I ran across the following today:
Our view on gasoline prices: With crude at $100 a barrel, Big Oil needs no tax breaks
It’s difficult — make that impossible — to justify taxpayer subsidies for an industry whose top five companies made $123 billion in profits last year. Oil at $100 a barrel ought to be plenty of incentive to drill without extra encouragement from taxpayers.
OK, sounds like a challenge. I will accept. First off, does it matter how much capital is being invested to make those returns? What if the required investments are 10 times that $123 billion? What if another industry – like say Hollywood studios – makes much higher profit margins, yet qualifies for exactly the same tax deduction? Does that make a difference? No? Is it just because $123 billion is a big number? How big should it be? What should the allowed return be to justify the cost and risk of building a floating city in the ocean? And what is the justification for denying the tax deduction to the largest companies of a single industry?
Is it really fair to exempt Citgo, after Hugo Chavez has already seized investments of U.S. companies? Believe it or not, these same companies whose investments Chavez has seized (COP and XOM) are being singled out for more punitive measures by a pandering Congress, while a Venezuelan oil company operating in the U.S. would continue to receive the tax deduction.
Further, with oil at $100 a barrel, understand that all costs associated with drilling have rapidly increased. Should that matter? Or does is still just boil down to $123 billion is so gosh-darned big? Well, get your mind wrapped around the capital expenditures. They also dwarf those of other industries. Should it matter that these projects take many years to bring to fruition, and yet politicians attempt to change the rules every year? If you are an oil company CEO, is it more likely or less likely that you will make marginal investments in the U.S. – given the uncertainty that the law will remain constant?
I have to agree with the OMB:
“The administration must strongly oppose” the legislation, the Office of Management and Budget said Tuesday, “because the bill would use the tax code to target tax increases on a specific industry in a way that will lead to higher energy costs to U.S. consumers and businesses.”
But here’s the political spin:
Rep. Rahm Emmanuel (D-Ill.) said “Americans are being asked to pay twice” — once at the gasoline pump and then through tax subsidies to the oil companies.
Are they really being asked to pay twice? Don’t oil companies pay far, far more in tax revenues than this little tax break? Sounds to me like oil companies are being asked to pay twice. And I guess that you also forgot that if your argument is true, Americans are paying three times. The government take from gasoline sales is huge – so you apparently forgot that payment. But I am sure politicians aren’t eager to highlight that point.
And if it is really this simple:
Supporters of the measure noted that rescinded tax breaks would amount to less than 2 percent of the profits of the five biggest oil companies. Even if the companies were to pass along that entire cost to gasoline consumers, it would amount to about a penny a gallon.
– then I have an idea. Raise gas taxes by a penny a gallon. My guess is that this would have much less opposition. But this isn’t really about the money. This is just politicians playing games and pandering for the public.
You have made the point in the past (not so much in this post, granted) that it is unfair and unproductive to change the rules of business by e.g. changing the tax code or the royalty requirements that apply to oil company work. OK, fair enough, but the logical extension of that point makes it illegal/immoral/wrong to impose any new taxes on the oil (or any other) industry because you’re “changing the rules”.
So, in your opinion, at what point and in what way is it reasonable to impose new taxes on these industries? If it is deemed that the oil companies have not been historically paying their fair share, then at what point can we try to redress that?
(Yes, I realize that the context of the current debate is selectively eliminating tax breaks, not imposing new taxes. But I think the same principle ultimately applies.)
I anticipate that you will complain that the oil companies are being singled out preferentially vs. other industries. That is certainly true. On the other hand, the oil companies are different from most other manufacturers in that they extract and sell a finite natural resource that directly contributes to global warming and environmental degradation. Given the fact that their revenue comes from taking from and damaging the commons, it seems reasonable to assert that their level of profitability should be regulated and limited, and profit beyond a certain level (or perhaps simply a certain percentage of revenue) should in fact be taken and spent to redress the damage that they inherently do as they go about their business.
I realize that they are not unique in this — most other extractive industries (e.g. coal, mining) do the same. On the other hand, I wouldn’t hesitate to recommend that this logic be applied to those industries as well.
I also realize that the proposals currently on the table do not rely on this logic, and are not necessarily justifiable on this basis. My point is not to argue about the validity of the current proposals. I am hoping to understand under what conditions, if any, you think that it would be reasonable to limit the profits of the extractive industries.
I’m going to step back and make what I think is a fair, but unpopular, statement:
Taxes on oil are taxes on oil.
It doesn’t matter if you do them at the well-head, the import terminal, at the refiner, at the blender, at the wholesaler, or at the retail pump (perhaps in a last-minute “carbon tax.”)
All those will always distort the market, and will always be split as costs between buyer and seller. They’ll be “passed on” every time, in what the market will are.
That’s not bad, that’s just the way it is.
So having said that, I can name my favorite sorts of taxes (well-head to preserve native resources and retail to reduce consumption). At the same time I can see any other tax at any other point in the “pipeline” as loosely aligned.
Some people do feel an emotional sense of injury for some of those taxes but not others. It’s not really rational to call for lower gas pump prices and higher oil company taxes, but neither is it really rational to call for lower oil company taxes and higher carbon taxes …
heh, “n what the market will bare.”
What a disappointment, Robert. As one of your fans and regular readers, this is really beneath you. You provide no background, reaseach, nor logic from which to draw conclusions. Worse, by confusing “tax deductions” for tax subsidies, you even suggest you don’t understand the issue. At the risk of a political barb, please don’t give your fans reason to start calling you “Hillary”.
…TommyGuy
What if the required investments are 10 times that $123 billion?
The 1.2 trillion mentioned in that article is bogus. Even if the number itself is real, it’s a distortion to compare gross investment against net earnings.
I don’t have industry-wide numbers, but XOM return on invested capital (ROIC) for the last few years has run 40-50% pre-tax and 25%+ after taxes. I don’t know of any other commodity industry which has sustained such high ROI over time. Some housing-related industries (e.g. drywall) had a couple years like that, but it was a cyclical peak which has since crashed back to earth.
XOM’s net capital investment (capex minus depreciation) the last few years has run 3-4 billion dollars. This is about one tenth their 35-40 billion annual earnings, giving lie to the “earnings are being reinvested” claim. Big Oil should be free to allocate capital as they see fit, of course, but let’s get off this moral high horse and stop pretending oil companies have not received a massive windfall from OPEC’s restraint-of-supply policy.
Looks like I need to knock out a few replies.
You provide no background, reaseach, nor logic from which to draw conclusions.
Um, I had links throughout to various background information. Besides, this has been discussed here quite a bit, and I thought it was well understood. But here’s a quick primer:
An important new deduction for manufacturers and producers
On Oct. 22, 2004, President Bush signed the American Jobs Creation Act, legislation meant to encourage the hiring of American workers and reduce outsourcing to overseas labor. Among its provisions, the act created a new tax benefit that gives a break to nearly every kind of business that is engaged in production in the United States. This tax deduction (not a credit) begins in 2005 as a 3 percent deduction on income from qualified production activity and increases in two steps to a 9 percent deduction by 2010, when it will be fully phased in.
OK, it is a tax deduction, addressing your complaint that it isn’t a tax deduction. Who gets it?
• Chemical manufacturing
• Publishing
• Motion picture and sound recording production
• Computer and electronic-product manufacturing (including software production)
• Utility production operations
• Petroleum and coal products manufacturing and other mining operations
• Beverage and tobacco products creation
• Construction
• Transportation equipment manufacturing
• Farming and other food manufacturing
• Wholesale and retail trade
• And various other businesses engaged in domestic production
So cigarette makers, coal miners, ethanol producers, corn farmers, movie makers, beer companies, etc. etc. etc. But they want to single out the oil industry for denying the tax DEDUCTION.
Pardon me if I think that’s highly unfair. It stereotypes and points fingers at the oil industry over all of those other industries, despite the fact that oil industry profit margins are right in line with those other industries. That is complaint one: The industry is singled out. Complaint two comes as a person who has prepared project budgets. In my budgets, we have tax rates. Those tax rates are factored into project economics. Those projects will take 3 to 5 years to complete. If Congress changes tax rates at a whim, and that threat is always hanging over the industry, then how on earth can you properly plan projects? Well, one way is by increasing the expected tax rate. What does that do? Push the marginal projects somewhere else, even though that tax rate may never come to fruition. It is just highly frustrating that we can’t even make a 3-year plan for fear that Congress is going to throw a monkey wrench into the budget.
Those are my complaints in a nutshell. You have an industry out there risking life and limb to bring a critical commodity to the marketplace, and that industry is widely hated as a result. Grandstanding hearings like this just feed those stereotypes and add fuel to the fire. That, quite frankly, pisses me off.
