Likewise, starvation in Africa is not due to a lack of food or technology etc. or the failure of "free markets". The problem is man made. (Corruption, lack of stable legal institutions, subsidies to U.S. and E.U. farmers etc. etc...i.e. governmental problems...) People on this board do know economics but they can't grasp simple facts like this, so they blame "free markets". I was amazed in college that many of my learned economic professors still clung to outdated anti-market ideology....just after they explained why rent control doesn't work! Sociobiology? Do people derived from the English isles "get it" and the rest of the world doesn't and never will? It looks as though this may explain much of it. I know so many people with high I.Q.'s but they can't grasp simple economic concepts. (Many people on this board and my Russian friends suffer from this.) Why? I think E.O. Wilson is on to something. People on this board will not like this theory, but it explains a lot. So go ahead - you all with much higher I.Q.s than mine....say silly things like, "Oil companies make too much money...let's tax away their profits!" Simple people like me ask, "Well, how will they invest in new projects to extract more oil to satisfy our increasing demand?" "Conservation" you say? First, what liberal yuppie is going to cut back on their fuel usage? That is why they are complaining about the high gas prices now...they don't want to cut back. And don't get me started on Bono...a super liberal yuppie who flies all over the world wasting gas and resources telling people...well, that they shouldn't be flying all over the world wasting gas and resources....maybe people from the British Isles aren't so smart after all.....
Posted by: Jack Morrison at February 3, 2006 12:09 AM
Biker: To answer your last question - my point? People should not blame oil companies for high oil prices. Instead irrational religious beliefs in the middle east combined with despots/corruption in Venezuela, Russia, Nigeria combined with irrational left-wing enviro wackoness in the US. (ANWR) have constricted supply and driven up prices.....something OPEC and oil companies LOVE!!!.....OPEC and oil companies DO NOT like free markets....but I do...and if we had truly free markets, oil prices would be much lower than today....I know I am beating a dead horse, but most people will never be able to grasp this simple concept....most companies hate free markets.....contrary to what most know nothing libs. believe....uggghhh The solution? Probably nothing....humanity is too dumb to understand how markets work (including many economists) and are therefore in favor of retarded concepts like "windfall profit taxes". Some areas of the world sort of buy into markets and live well...and many don't and live like animals...total poverty....so then some idiotic economists (some on this board)advocate taxing "rich" nations to subsidize the "anti-market" nations....but it never helps....they still live like animals....they still curse markets and the know nothing economists scratch their heads and ask, "Why hasn't all of this aid helped them? Lets give them MORE aid!!...That should do it!" It doesn't, it won't and it never has....instead of sending Harvard grads. to Africa to feed starving people (poor allocation of human capital)...why don't the do-good Harvard grads. do something really compassionate and useful: Advocate free markets and non-corrupt institutions and a stable legal system for Africa? If well educated people on this board believe in failed left-wing economic myths....there really is no hope for poorly educated people....which is most of the world's population....
Posted by: Jack Morrison at February 3, 2006 12:42 AM
Jack: I think you are carrying on an argument with a whole host of strawmen. I don't buy into ideologies left or right.
I believe all problems and issues should be considered on their merits. You mentioned Africa: The west has a long history of disturbing and exploiting Africa, having carved it up into fiefdoms, largely enslaving into poverty a large proportion of the population. When a patient is sick, the answer is not always to pull all support. The patient may die. This is not an argument for top-down management and economic control, but I saw a quote the other today: the world has spent somewhere on the order of $2.1 trillion on aid in the past 50 years. And spent about $1 trillion on weapons last year. Aid should be well spent, should not cause more problems than it helps. Both are issues. But I'm not too concerned about that $2.1 trillion when I have direct experience on how much real waste takes place in the military industrial sector.
Posted by: T.R. Elliott at February 3, 2006 11:27 AM
I see the quote. Oddly enough, I mostly agree with him: moving to a better energy system is an enormous job, it's very important that we do so faster than we are, and we should make a much larger national commitment immediately. That said, I would point out some questions of interpretation.
First, some people take the "ten miracles" quote and take it to mean that a better system is (or might be) impossible, and we're doomed. That's not what Smalley is saying. He believes these things are doable, just that they will either take some time, or an enormous effort, to achieve.
Second, Smalley exaggerates to some degree. I've already pointed out one exaggeration (or major error) in the presentation I referenced. Another is that he uses the word "miracle" (suggesting whole new scientific principles/technologies, like lasers), when all of the essential technologies are here now, at least in the lab. It's a matter of engineering, investment and development.
Why does this matter? Because I don't like to see people paralyzed by despair, which is what you get when you declare "we're doomed!", or even that cheap energy will never return and therefore we should limit our expectations.
Posted by: Nick at February 3, 2006 12:45 PM
How many people here are old enough to remember when photovoltaic solar cells were going to save us?
There is a middle ground between techno optimism and pessimism that laymen (and even some scientists and engieers) often miss.
