Exxon is Huge....

From a Carpe Diem post today...

ExxonMobil CEO and chairman Rex Tillerson defended his company's staggering $11.7 billion in profits for the second quarter, saying that the company's earnings reflected the magnitude of its business operation. "I saw someone characterize our profits the other day in terms of $1,400 in profit per second. Well, they also need to understand we paid $4,000 a second in taxes, and we spent $15,000 a second in cost," Tillerson told ABC News' Charles Gibson. "We spend $1 billion a day just running our business. So this is a business where large numbers are just characteristic of it."

OPEC's Biggest Ally...Congress

Great column today from Walter Williams.

Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel. Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's staunchest ally.

Not Even All the Land In Saudi Arabia Produces Oil

Is it any wonder that oil companies have not drilled on every acre of lease they hold from the government? Not even the Saudis and the giant Ghawar Oil Field (the world's largest) has oil in every acre. Maybe B Hussein should look at a few maps of the Gulf and the American West.

Oil and gas are located in pockets. Not every square foot of a region hold recoverable reserves so oil companies have to be selective on where they drill.

The Blame for High Oil Price... Congress and Demand.

There is a great article written by Alan Reynolds of the Cato Institute the correctly blames Congress and increased demand as the culprits in high oil prices. He also goes into detail why speculators are not to blame. In the speculative market there are two sides to every trade. Half bet the price will rise, half bet the price will fall.

Here are some excerpts:

But, much as politicians would like to blame speculators, it's just not so.

For starters, there's nothing about futures or options that makes it any more attractive to bet that commodity prices will go up than to bet they'll go down. Guess wrong on the direction, and you lose money.

And speculation that oil prices will rise rather than fall has dropped drastically since we crossed $100 mark. The "net long" position on the New York Mercantile Exchange fell from 113,307 contracts on March 11 to 25,246 by June 10 -so nearly as many traders are now shorting oil as are going long.

Speculators, in other words, are increasingly leaning toward betting the price of oil will go down, not up. So they're unlikely villains if prices do keep rising.

From November 2000 to November 2001, the volume of crude oil futures contracts in New York rose from 2.8 million to 3.2 million - even as the price of crude fell from $34 to $20.

There is no mystery behind the rise in oil prices. They rose too high too fast because of booming demand for oil for petrochemical products, electric power and shipping from many emerging economies (particularly China, India and the Middle East). Meanwhile, the supply of oil slipped in the US, Mexico, Venezuela, Nigeria and Russia.

But now JPMorgan analysts estimate that oil will drop to $85 a barrel from 2009 to 2011. Even Goldman Sachs analyst Arjun Murti, who recently guessed oil might reach $200, later told Barron's that oil will likely drop to $75 or less in the long run.

The urge to blame speculators is as big a waste of time as blaming oil companies. Americans want more oil and gas - not more hot air from politicians.

You thought Exxon was big?

Saudi Aramco is 32 times larger than ExxonMobil. So who do you think has more control over the price of gasoline? Maybe it is time the Iraqi people paid some debt for freedom? The Iraqi National Oil Company is 14 times bigger than ExxonMobil.

Oil and Housing

Don Boudreaux made a great point today at the Cafe Hayek blog that I have not thought about. Why is it okay for one type of asset to increase in price and get government scorn and yet another asset declines in price (moderately I would say, 10-15%) and the government does everything it can to get the price to rise? Let's call the first asset apples and the second asset oranges.

Would people say it is fair to have government suppress the price of apples yet welcome the increase in oranges? In fact government is proposing programs that would use money made by apple growers (windfall profits tax) to support the prices that orange growers get for their oranges. That does not seem right does it?

Now replace the above apples with oil and oranges with housing and see if it makes any more sense. It does not. Assets are assets and there are times when it is better to own or produce assets over others. Right now it is better to own oil production than a nice home on the coast. 5 to 10 years ago it was certainly the other way around when crude was around $10 per barrel and homes on the coasts were appreciating 10-20% per year.

Cheap oil is not a right and neither is a guarantee your house will appreciate in value. Both assets' prices are functions of the market and what consumers around the world value. Right now consumers value crude oil more.

Nationalized (Socialized?) Oil Companies in the US?

This should scare everyone.....

If you thought gas was expensive....

Monday the price of stamps is again on the rise. While this may not sound too bad, just compare the way the price of stamps has moved compared to gas. While the government might want to pursue the BIG OIL companies and claim anti-trust, maybe they should look into a government sponsored monopoly called the US Postal Service. If the BIG OIL companies treated customers like the USPS (for the same prices), then there really would be outrage. Instead, the BIG OIL companies have always found ways to bring more oil and thus brought Americans cheap fuel for their transportation needs.

Populism and Energy Policy

This is a great opinion piece in the Wall Street Journal. Everyone should be very afraid when politicians say they are going to do something about high gasoline prices. That something will most likely result in more costly energy.

Windfall Profits for Dummies

If you want to tax windfall profits, look at Google. It is 4-5 times more profitable on every dollar of revenue than the BIG OIL companies.

This rhetoric is really about fanning the flames discontent of a public that does not know how bad things could get. You think $3.50 is bad, try $5-6. That could easily happen with B Hussein or Billary's energy policy. Of course they will place more blame on the oil companies and take no responsibility for the roll they played.