RR
OK, fair enough, but the logical extension of that point makes it illegal/immoral/wrong to impose any new taxes on the oil (or any other) industry because you’re “changing the rules”.
Again, my complaint is not that taxes are at the right level or wrong level. My complaint is that unless these changes are known in advance, they play havoc with project economics, and the industry is being singled out for punishment.
On the other hand, the oil companies are different from most other manufacturers in that they extract and sell a finite natural resource that directly contributes to global warming and environmental degradation.
Slap a higher carbon tax on, then. I have no complaint about that. The end user of the product is encouraged to use less of it, it doesn’t play havoc with project economics, and it doesn’t stereotype the industry.
This is the same tired argument we’ve been hearing from conservatives for as long as I can remember. When they want to cut a program the spending has to be justified on its relative merits (that is, it is the best use of spending relative to other uses). When they want to increase spending it is evaluated on its absolute effects (all taxes work to decrease production, does that mean the ideal government size is zero?). Defense spending is unequivocally necessary because it supposedly makes us a little bit safer and oil and gas subsidies are justified because they, in theory, result in slightly more energy production. With the returns cited by doggydogworld, does anyone honestly believe that oil and gas companies are going to cut E&P spending just because their returns are going to fall by a few percent?
I don’t have industry-wide numbers, but XOM return on invested capital (ROIC) for the last few years has run 40-50% pre-tax and 25%+ after taxes. I don’t know of any other commodity industry which has sustained such high ROI over time.
You are confusing two terms. ROI is not the same as return on capital employed (ROCE). There are loads of costs in the industry that don’t involve capital. Besides, it should again be compared against other industries. What’s the ROCE for Microsoft? It’s probably 10, or even 100 times the ROCE for XOM. So pick your metric, compare to other industries, and then justify singling out this one critical industry on the basis of returns. It can only be done by looking at the size of the profits without the context of the money and risk it took to earn those profits, and frankly I think that’s a stupid way of looking at it.
“OK, it is a tax deduction, addressing your complaint that it isn’t a tax deduction. Who gets it?”
He was getting at the point thateconomically they are identical. Giving someone a dollar from the treasury is the same thing as lowering their tax liability by a dollar. You are arguing semantics until oil and gas exploration and production becomes unprofitable.
“So cigarette makers, coal miners, ethanol producers, corn farmers, movie makers, beer companies, etc. etc. etc. But they want to single out the oil industry for denying the tax DEDUCTION.”
Has any other industry benefited from the actions of a formal cartel at the expense of every American?
“Pardon me if I think that’s highly unfair. It stereotypes and points fingers at the oil industry over all of those other industries, despite the fact that oil industry profit margins are right in line with those other industries.”
This is just the result of accounting structure of the integrated, but separate, model. In reality, oil gets pumped out of the ground at a cost of 15 a barrel, refined and distributed for 5, and retailed at an cost of 2 for a price of 120. For a margin of (120-15-5-2)/120 = 81%. However, when each company is separate you book the revenue multiple times. Otherwise to generate 400 billion in revenue Exxon would have to pump 4+ billion barrels of oil a year. Of course, not even Saudi Arabia produces at that level.
“Complaint two comes as a person who has prepared project budgets. In my budgets, we have tax rates. Those tax rates are factored into project economics. Those projects will take 3 to 5 years to complete. If Congress changes tax rates at a whim, and that threat is always hanging over the industry, then how on earth can you properly plan projects?”
Most people have to deal with the same decision in investing in 401k’s or IRA’s. You are not being singled out and relative to young workers you have a much rosier situation. I don’t know of any project whose profitability hinges on predicting tax rates 30-40 years from now.
“Those are my complaints in a nutshell. You have an industry out there risking life and limb to bring a critical commodity to the marketplace, and that industry is widely hated as a result. Grandstanding hearings like this just feed those stereotypes and add fuel to the fire. That, quite frankly, pisses me off.”
When I worked in anodizing, inhaling fumes and enduring incredible heat so that people could have pretty leathermans, I didn’t expect anyone to care about my trials. You can say the same for the guys that do highway construction at night. Every industry gets grandstanded for some reason or another. Financial services, construction, automakers. You just only notice when it is your industry.
As I have pointed out elsewhere, the proposed tax increases apply only to the largest domestic oil companies (ExxonMobil, Chevron, and ConocoPhillips) and two US subsidiaries (BP and Shell). Citgo would still get the tax deduction. How is it fair to single out certain industries because of their size.
I’m with Robert, you can’t equate income taxes with greenhouse gas taxes. Each company has a different footprint. If you want to tax GHGs then have the political will to propose one.
“You are confusing two terms. ROI is not the same as return on capital employed (ROCE). There are loads of costs in the industry that don’t involve capital.”
Oil and gas is one of the most capital intensive industries on the face of the Earth. There are not “loads” of costs that don’t involve capital. Years ago in intermediate micro I had to calculate the cobb douglas (capital and labor exponents for a production function) exponents for a laundry list of industries. Oil and gas came out as the most capital intensive. This was even before the boom in capital intensity that has characterized oil sands and deepwater projects.
“Besides, it should again be compared against other industries. What’s the ROCE for Microsoft? It’s probably 10, or even 100 times the ROCE for XOM”
Relative to other capital intensive industries (not labor intensive like software programming, what a ridiculous comparison [the only capital that is required for making software is a computer and coffee]) oil and gas is earning much higher returns.
“It can only be done by looking at the size of the profits without the context of the money and risk it took to earn those profits, and frankly I think that’s a stupid way of looking at it.”
Risk is not quantifiable. Return on capital, unfortunately for you, is.
Frankly, I believe your whole line of argument is irrelevant. Oil and gas firms have been the beneficiaries of the actions of a cartel at the expense of American citizens. It is absurd to argue that on top of that enormous competitive advantage they need subsidies.
He was getting at the point thateconomically they are identical.
No, he said I have confused tax subsidies with tax deductions.
Has any other industry benefited from the actions of a formal cartel at the expense of every American?
What difference does it make when the actions of the cartel resulted in pushing profit margins from 5% up to the astronomical levels of 10%? If not for the actions of the cartels, refiners would simply have continued to go out of business as they were in the 90’s, and more and more of our refining capacity would have ended up overseas.
Most people have to deal with the same decision in investing in 401k’s or IRA’s.
That’s a confused analogy. Here’s a proper analogy. If your IRA returns are predicted to be better than my IRA returns, guess what? I don’t get to invest in my IRA. That is the case with these project economics. All of these projects are competing against one another, and if the economics don’t look good enough, the project isn’t funded.
In reality, oil gets pumped out of the ground at a cost of 15 a barrel, refined and distributed for 5…
You are living in the distant past. The number were like that when oil prices were much lower. Then aren’t any more.
Otherwise to generate 400 billion in revenue Exxon would have to pump 4+ billion barrels of oil a year. Of course, not even Saudi Arabia produces at that level.
Gasoline and diesel sales? That’s where most of the revenue comes from. It isn’t from producing their own oil. They (and other U.S. companies) buy most of the oil they turn into gasoline.
When I worked in anodizing, inhaling fumes and enduring incredible heat so that people could have pretty leathermans, I didn’t expect anyone to care about my trials.
Again, you are confusing the issue. You may not have expected anyone to care, but did you expect people to hate you for what you did? Did you expect them to punitively raise your taxes because of what you did?
You just only notice when it is your industry.
To be clear, it is not longer my industry, but it is an industry that ranks at the bottom of public opinion, along with tobacco companies. And the crap that’s going on in D.C. right now just keeps those perceptions going. It isn’t like this in Europe, you know. Oil companies are not widely hated here. Then again, there isn’t a constant political circus revolving around oil companies over here.
“As I have pointed out elsewhere, the proposed tax increases apply only to the largest domestic oil companies (ExxonMobil, Chevron, and ConocoPhillips) and two US subsidiaries (BP and Shell). Citgo would still get the tax deduction. How is it fair to single out certain industries because of their size.”
Citgo is not engaged in E&P in the US. Refining margins have not been inflated by OPEC. If anything they have been victimized.
Independents have also been investing aggressively. Why have the supermajors chosen not to? Thus the tax structure has only worked to inflate the supermajors profits while independents have at least fulfilled the ideal of using it to increase capital expenditures.
Oil and gas is one of the most capital intensive industries on the face of the Earth. There are not “loads” of costs that don’t involve capital.
Sure there are. One example: Drilling costs. The costs to find and drill a well have exploded.