Technology marches on, but we don't always have the ability (like Babe Ruth?) to point at the far fence and name our home runs before we hit them.
I'm sure we will get many better technologies and solutions ... but I don't think caution should get bundled with rank dispair.
Up until we hit those home runs, and have those cheap and easy replacements for fossil fuels, it would be prudent at the very least to be cautious in our consumption of the resources we have.
Posted by: odograph at February 3, 2006 01:43 PM
Nick: We are in concurrence. Smalley's comment about miracles takes into account that many miracles have occured in the twentieth century. The atomic bomb itself was likely several miracles wrapped up in a relatively small package (when considering bang for the pound--in terms of bang for the buck, the first bomb was darn expensive).
Smalley's main point: we need to get going now.
Posted by: T.R. Elliott at February 3, 2006 06:17 PM
Hi, I'm just a student but have read all your opinions. So far i would be on the side of free markets. The atomic bomb was created because of WW2 maybe we need WW3 to come along to get another technological jump.
Posted by: Ecoman at February 5, 2006 06:35 AM
Ecoman: With respet to WW3: That's an awful idea. But if it happens, we'll put you on the front lines.
A lot of the technologies I'm referring to were created by DARPA and related govt funded programs in support of the cold war. A lot of them didn't have any specific purpose. I suggest studying the history of actual events in addition to the theories of economics. You will find that solid state physics, communications, the internet, graphics, and a whole host of technologies were first developed by the military and its adjuncts. There are no two ways about it. The same holds for genetics. If you look at the structure or manner in which funds are dispursed by the govt, they are categorized. E.g. the navy used to categorized according to a graded scale, with the least funds and largest number of projects dispursed to pure ideas and paper/pencil projects. The largest funds and least number of projects to actual development.
Digital signal processing, data compression, etc are all heavily influenced if not direct outcomes of govt sponsored research.
Many of the economic ideas you are studying are the direct result of govt funded universities and programs. The Fed funds economics to think about the economy.
The larger economy should operate by free market principles with few exceptions. But there are few incentives and few dollars chasing after ideas that, most likely, will not pan out. Particularly in the age we live in today of short-term focus on the bottom line.
Posted by: T.R. Elliott at February 5, 2006 08:25 AM
So are you saying that we should have free market economies but with the govt. funding scientific research?
Also, I would like to add that my comment on WW3 was only to see what economists would think of the saying 'necessity is the mother of all invention. And if WW3 does come along, knock on wood, I'll put myself on the front line for just a ridiculous statement. LOL
Posted by: Ecoman at February 6, 2006 01:08 PM
I think we're on the same page, with pretty small differences in interpretation. I'll repeat what I said before:
There's no question energy will be cheap in the long run. It's the transition during the next 30 years that is the problem.
I'd like to arrive in 2035 with: the US not deeply in debt to the rest of the world; the 3rd world not deeply poor; the rest of the world not hating the US; and sea water not covering most of Florida.
For better or worse, technology isn't the problem. That's the maddening thing about this: we could have been in a dramatically better situation had we made relatively small changes in our priorities in the last 30 years (like if Reagan hadn't put the DOE alt energy programs on the back burner, and CAFE increases hadn't been halted).
We could still improve the course of things greatly with changes that aren't that large in the grand scheme of things. It's a matter of social choice, and politics, not tech. Which fits pretty well with what you've been saying.
Posted by: Nick at February 6, 2006 02:19 PM
Let me clarify: I agree that there is urgency to improving our energy systems. I think the crucial problem is resistance from existing industries: oil & gas, and automotive. People are afraid of losing their careers, and so they're slowing the transition to improved systems as much as possible.
That's understandable, but not a good idea. The best approach would be to understand people's fears, and try to address them. For instance, a freeze in automotive CAFE can be best understood as an extremely expensive, short-term and counterproductive subsidy to the car industry. Well, heck, why not design a much more efficient subsidy, in exchange for better MPG? Like, paying for autoworker health insurance, like the Canadians(more cars are assembled in Ontario than Michigan) and Japanese do? Or paying for R & D, like we did with the PNGV program?
Posted by: Nick at February 7, 2006 01:12 PM
How much of oil company profitability is attributable to subsidies? In what way does the US gov't subsidize oil companies?
Posted by: Al at February 8, 2006 10:40 AM
Al, was that a response to my post?
Although I would argue that there a number of subsidies for oil companies, many of them indirect (and open to interpretation), what I was primarily talking about was industry blocking of alternatives.
The Whitehouse has been heavily influenced by oil & gas people for 18 of the last 26 years. Heck, there's been a Bush as VP or Pres for all of those 18, not to mention many other staff.
One of the first things Reagan did in office was cut deeply into DOE alt energy R&D. When you remember that DOE R&D has been instrumental in developing solar, wind and a raft of other things, you realize what has been lost.
Some of this isn't conscious undercutting of competition. To a great extent they think oil & gas (and nuclear) is the present and future face of energy, and just can't imagine anything else.
Posted by: Nick at February 9, 2006 10:29 AM