The Untold Story of Exxon's Profit

ExxonMobil, the company portrayed as the evil gasoline price gouger, has just set a couple records. The first record is it's first quarter earnings, $10.89 Billion. The second record, and the one that will be overlooked by the media, meddling Congressmen, and consumers is their tax bill. Exxon paid $9.32 Billion in Federal Corporate Income Tax.

From the Carpe Diem Blog today, Dr. Perry says this:

In every single media story today about Exxon, the one key income statement
variable that will receive ABSOLUTELY NO ATTENTION is the amount of income taxes paid by Exxon, which was $9.32 billion in the first quarter, according
to Exxon.

Following CNN's analysis, Exxon paid $1185 in income taxes
every second this quarter, enough to buy 327 gallons of gas.

Think about this as you fill up. It is really Uncle Sam who is getting windfall profits.

Now, the rest of the story.

We only hear the 1/2 of the story where Big Oil is the bad actor in the environment, so what is the other 1/2 of the story? Turns out the government of Ecuador is to blame.

In Defense of Chevron

This kind of environmental targeting with big trial lawyers is the force behind locking out production in ANWAR and Off-Shore fields in the US. Who would want oil production in their backyard with all the horror stories coming out of South America. Turns out it is the oil companies that were the responsible ones. It is the National Oil Companies and their associated governments that are the problem.

Big Ag vs Big Oil

In reading a little bit on the Congressional hearings today for the big oil companies I came across something very interesting. Rep. Edward Markey, D-Mass stated the following:

"These companies are defending billions of federal subsidies ... while reaping
over a hundred billion dollars in profits in just the last year alone," he said.
The companies are reaping "a windfall of revenue" while poor people have to
choose between heating and eating because of high energy prices.

I find this interesting because of a quick bit of research I did this afternoon. It turns out that US Farm income is expected to be $92.3B in 2008 according to the USDA. Now farmers are enjoying in excess of $20B in government support (subsidies, loan programs, disaster aid, etc). On the other hand, the Oil Companies are enjoying $123B in profit (2007 and less expected in 2008) and only $18B in government support. So farmers’ income to aid ratio is 21.6% while Big Oil is 14.6%. So it would seem to me that it is the farmer who is actually making people make the choice between heating their homes and eating, not the oil companies.

Maybe the right thing to do is have no subsidies for anyone and let consumers choose what the right price for energy and food is in the market place. Why do any of these for profit entities need tax payer support? If they cannot stand on their own two feet, they should be allowed to fail, even farmers. Get the land in the hands of farmers that can be more efficient and deliver food to consumers that is cheaper. That is the humane thing to do, even for the farmers.

High Oil Prices

Today, there will be yet another Congressional hearing on the high cost of gasoline and the subsequent grilling of Big Oil executives. I am sure there will be lots of blame placed on Big Oil and how they are contributing to the excessive hardship of ordinary Americans.

I am confident that one thing these Congressmen will do is fail to do any self-reflection. Have they considered that many of the actions that they have taken might actually be contributing to the high cost of gasoline?

For starters, governments (State, Local and Federal) have put so many unique limitations on gasoline that oil companies have to keep literally thousands of formulas on the market to comply with standards. Gasoline is not a commodity product like wheat any more. That drives tremendous complexity in the business. The Feds have also failed to allow new drilling in some of the most promising areas of the US like ANWAR, Coastal Florida, and Coastal California. Permitting is do difficult in this country that new refinery construction is virtually impossible. In fact, there has not been a new refinery built in the US since 1976.

There has also been no consideration given to a reduction in the gasoline taxes. The US average fuel tax is $0.47/gal (from API). At $3.15/gal, gasoline taxes represent 15% of the cost to the consumer. It is the government that benefits most from the sale of gasoline.

A very good article from the President of the Heritage Foundation details some of the challenges faced by oil companies today. It is worth the time to read it. Considering what has to be done to get gasoline to the consumer today, we should be thanking oil companies, not bashing them.

Oil companies have to go to the most dangerous and perilous places on earth to find crude oil. Then they have to extract it from as deep as 30,000 feet at tremendous risk and capital cost, then transport it via pipelines that terrorist are constantly attacking and loading it onto very expensive double-walled tankers and shipping it half way around the world to refineries. These refineries cost billions to build (when you can) and maintain just so they can then put a product into a pipeline again so it can be distributed to local terminals for delivery. All this is done so consumers can enjoy a gallon of product for less than they pay for a gallon of milk.

Big Oil

After reading this Op-Ed in the New York Times, it amazes me just how little people know about Big Oil.

For one, it is very debatable whether the break up of Standard Oil by Teddy Roosevelt was actually good for consumers. At the time, the price of kerosene was actually dropping even though Rockefeller was consolidating the industry. His consolidation was driving efficiency and thus lowering the cost of petroleum products for everyone.

As for contributions to society, ExxonMobil alone pays more in corporate income tax than the bottom 65% of taxpayers combined. The $15B in incentives the oil companies enjoy are a pittance compared to the payments to the renewable energy crowd (i.e. ADM, Farmers, the solar and wind energy proponents). As for the 700% increase in payouts to shareholders, this is great news. These shareholders are primarily mutual funds and pension funds that hold the retirement savings of most Americans.

There will always be stories about people not being able to heat their homes. It is very unfortunate that it happens. However, price is the most efficient way to ration scare resources like heating oil and natural gas. Price is a much better mechanism than some politician telling you what you can set your thermostat to in the Winter. Oops, too late as the politicians are already trying to do this very thing in California.