Relative to other capital intensive industries (not labor intensive like software programming, what a ridiculous comparison
Oil industries pay their people as well. So shall we compare return on labor employed? Just compare apples to freaking apples and you will find lots of industries with much higher returns, and yet this industry being singled out by demagoguing politicians.
Independents have also been investing aggressively. Why have the supermajors chosen not to?
That doesn’t really make any sense. When I was with COP, we made something like $15 billion over 3 years. What was our capital budget going forward over the next 3 years? Something like $15.9 billion. I won’t speak for the others, but look at the profits of COP versus their capital budgets.
Oil and gas firms have been the beneficiaries of the actions of a cartel at the expense of American citizens. It is absurd to argue that on top of that enormous competitive advantage they need subsidies.
I don’t think they need subsidies either. But I think they deserve the same tax deductions that are available to Microsoft, Marlboro, and MGM.
Citgo is not engaged in E&P in the US. Refining margins have not been inflated by OPEC. If anything they have been victimized.
Yet that’s exactly where elimination of the bulk of this tax deduction will hit U.S. oil companies – in that same refining sector.
Companies that made the investments,and increased their reserves when oil was a losing proposition,deserve every penny of profits imo. Should individuals be forced to cough up a higher tax rate if they were lucky enough to buy oil futures at $10 a barrel?
Gates went from living with his parents,to being the worlds wealthiest man in less than 15 years. Shouldn’t we tax software profits more?
Well, that’s going to do it for me. It’s late here in France (funny story – I thought I was in Switzerland; my meetings are there but my hotel is across the border in France. I only realized this after being in France for over 24 hours and having people look at me like I was crazy when I asked if they accepted Euros).
I have said my piece, and I don’t really think there’s much to add. In my opinion this piece of legislation is a punitive measure by politicians eager to tell their constituents that they stuck it to Big Oil. Meanwhile, it keeps the public angry at oil companies.
Tomorrow, a post about the diesel tree. Very interesting stuff.
Good night.
RR
“No, he said I have confused tax subsidies with tax deductions. “
Well, I am making the point that they are economically identical.
“What difference does it make when the actions of the cartel resulted in pushing profit margins from 5% up to the astronomical levels of 10%? If not for the actions of the cartels, refiners would simply have continued to go out of business as they were in the 90’s, and more and more of our refining capacity would have ended up overseas.”
Are you honestly trying to justify oligopoly? There is a reason that it is illegal in the United States. It is extremely destructive to the general welfare of the population. Furthermore, you still don’t understand my point. Profit margins were not 5% then and weren’t 10% now in the terms that normal people view things. But I’ll address this soon.
“That’s a confused analogy. Here’s a proper analogy. If your IRA returns are predicted to be better than my IRA returns, guess what? I don’t get to invest in my IRA. That is the case with these project economics. All of these projects are competing against one another, and if the economics don’t look good enough, the project isn’t funded.”
People have alternatives to a traditional IRA. They can use a Roth IRA, buy a house, or allocate the money to consumption. For normal people, these “projects” compete against one another. It is not a confused analogy at all.
“You are living in the distant past. The number were like that when oil prices were much lower. Then aren’t any more.”
I am not living in the distant past. You may be confusing the marginal cost of extraction (say 65 dollars in the deepwater gulf) with the average cost of extraction (which is unknown, but likely less than 20 dollars a barrel). Even if you include reserve replacemnt as a cost (as in the EIA FRS survey) you still only get 25 dollars a barrel.
http://www.eia.doe.gov/emeu/perfpro/production.pdf
“Gasoline and diesel sales? That’s where most of the revenue comes from. It isn’t from producing their own oil. They (and other U.S. companies) buy most of the oil they turn into gasoline.”
My point is that oil revenue is booked several times. Sale from upstream business, sale from downstream business, and sale from retail business. So now you’ve booked 350 dollars in “revenue” on one barrel of oil. By entering into transactions at an increasing number of stages in the production process of gasoline and diesel you can drive down the “profit margin” as far as you’d like. The oil companies representation of themselves as a low margin industry is highly disingenuous. The truth is that upstream has extraordinary margins while refining and retail typically have normal(relative to cost of capital)/low margins.
“Again, you are confusing the issue. You may not have expected anyone to care, but did you expect people to hate you for what you did? Did you expect them to punitively raise your taxes because of what you did?”
It’s not punitively raising their taxes. It’s removing a subsidy that no longer serves its purpose (if it ever did). Also, I doubt many people hate the people that work for oil companies. They are just upset that they are benefiting from actions (OPEC supply restraint) which are leading to the suffering of everyone else.
“Sure there are. One example: Drilling costs. The costs to find and drill a well have exploded.”
The definition of a capital cost is anything you purchase that is not labor. I imagine the rig, well, and all the equipment required to get everything on site dwarfs the labor cost.
“Gates went from living with his parents,to being the worlds wealthiest man in less than 15 years. Shouldn’t we tax software profits more?”
You may remember that Microsoft has been under continuous scrutiny, and has paid large fines, from the Department of Justice and the EU for at least a decade. You should also realize that there have been free alternatives (linux, open office) and commercial alternatives (Apple) to Microsoft products for a long time yet people still choose to pay more (the source of M$’s profits) to use, and even upgrade, products like Windows and Office. The ease (download the installer for free and double click) with which one can switch from Microsoft Office to Open Office is startling compared to the drastic capital expense and lifestyle change one would have to endure to switch from oil and gas to something else.
“Companies that made the investments,and increased their reserves when oil was a losing proposition,deserve every penny of profits imo. Should individuals be forced to cough up a higher tax rate if they were lucky enough to buy oil futures at $10 a barrel?”
Commodity futures are taxed at a higher rate than other investments.
“Yet that’s exactly where elimination of the bulk of this tax deduction will hit U.S. oil companies – in that same refining sector.”
Refinery investment is limited in the US for reasons completely unrelated to economics.
“That doesn’t really make any sense. When I was with COP, we made something like $15 billion over 3 years. What was our capital budget going forward over the next 3 years? Something like $15.9 billion. I won’t speak for the others, but look at the profits of COP versus their capital budgets.”
I don’t have time to dissect the financial statements of COP, but I do remember the large acquisition of Burlington Resources. While it is an investment, it is not one which results in increased production or new jobs. The welfare implications (which are at the heart of preferential tax treatment) are weak.
Anon – the tax provision in question specifically hits at refiners. The rates on domestic E&P are unchanged. The details are pretty complicated, but basically it allows companies to more fully deduct taxes paid to foreign governments on raw materials (like crude oil).
In another post you asked why your mother’s consulting business doesn’t get the same tax breaks. The implication is that oil companies don’t pay their fair share. Read this and tell me if your mother wants to trade tax rates: American Oil and Gas Companies Taxes
“The definition of a capital cost is anything you purchase that is not labor. I imagine the rig, well, and all the equipment required to get everything on site dwarfs the labor cost.”
This is incorrect in the oil & gas business (assuming the commonly used successful efforts accounting convention). Unsuccessful exploration wells … and there are a lot of them… are expensed. All of the associated costs, not just the labor. Other expenses include refinery purchases of crude oil, overheads, severance taxes, lease rental payments, royalty payments…. and the list goes on.
You may have your own definition of capital from a textbook somewhere, but when you read an oil company’s annual report, it uses the term “capital” in a different, well defined, and accepted way.
“Commodity futures are taxed at a higher rate than other investments.”
I think the point is that investors made decisions based on perceived future market conditions. I believe that those who are best able to serve future markets should be rewarded for it. If people aren’t rewarded for risk then the economy wouldn’t work very well, would it?
And anyway, if I take your argument to its logical conclusion, shouldn’t we then compensate oil companies, by amending existing tax law, in years when prices are falling? After all, that’s what many are proposing to do now. Go outside of tax law (i.e. change the provisions) to capture more cash from the industry.
“Refinery investment is limited in the US for reasons completely unrelated to economics.”
And yet the common rumor is that the industry is intentionally holding back to reduce supply. Do you agree? Where is the line between prudent capacity management and supply manipulation, considering the long term nature of refinery investment?
“I don’t have time to dissect the financial statements of COP, but I do remember the large acquisition of Burlington Resources. While it is an investment, it is not one which results in increased production or new jobs. The welfare implications (which are at the heart of preferential tax treatment) are weak.”
According to the API, new investment has been at or above earnings for the industry as a whole, except for one year, since 1992.
http://www.energytomorrow.org/energy_issues/truth_about_oil_gasoline_primer.pdf
Anyway, I’m not sure where you’re coming from with this argument that Big Oil is underinvesting while Middle and Small Oil aren’t (in fact from the above they must be hugely overinvesting). Where would you, for example, advise Exxon to invest capital to replace 1 billion barrels of oil produced annually? Would they refrain from investment if they could earn, say 30-40% ROR on it? Why?
Robert, ROCE and ROIC are essentially the same. XOM’s ROCE is above 40%.
Besides, it should again be compared against other industries.
That’s just silly. “Knowledge industries” require little or no capex and don’t use ROCE to make business decisions. Some such companies have infinite ROIC or even better (due to negative invested capital which makes the metric meaningless). Comparing XOM and MSFT on a ROCE basis makes no more sense than saying “WMT is very profitable at 3% net margin so let’s set a 3% ceiling on oil company margins”.
When I was with COP, we made something like $15 billion over 3 years. What was our capital budget going forward over the next 3 years? Something like $15.9 billion.
Again, you confuse the issue by comparing net earnings with gross capex. One is calculated before depreciation, the other after. COP shows 11.8b of capex in 2007, but 8.7b of this merely replaced depreciation assets. Net capex was 3.1b, about one fourth of net earnings.
Look, I’m generally sympathetic to your point of view but these absurd arguments are simply beneath you. Oil companies have received a huge windfall due to anti-competitive actions of a massive cartel. Actions which would be blatantly illegal in the US, I might add. This isn’t the fault of the “dedicated oil company employees risking life and limb to supply us with a vital commodity”, and it sickens me to see elected officials pandering and demonizing your friends and (former) co-workers. But it does not good to fight pandering and demonizing with blatant distortions and misinformation.
shouldn’t we then compensate oil companies, by amending existing tax law, in years when prices are falling?
Basically, yes. But there’s no need to constantly amend laws. Oil production is a partnership between a country’s citizens, who own the oil, and the oil companies who provide labor and capital to extract it. The tax scheme should reflect this partnership. Royalties should be on a sliding scale, nearly zero until the oil company has achieved a reasonable ROCE and 50% (or even higher) thereafter.
With such a scheme both parties profit when OPEC curtails production to send prices skyward and both parties suffer if prices fall. The kangaroo courts would disappear (notice how tobacco execs don’t get grilled now that the US Treasury makes more off cigarrettes than the companies themselves?). Why don’t oil companies use their considerable influence to get such sliding-scale royalties installed? Because 40% ROI beats 20% any day, even if it does come with the occasional Congressional appearance.
I really don’t think anyone is denying that the profits are large. I think the issue is more, what is fair, and fair over the longer term, and is anyone doing anything illegal here? Oil, like a lot of businesses, is cyclical. Lots of businesses make high profits. Every year, hundreds of individual businesses make their respective record profits.
OPEC is what it is, it’s part of the landscape. The oil industry shouldn’t be tarred with that brush. Why should it be singled out for punitive treatment if it has been acting within the law?
Wouldn’t cash from operations be a better benchmark for capital investment than net earnings? After all, the latter has a lot of non-cash items, one time charges, etc. It seems to me that the better question is, what is the industry doing with its cash? Not its accounting gains.
“Royalties should be on a sliding scale, nearly zero until the oil company has achieved a reasonable ROCE and 50% (or even higher) thereafter.”
If the marginal investment is slapped with a 50% royalty, that’s going to kill a lot of projects, sending domestic reserves downwards. I don’t see a way out of this. Can you explain?
“Why don’t oil companies use their considerable influence …”
I think the influence of the industry is highly overrated. Certainly it has clout. But it’s not drilling in ANWR or offshore California. And its #1 and #2 recipients of political donations to presidential candidates in both parties are out of the running. Few other industries get hauled before Congress whenever profits are deemed “too high”.
greenengineer said,
“in that they extract and sell a finite natural resource that directly contributes to global warming and environmental degradation.” bold emphasis is mine.
Excuse me, the one thing the biofuels debacle has helped establish that in most cases petroleum is the most environmentally friendly energy source there is that can supply societies energy needs.
Mark my words in the next five (and probably ten) years time all of the attempts to reduce CO2 emissions by replacing petroleum with other energy sources will result in two things.
1. Greater environmental damage then doing nothing would have produced.
2. No reduction in CO2 output
TJIT
Anonymous at April 02, 2008 9:47 PM says,
“Oil and gas firms have been the beneficiaries of the actions of a cartel at the expense of American citizens.”
A quick look at historical oil prices would prove that statement is just flat wrong.
If anonymous would take a look at the price of crude oil from about 1986 to 2003 he would see that for most of that time the cartel he is complaining about rarely saw oil over $20 / barrel. IIRC oil got as cheap as $12 per barrel in that time period.
In other words the cartel you complain about mostly did not exist and oil prices are primarily driven by supply and demand with some speculation premium added in.
TJIT
It appears a lot of people are confused about the actual financial condition of the oil companies. This link below should help get them schooled up
Obama, Big Oil and fun with charts
TJIT
Anonymous says,
Relative to other capital intensive industries (not labor intensive like software programming, what a ridiculous comparison [the only capital that is required for making software is a computer and coffee]) oil and gas is earning much higher returns.
By your argument the comparison to software actually underestimates how much more profitable software companies are.
They don’t have the massive amounts of capital at risk the oil companies do.
TJIT
Anonmyous said
My point is that oil revenue is booked several times. Sale from upstream business, sale from downstream business, and sale from retail business. So now you’ve booked 350 dollars in “revenue” on one barrel of oil.
And your point is ridiculous because you ignore one half of the equation. Each transaction also books a cost of the oil purchased which you ignore.
Upstream divisions can’t give oil to downstream divisions because they would go broke if they did.
The downstream division have to pay for it.
TJIT
Also missing in this discussion is the fact that oil companies pay taxes other companies don’t.
Severance taxes is one example of this.
TJIT
“Oil and gas firms have been the beneficiaries of the actions of a cartel at the expense of American citizens.”
Let’s consider what the US domestic and western oil industry in general would look like right now if OPEC had cranked out all the oil it could since the early 1970’s, in competition, and competing solely for market share. Selling very cheap oil for something like $5-10 per barrel.
Perhaps anonymous would like to comment on what the western energy security situation might look like now as a result. Would billions of barrels of oil have been discovered in one to two miles of water in the Gulf of Mexico? Would the North Sea have been developed? The answer to both question is probably “Yes, but…” A few big discoveries, maybe, but not the large number of smaller ones that really add up. The US would almost certainly be importing far more oil than it does now, and from less stable places. Would it be a good thing for the US to have an anemic, declining oil industry?
What would the alternate energy industry look like with $10 oil? Would it have been a benign influence in decreasing the content of CO2 in the atmosphere?
I hate to put myself in the position of defending OPEC (and I’m sure I’ll get yelled at for this LOL)! Their use of oil as a weapon in the past was not a good thing (even for them, it turned out). But in some ways, in hindsight, their policies have had positive consequences. In a way, they are essentially subsidizing the western oil industry when they restrict supply and cause prices to rise, and this promotes more investment and domestic reserves. Having said that, history has shown that OPEC can’t set whatever price it wants. I doubt they wanted $12 oil in 1998.
And besides, if I was running a dry and otherwise resource-poor country and all I had to sell the world was oil, I sure wouldn’t want to squander it all, making my people suffer in both the short and long term so that Americans could drive inefficient SUV’s with cheap gasoline.
“My point is that oil revenue is booked several times. Sale from upstream business, sale from downstream business, and sale from retail business. So now you’ve booked 350 dollars in “revenue” on one barrel of oil.”
Ever heard of value added? Do you think Valero, the largest refiner in the US, should pay $100 per barrel for its oil, and then turn around and give it away for free?
Value added occurs in a lot of industries. How many times does a sugar molecule change hands when a can of Coke is made? I don’t see what your concern here is.
“Ever heard of value added? Do you think Valero, the largest refiner in the US, should pay $100 per barrel for its oil, and then turn around and give it away for free?
Value added occurs in a lot of industries. How many times does a sugar molecule change hands when a can of Coke is made? I don’t see what your concern here is.”
Ever heard of a non sequitur? Your response was an example. Perhaps if you re-read my posts and do some research you can educate yourself to the point where you can make a valid argument one way or another.
After reading your response I had to go back and re-read my posts to ensure that I had not made some horrible error. But alas, it seems you intended to say your piece regardless of whether or not it had any relevance or logical basis to it.
“
Mark my words in the next five (and probably ten) years time all of the attempts to reduce CO2 emissions by replacing petroleum with other energy sources will result in two things.
1. Greater environmental damage then doing nothing would have produced.
2. No reduction in CO2 output”
You have no basis for these claims unless you are omniscient.
“A quick look at historical oil prices would prove that statement is just flat wrong.
If anonymous would take a look at the price of crude oil from about 1986 to 2003 he would see that for most of that time the cartel he is complaining about rarely saw oil over $20 / barrel. IIRC oil got as cheap as $12 per barrel in that time period.”
If TJIT would stop engaging in confirmation bias perhaps he would be rational. What kind of argument are you putting forth? That if we exclude all the data which clearly refutes your analysis you are correct? OPEC surely couldn’t have had an enormous impact on oil markets from 2003-2008 (the present period which we are discussing in this thread)? How about the data from ’71 to ’83? And of course there was no demand destruction in the late 70’s and early 80’s? Or a states of war between certain members of the cartel which may have inhibited it from functioning well?
“It appears a lot of people are confused about the actual financial condition of the oil companies. This link below should help get them schooled up”
Unfortunately, you can’t get “schooled up” in the disciplines of history, economics, and accounting in five minutes.
“By your argument the comparison to software actually underestimates how much more profitable software companies are.
They don’t have the massive amounts of capital at risk the oil companies do.”
Actually, most software companies are not making Microsoft kinds of profits. I could of course use Saudi Aramco as the benchmark oil company and draw similar types of ridiculous conclusions about the oil industry as you have regarding the software industry.
Furthermore, software companies actually are frequently forced to improve their product in order to maintain and increase levels of profitability. If businesses desired, they could run the same software they used 20 years ago and there would be no software industry.
Ultimately, I’m saying it is a fallacious comparison.
“And your point is ridiculous because you ignore one half of the equation. Each transaction also books a cost of the oil purchased which you ignore.
Upstream divisions can’t give oil to downstream divisions because they would go broke if they did.
The downstream division have to pay for it.”
Your point is ridiculous because you went from the gut rather than doing the math. When BP E&P sells to BP Refining the transaction does not increase the holding companies’ profit, it does however increase their revenue. And net margin is…. net profit/revenue. Do you not understand that each time something is sold the value of the sale is booked as revenue? And that the cost of the goods have nothing to do with revenue? And that no matter how many steps you break up a process into you can’t increase the profit via that means alone? My original example took into account the fact that BP refining had to buy petroleum to refine. However, if you buy at 100 a barrel and sell at 105 that is only a profit of 5 dollars a barrel (see the original example for context).
“Also missing in this discussion is the fact that oil companies pay taxes other companies don’t.
Severance taxes is one example of this.”
Discussing the tax code on a relative basis in aggregate is beyond the scope of a single human’s brainpower and lifetime. There are a lot of industries that pay special taxes (restaurants in Seattle for example). A severance tax is simply a form of production tax that ensures governments are always paid when resources are extracted from their territory. And it is of course perfectly reasonable. Why should governments allow resource extraction for nothing?
I don’t see anyone mentioning the increase in demand in China as part of the reason for an increase in demand, and the resultant rise in the price per barrel.
It’s a complicated world. Yes, $123 billion in profit staggers the mind. But instead of enriching accountants by adding complications to the tax code, how about simply asking for more profits to be distributed as dividends? Beyond that, Congress might ask for different shareholder and board of director rules. But this idea of “fair” made “more fair” by taxes goes nowhere but “TV infotainment” as a result.
All San Francisco got for their incessant taxing of the largest corporations was to create reasons for companies like Chevron to completely vacate the town. In 1981, Chevron owned several buildings downtown, and leased a ton of office space over 15 different sites.
All gone to San Ramon, thirty mile east. Taxed to oblivion, and San Francisco is the poorer for it.
Why should governments allow resource extraction for nothing?
I think this was probably directed at Green Engineer’s initial argument:
oil companies are different from most other manufacturers in that they extract and sell a finite natural resource
By pointing out severance taxes, TJIT is pointing out that the argument that oil companies should be taxed differently is moot – since they already are.
Robert, ROCE and ROIC are essentially the same. XOM’s ROCE is above 40%.
That’s not what I am saying. Your term for ROIC is exactly what we refer to as ROCE. My point is that ROCE/ROIC is not the same as ROI. As I pointed out, the rental rates for drilling rigs, for instance, has exploded over the past few years. Personnel costs have exploded due to manpower shortages. By focusing on capital alone, the true returns are not captured. That’s the purpose of the Microsoft comparison: Of course they are a low-capital industry. But they still pay their people, just as oil companies do. But an ROCE just ignores that aspect. It gives inflated returns, and the only reason oil companies even use it is to compare with peer companies. But it is incorrect to conflate ROCE with ROI.
Again, you confuse the issue by comparing net earnings with gross capex. One is calculated before depreciation, the other after. COP shows 11.8b of capex in 2007, but 8.7b of this merely replaced depreciation assets.
Replacing depreciated assets is still invested capital, so I don’t really see the point.
But it does not good to fight pandering and demonizing with blatant distortions and misinformation.
I simply don’t believe that’s accurate. It is not a distortion or misinformation to point out the blatant double-standards at play here when the oil industry is compared to other industries.
But there’s no need to constantly amend laws.
Yet this is exactly what’s being done. The laws are constantly being changed, or under threat of being changed.
The kangaroo courts would disappear (notice how tobacco execs don’t get grilled now that the US Treasury makes more off cigarrettes than the companies themselves?).
I believe this is already the case, when you add up all of the taxes paid by oil companies.
Are you honestly trying to justify oligopoly? There is a reason that it is illegal in the United States. It is extremely destructive to the general welfare of the population.
That’s not what I said. If it weren’t for the oligopoly of OPEC raising prices, we would have likely seen a different impact: U.S. refining capacity moving overseas at an even faster rate.
But we keep hearing that the oil industry is different; that it is taking a non-renewable resource and thus should be taxed differently (which it already is). Why then shouldn’t OPEC manage their resources to get the highest possible return on those non-renewable resources? It’s hard to argue that the oil industry should be singled out and treated differently, but then get upset when it acts differently due to the nature of that non-renewable resource. When the oil is gone, it’s gone. Therefore, if I am Saudi Arabia I want the highest possible price for my oil. For the same reason, you want to tax it more heavily.
People have alternatives to a traditional IRA. They can use a Roth IRA, buy a house, or allocate the money to consumption. For normal people, these “projects” compete against one another. It is not a confused analogy at all.
That analogy is becoming more confused, and completely missed my point. Companies have budgets. Projects in the Caspian are competing with projects on the North Slope of Alaska. If my project is in Alaska, but I have to add extra contingencies because of tax uncertainties, I may miss out on my project to someone with better economics. That doesn’t mean I get to invest the money in an alternative. I don’t get to invest it at all. That’s the meaning of the analogy I used. Your dollar isn’t competing for a variety of investments. It is competing against someone else. Whoever wins gets to make the investment. Whoever doesn’t loses out.
I am not living in the distant past. You may be confusing the marginal cost of extraction (say 65 dollars in the deepwater gulf) with the average cost of extraction (which is unknown, but likely less than 20 dollars a barrel).
If it’s unknown, then you can’t say what it likely is. It may be less than $20/bbl for Saudi Aramco. It isn’t for the average U.S. oil company who is forced to an ever greater extent toward making higher and higher risk investments in unconventional oil.
My point is that oil revenue is booked several times. Sale from upstream business, sale from downstream business, and sale from retail business. So now you’ve booked 350 dollars in “revenue” on one barrel of oil.
I don’t believe that’s accurate. Do you have a source for that? I have been researching the issue. I am looking through XOM’s annual report, and they don’t specifically define revenue. They show sales and operating revenue as $390 billion, and then start deducting costs from that. One of those costs is crude oil at $199 billion. They list their daily production at 4.18 million bpd. If I presume that the average oil price was around $70/bbl, that gives a revenue of $107 billion on just their own oil production. Given that oil companies buy large amounts of oil and turn it into gasoline, diesel, and jet fuel – and the $107 billion was merely the revenues on the oil they produced themselves, I don’t see that there is room for booking these revenues several times. Had they done so, the revenue would have been in the neighborhood of a trillion dollars.
It’s not punitively raising their taxes. It’s removing a subsidy that no longer serves its purpose (if it ever did).
It’s removing a tax deduction that is available to all other manufacturers. That is punitive. It’s no different than suggestion that oil companies can no longer deduct employee salaries, or any other kind of adjustment to earnings that is normal for businesses.
One other thing – in fact maybe the most important thing – for the “this is beneath you” crowd: It is always possible that I could be wrong. The main purpose of this blog is educational. Any post I put up is an invitation to debate, and I may change my opinion as a result of the debate. It has happened on a number of occasions.
So, please argue your points, and just convince me that I am completely off the mark.
RR
And your point is ridiculous because you ignore one half of the equation. Each transaction also books a cost of the oil purchased which you ignore.
TJIT, you misunderstand. He does not ignore one half of the equation. Here is a simple example. Two oil companies, ABC and XYZ, each pump, refine, distribute and retail one billion bbls of oil per year. Final retail sale price is $100/bbl. The costs per bbl are:
Pumping – $15
Refining – $5
Distribution – $1
Retailing – $1
—————
TOTAL – $22/bbl
Company AAA reports as a single unit. Their financial statement shows (in billions):
Revenue 100
Expenses 22
————-
Op. Inc. 78
Pre-tax Margin=78/100=78%
Net Margin approx 45%
Company XYZ treats each stage as a separate subsididary with it’s own P&L. XYZ E&P sells crude to XYZ Refining for $85/bbl, which sells product to XYZ Distro for $92, which sells it to XYZ Retail for $96, which sells it to motorists for $100:
XYZ E&P (in billions)
Revenue 85
Expense 15
————
Op. Inc. 70
XYZ Refining
Revenue 92
Expense 90
————
Op. Inc. 2
XYZ Distro
Revenue 96
Expense 93
————
Op. Inc. 3
XYZ Retail
Revenue 100
Expense 97
————
Op. Inc. 3
Company XYZ reports consolidated revenues and expenses by adding up all four subsididaries:
Revenue 373
Expenses 295
————-
Op. Inc. 78
Operating Margin=78/373=20.9%
Net Margin approx 13%
If the refining/distro/retail operations are larger than E&P, such that the company purchases extra crude from 3rd parties to help supply these low-margin units, the net margin will be around 10%.
Disclosure: Although some of the numbers above approximate XOM reported financials, this grossly oversimplified example in no way describes XOM’s actual business. I am merely showing how a simple accounting trick which has zero effect on overall profits or ROCE can reduce MSFT-like 45% margins to a more politically palatable 10%.
My point is that ROCE/ROIC is not the same as ROI. As I pointed out, the rental rates for drilling rigs, for instance, has exploded over the past few years….
But these costs all factor into the R or the CE part of the equation.
I think what you’re trying to say is ROCE for new capital investments will be lower because costs have risen. Maybe so. It depends on the future price of oil which we don’t know. New capital investments may or may not enjoy another OPEC-driven windfall. This does nothing to change the fact that previous investments did.
Replacing depreciated assets is still invested capital, so I don’t really see the point.
The point is capital used to replace depreciated assets does not come out of earnings, so it makes no sense to compare the two.
If you really want to compare something to gross capex you should use EBITDA or some similar cash flow metric. But even that is rarely done. Financial analysts divide capex into maintenance and growth. Growth capex is actual new investment and is compared directly to net earnings to calculate things like reinvestment ratio and organic growth rate. Maintenance capex, roughly equal to depreciation, is an expense, not an investment. If it gets compared to anything at all it’s a cash flow metric such as EBITDA.
I’ve never seen maintenance capex compared to net earnings in any financial analysis. In fact I’ve never seen it done by anyone except lobbyists trying to confuse folk.
If the marginal investment is slapped with a 50% royalty, that’s going to kill a lot of projects..
Armchair, a progressive royalty (or severance tax) is applied on a project-by-project basis. If a field is expected to produce with a cost of $50/bbl you pay a minimal amount up to $60 then 50% thereafter (or perhaps 50% up to $150/bbl then 75% thereafter). Such a tax factors into go/no-go decisions a little because it reduces some of the upside, but properly done the effect is minor. Of course the devil is in the details, but that is always true.
With a progressive severance tax we get no Congressional hearings if OPEC drives the price to $200/bbl. But Congress and oil companies both prefer our current windfall/demonization system, so don’t expect any changes.
This thread has become very long and I seem to be a primary offender, so I’ll sign off unless someone has specific questions.
“But alas, it seems you intended to say your piece regardless of whether or not it had any relevance or logical basis to it.”
Gosh, are you having a bad day?
There are apparently several people on here posting anonymously. I can’t tell who’s who without poring through in detail, and I don’t want to do all the detective work to figure out who’s who. Rereading your referenced post, I can see that I did miss your point. Pardon.
But I still don’t see where you’re going with all of this. OPEC is influencing prices (sometimes effectively, but not always, as you acknowledged), so the industry should pay more tax in certain years, as defined by you? And how are you going to put a dollar per barrel figure on OPEC’s clout versus real changes in demand or the strength of the dollar or the actions of speculators?
“It’s removing a tax deduction that is available to all other manufacturers. That is punitive. It’s no different than suggestion that oil companies can no longer deduct employee salaries, or any other kind of adjustment to earnings that is normal for businesses.”
When the subsidy was enacted it had a specific purpose; encourage more domestic manufacturing. The integrated oil companies have not shown that the accelerated depreciation changes their decisions as to whether or not they pursue projects. In addition, the economics of their business (unlike most manufacturing) has appreciably improved since the subsidy was enacted. In a sense, it is redundant.
Furthermore, it is not a deduction in the sense that you are saying. The oil and gas firms still get to expense the depreciation, they just don’t get to do so as rapidly as under this subsidy regime.
“If it’s unknown, then you can’t say what it likely is. It may be less than $20/bbl for Saudi Aramco. It isn’t for the average U.S. oil company who is forced to an ever greater extent toward making higher and higher risk investments in unconventional oil.”
The integrated oil companies (who this legislation applies to) don’t extract much crude from the US period. Less than 15% of XOM’s upstream revenue (see consolidated financial statements, not the annual report) came from the United States. Plus, for a project to be economic the returns just have to be above the hurdle rate. The lowest return they cite was 24.9% in Chemical. Upstream and refining had even better returns. Clearly they are not taking as much risk as you imply. Finally, for the last two years ROCE internationally has been better than ROCE in the US even with the subsidy. Seems like they are making the right decision for their shareholders by not focusing their investment in the US. In addition, in reviewing their consolidated financial statements the only “unconventional” projects in the US they deem worthy of discussion are deepwater GOM. Finally, I cited the EIA FRS in my previous post which shows that production and reserve replacement costs average slightly less than 25 dollars a barrel for the companies surveyed.
My ultimate point… the subsidy is not encouraging new oil projects to be undertaken in the US. Why? The returns are already adequete. The returns are better elsewhere. And the subsidy does not address the types of risk dominant in unconventional projects (operational risk!).
“
That analogy is becoming more confused, and completely missed my point. Companies have budgets. Projects in the Caspian are competing with projects on the North Slope of Alaska. If my project is in Alaska, but I have to add extra contingencies because of tax uncertainties, I may miss out on my project to someone with better economics. That doesn’t mean I get to invest the money in an alternative. I don’t get to invest it at all. That’s the meaning of the analogy I used. Your dollar isn’t competing for a variety of investments. It is competing against someone else. Whoever wins gets to make the investment. Whoever doesn’t loses out.”
How is this any different than how ordinary people allocate money? My point was that if a normal person did an analysis as to whether to put money in an IRA, Roth IRA, home, or engage in consumption he would have to estimate the tax structure he would face in all periods (which for an IRA could be as long as 40 or 50 years) just as an oil and gas company would need to estimate the tax rates/treatment over the life of their project. The risk of tax rates or tax regimes changing is certainly not unique to the oil and gas business. It is not a confused analogy at all.
Also, not investing in a project is a form of investment. That capital is either allocated to some kind of financial investment (share buyback, dividend, bond) or combination of financial investment and future project. Your perspective in this post is that of a project manager. You should change your perspective to that of the CEO or board.
In the case of a normal person. If their is too much tax uncertainty (and thus a high estimated rate), he goes out and buys a new car instead of investing the money in an IRA or a house. The “project” of the car wins and the “project” of the house/IRA loses.
“That’s not what I said. If it weren’t for the oligopoly of OPEC raising prices, we would have likely seen a different impact: U.S. refining capacity moving overseas at an even faster rate.”
It is also likely (is the reserve claims are true) that we would continue to have cheap oil. Oil at 20 dollars a barrel helps the US economy a lot more than any effects of domestic oil investment.
“But we keep hearing that the oil industry is different; that it is taking a non-renewable resource and thus should be taxed differently (which it already is). Why then shouldn’t OPEC manage their resources to get the highest possible return on those non-renewable resources? It’s hard to argue that the oil industry should be singled out and treated differently, but then get upset when it acts differently due to the nature of that non-renewable resource. When the oil is gone, it’s gone. Therefore, if I am Saudi Arabia I want the highest possible price for my oil. For the same reason, you want to tax it more heavily.”
Of course the oligopoly/monopoly structure is the ideal form of business for the producer… It is ideal irrespective of the industry. There is nothing special about the oil and gas industry when you are trying to maximize profits (almost all products have a finite lifespan; for example, oil relegated candlemaking to a fringe industry). Fortunately for us domestically, as oligopoly is destructive to the general welfare in a variety of ways, it has been made illegal. Now in the case of domestic oil companies, we are experiencing the same effects of oligopoly (in perfect competition, producers can only be made off by making consumers better off) in that they are benefiting (generating excess profits in the economic sense) at the expense of the consumer. Thus these profits should be subject to scrutiny, and if it is found appropriate and beneficial, extra taxation.
Great diary, Robert – I’ve posted elsewhere on this same topic. Please feel free to steel/borrow any of my material.
If we’re going to kick the oil habit, it’s critical that we help people understand how the market actually works. No small task, but you’re on the right path.
Cheers
“The integrated oil companies have not shown that the accelerated depreciation changes their decisions as to whether or not they pursue projects. “
The Baker-Hughes US Rotary Rig Count is up by 71% since 2003. Somebody is pursuing more domestic projects. How much of this rise is due to the tax code versus price is uncertain. But projects are being pursued by industry in general. Why single out the handful of large integrated companies, out of hundreds of domestic companies, for comment?
“Clearly they are not taking as much risk as you imply.”
Excessive focus on the present. Very profitable now, yes. But what about mid-1980’s through early 2000’s? When we all had to play musical chairs with our jobs every year and profitability was not very exciting at all?
Apart from the normal operational risk of dry holes and so on, there is undeniably risk in a business which is deciding whether to invest billions in an offshore platform or refinery upgrade based on assumptions on product prices 10 years in the future.
Imagine if you had written all of this in, say, 1983. You may have made a lot of the same points. A lot of companies made decisions based on high price forecasts that they later regretted around that time, and they went out of business. Or what about sinking billions into projects in Venezuela or Russia recently? It’s neither fair nor accurate to judge an industry’s risk by looking at profitability over a short time window.
“Thus these profits should be subject to scrutiny, and if it is found appropriate and beneficial, extra taxation.”
As decided by whom? You? Populist politicians with no knowledge of the industry? I think there is something to be said about stable tax law. Once you start singling out an industry, you’re on a slippery slope. Which industries and what years? Will there be tax breaks as well as confiscatory taxes? What percentage of the profits should we calculate as being due to politically objectionable reasons? Why not individual companies? Who is going to decide whether the goal of the tax incentive has been achieved, and how? By industry, by company?
I appreciate your comments though. It’s refreshing to hear an industry critic who has thought about the subject in detail. Usually all we hear is silly unfounded conspiracy theories.
“The Baker-Hughes US Rotary Rig Count is up by 71% since 2003. Somebody is pursuing more domestic projects. How much of this rise is due to the tax code versus price is uncertain. But projects are being pursued by industry in general. Why single out the handful of large integrated companies, out of hundreds of domestic companies, for comment?”
Yes, independents like Chesapeake, XTO, and Devon (who will not be affected by this legislation) are the ones driving the push into unconventional oil and gas. Collectively, the integrated oil companies called before the committee produced less natural gas in ’07 than they did in ’06. Independents have been responsible for almost all of the increased activity. I would speculate that commodity prices (not tax changes) are responsible for nearly all of the increased activity. The integrateds are being singled out because they have not been investing aggressively. If they could point out some jobs and projects which would immediately be cut as a result of this legislation they would have a better position to argue. Also, the integrateds are the largest oil producers (most of the large independents have production heavily weighted towards gas) and have been the biggest beneficiaries of OPEC. I am not saying the legislation is perfect or fair (by the way: the tax code has never been about fairness), but I am saying that it is easily justifiable given the circumstances that lead to their increased profits.
“Excessive focus on the present. Very profitable now, yes. But what about mid-1980’s through early 2000’s? When we all had to play musical chairs with our jobs every year and profitability was not very exciting at all?
Apart from the normal operational risk of dry holes and so on, there is undeniably risk in a business which is deciding whether to invest billions in an offshore platform or refinery upgrade based on assumptions on product prices 10 years in the future.
Imagine if you had written all of this in, say, 1983. You may have made a lot of the same points. A lot of companies made decisions based on high price forecasts that they later regretted around that time, and they went out of business. Or what about sinking billions into projects in Venezuela or Russia recently? It’s neither fair nor accurate to judge an industry’s risk by looking at profitability over a short time window.”
To justify a subsidy you have to present a case as to why it is warranted. If the subsidy does not generate the desired effects (more jobs, more investment) it is unwarranted. If the companies are not willing to take on more risk as a result of this subsidy, it has not served its purpose and should be eliminated.
But you are correct in saying it is unfair to characterize the risk of the industry based solely off their returns. It is however fair, to point out that XOM’s capital employed in US upstream operations has only increased by 500 million dollars since 2003. One would assume that taking on increased risk would accompany an increase in capital employed in order to bring projects with relatively lower returns onstream (though higher absolute returns due to higher commodity prices).
“As decided by whom? You? Populist politicians with no knowledge of the industry? I think there is something to be said about stable tax law. Once you start singling out an industry, you’re on a slippery slope. Which industries and what years? Will there be tax breaks as well as confiscatory taxes? What percentage of the profits should we calculate as being due to politically objectionable reasons? Why not individual companies? Who is going to decide whether the goal of the tax incentive has been achieved, and how? By industry, by company?”
There has been no such thing as a stable tax code in the United States this century.
http://www.truthandpolitics.org/top-rates
Also, I am not advocating the singling out of oil and gas. It is not even a slippery slope or a result of politics. Antitrust law is over a hundred years old. Profits generated due to oligopoly should be subject to review and seizure by the government. While this would be a new case (to my knowledge) in that much of oil firms profits have been generated as a result of oligopoly but not due to explicit participation in the cartel… it is something that should be looked into. In the face of such circumstances it is disgusting that the integrated oil companies are arguing against the repeal of a subsidy which is no longer serving its purpose.
“Collectively, the integrated oil companies called before the committee produced less natural gas in ’07 than they did in ’06. Independents have been responsible for almost all of the increased activity.”
Sure. Gas declines quickly, the US is a very mature province, and it’s not easy for a very large company to replace its gas production. US oil production peaked in the early 1970’s. So what? Are you alleging wrongdoing here? If the integrated oil companies thought they could find a lot more oil and gas in the US than they have, why don’t you think they’d be investing more in exploration than they do? Do you have some ideas on where a major oil company should be drilling if you want them to, say, double their exploration programs? Remember that the majors are not going to be very interested in drilling oil wells that produce 20 bopd, or gas wells that make 1 mmcfd. They need to replace hundreds of millions of barrels per year, so they have much higher standards of materiality, and in general, apart from deep water GOM, opportunities like that are not plentiful in the US.
“It is however fair, to point out that XOM’s capital employed in US upstream operations has only increased by 500 million dollars since 2003.”
Over the past 5 years, Exxon’s exploration budget has increased by 51%, during which time they’ve invested $1.66 billion. So it looks like they are probably holding their own in the rig increase. In the US over the past 5 years, they’ve invested a total of $8.2 bn.
“The integrateds are being singled out because they have not been investing aggressively.”
How aggressive do you want them to be? Who in the world defines the proper level, if not the market? I don’t think planned economies have worked out very well. What’s your plan, force the construction of new refineries? What might the unintended consequences be?
Look, if Exxon thinks it could make a good return on a project, they’ll do it. They’re not going to let good exploration projects just sit in the ground, meanwhile paying lease rentals and overheads when oil is at $100. Tell us what you want them to invest in. If you say you want more refineries to keep prices low, then I’ll ask you to lobby the auto industry to double their plant capacity so we can have cheaper cars. Companies are in fact investing in refineries, to the tune of one large refinery per year in terms of capacity equivalent. Barrels refined per capita has increased over the years. More gasoline was produced in 2007 than in any other year, and refinery capacity is higher than it’s ever been. How much more incremental capacity should they add, and why wouldn’t they if they thought they’d earn a good profit on the refinery? You may have noticed how pure refiner stocks (e.g. Valero and Tesoro) have performed lately. Go have a look at insider trading for those companies. The market is saying refineries aren’t a fantastic investment.
And even if they invest overseas, then since oil is a global commodity (and increasingly gasoline as well), new supply in the form of discoveries and refineries abroad will ultimately benefit US consumers. Plus, all that foreign investment will create more quality jobs in the US, depending on how the companies staff their projects.
Sorry, but I really don’t get this underinvesting argument. Please clarify for me.
“If they could point out some jobs and projects which would immediately be cut as a result of this legislation they would have a better position to argue… If the subsidy does not generate the desired effects (more jobs, more investment) it is unwarranted.”
Why shouldn’t all industries be asked to justify the need? And besides, I really doubt anyone would believe the oil companies. This is not a rational fact finding mission. This is a punishment drill.
“There has been no such thing as a stable tax code in the United States this century.”
No one is expecting tax laws to be cast in stone and never change. My point here is that arbitrary tax laws should be avoided. Especially when they are proposed by hostile lawmakers that don’t understand the business and really are looking to punish the business and gain admiration from their equally uninformed constituents. It’s a great strategy, tax the rich whipping boy, whether he’s honest or not who cares?
“Also, I am not advocating the singling out of oil and gas.”
But you are. You’re asking them to justify their profits. You suggest that they discuss projects enabled by the subsidy. You demand that they invest more. You aren’t doing this same research or making these same demands on other beneficiaries of the subsidy, I don’t think. Or are you?
“Profits generated due to oligopoly should be subject to review and seizure by the government.”
How can the major integrateds operating in the US, who combined have a global oil production market share of around 12% and a global reserve share of around 3%, be ethically liable for the business decisions of foreign countries who want to manage their resources in the way they think is best for them? OPEC may be an oligopoly now, but they weren’t much of one for the 20 years or so beginning around 1983. A serious recession in China here, a much stronger dollar there, and we may see some big price drops again in the future.
I don’t think this surge in profitability will last forever anyway, even if prices do stay high. Service companies, technical staff, tubular steel manufacturers, lease and royalty owners, governments, etc, are all getting their piece of the pie. Exploration is an easy business to enter. All you need is a few guys with ideas and some seed capital for data and drilling. More wells will be drilled and reserves booked. All of this is unfolding now. Eventually a new equilibrium will probably be reached. You are thinking in terms of a snapshot in time. We in the business have lived through a lot in the last 20-30 years and we have a longer term perspective. We know this boom is not going to last forever. That perspective probably plays at least some role in investment decisions.
“In the face of such circumstances it is disgusting that the integrated oil companies are arguing against the repeal of a subsidy which is no longer serving its purpose.”
Look, I don’t have particularly strong feelings about the need for this subsidy. It could be that the integrateds are more constrained in their investment by technical staff or available opportunities, and perhaps it’s not in fact “necessary”. Removing it though will almost certainly result in at least some lost opportunities at the margin. But I think we ought to be fair. You present this discussion as a rational debate on tax code. But the reality is that it’s perceived as a punishment by the public and politicians who want to implement it. They think the oil companies are guilty of intentionally setting high prices and want to get even. The CEO’s are put on the defensive by all of this, and they’re probably thinking, “A deal’s a deal, and this is unfair. We’ve done nothing wrong.”
I don’t think the oil industry is any more or less ethical than any other industry. Like most people in other industries, most of us are honest, hard working, and professional. We care about our families and contribute to our communities just like you and everyone else. We don’t have much control over prices, and for the vast majority of us in smaller companies, no control whatsoever. We don’t want to make life difficult for people. The fact that the public and a lot of politicians, who don’t know the first thing about how the industry works, think we’re all criminals is troubling to a lot of us. I think if there were any serious collusion going on to suppress production or investment or to fix prices, most of us above middle-management level would know about it or at least wonder about mysterious decisions being made around us. But it’s not happening, at least not at the scale that can affect national or global prices. There are always going to be a few bad apples, but Enron doesn’t represent us anymore than a tax-evading doctor represents the medical profession. I have never, ever, heard a compelling case anywhere for conspiracy. And yet not a few days go by before I hear the accusation again.
So in the face of such circumstances I think that the comments by Representative Markley and folks like Oil Watchdog, who from a position of ignorance wrongly accuse the industry of being a greedy band of rogues, are even more disgusting.
“Sure. Gas declines quickly, the US is a very mature province, and it’s not easy for a very large company to replace its gas production. US oil production peaked in the early 1970’s. So what? Are you alleging wrongdoing here? If the integrated oil companies thought they could find a lot more oil and gas in the US than they have, why don’t you think they’d be investing more in exploration than they do? Do you have some ideas on where a major oil company should be drilling if you want them to, say, double their exploration programs? Remember that the majors are not going to be very interested in drilling oil wells that produce 20 bopd, or gas wells that make 1 mmcfd. They need to replace hundreds of millions of barrels per year, so they have much higher standards of materiality, and in general, apart from deep water GOM, opportunities like that are not plentiful in the US.”
Considering Chesapeake, Anadarko, and Devon outproduce most of the integrateds in US natural gas and are increasing their production and reserves I find your attitude quite arrogant. Also, over half of US natural gas production comes from the resource plays (tight sands, shale, coal bed methane). The problem is, the CEO’s of the integrateds likely thought like you. That is why XOM could only get together 11,000 acres of leasehold in the Barnett Shale. I imagine independents lease more every 2 weeks. Also, US gas production has not peaked (not that the formation of a maximum on a chart has any real significance).
“Over the past 5 years, Exxon’s exploration budget has increased by 51%, during which time they’ve invested $1.66 billion. So it looks like they are probably holding their own in the rig increase. In the US over the past 5 years, they’ve invested a total of $8.2 bn.”
Look at their financial statements rather than their press releases to find the real story. Capital employed in the US in the upstream segment has been nearly flat the last five years.
“How aggressive do you want them to be? Who in the world defines the proper level, if not the market? I don’t think planned economies have worked out very well. What’s your plan, force the construction of new refineries? What might the unintended consequences be?”
How about as aggressive as the independents?
“Look, if Exxon thinks it could make a good return on a project, they’ll do it. They’re not going to let good exploration projects just sit in the ground, meanwhile paying lease rentals and overheads when oil is at $100. Tell us what you want them to invest in. If you say you want more refineries to keep prices low, then I’ll ask you to lobby the auto industry to double their plant capacity so we can have cheaper cars. Companies are in fact investing in refineries, to the tune of one large refinery per year in terms of capacity equivalent. Barrels refined per capita has increased over the years. More gasoline was produced in 2007 than in any other year, and refinery capacity is higher than it’s ever been. How much more incremental capacity should they add, and why wouldn’t they if they thought they’d earn a good profit on the refinery? You may have noticed how pure refiner stocks (e.g. Valero and Tesoro) have performed lately. Go have a look at insider trading for those companies. The market is saying refineries aren’t a fantastic investment.”
Exxon claims that capital employed in their downstream business generated the best returns of all the segments. Again, you have to look in the financial statements to find even a little bit of truth. Stock prices are not necessarily related to earnings and risk.
“And even if they invest overseas, then since oil is a global commodity (and increasingly gasoline as well), new supply in the form of discoveries and refineries abroad will ultimately benefit US consumers. Plus, all that foreign investment will create more quality jobs in the US, depending on how the companies staff their projects.”
Considering the subsidy was to encourage US jobs I find your argument extremely weak. It’s like saying that outsourcing manufacturing creates jobs because we have to hire a logistics person to move the product to the US and a customs person to inspect it.
“Sorry, but I really don’t get this underinvesting argument. Please clarify for me.”
Relative to independents, the integrateds are not leasing and drilling as much in the US. Some independents are outspending cash flow even with gas at 9-10 per mcfe. None of them are using half of their cash flow for dividends and buybacks.
“How can the major integrateds operating in the US, who combined have a global oil production market share of around 12% and a global reserve share of around 3%, be ethically liable for the business decisions of foreign countries who want to manage their resources in the way they think is best for them? OPEC may be an oligopoly now, but they weren’t much of one for the 20 years or so beginning around 1983. A serious recession in China here, a much stronger dollar there, and we may see some big price drops again in the future.
I don’t think this surge in profitability will last forever anyway, even if prices do stay high. Service companies, technical staff, tubular steel manufacturers, lease and royalty owners, governments, etc, are all getting their piece of the pie. Exploration is an easy business to enter. All you need is a few guys with ideas and some seed capital for data and drilling. More wells will be drilled and reserves booked. All of this is unfolding now. Eventually a new equilibrium will probably be reached. You are thinking in terms of a snapshot in time. We in the business have lived through a lot in the last 20-30 years and we have a longer term perspective. We know this boom is not going to last forever. That perspective probably plays at least some role in investment decisions.How can the major integrateds operating in the US, who combined have a global oil production market share of around 12% and a global reserve share of around 3%, be ethically liable for the business decisions of foreign countries who want to manage their resources in the way they think is best for them? OPEC may be an oligopoly now, but they weren’t much of one for the 20 years or so beginning around 1983. A serious recession in China here, a much stronger dollar there, and we may see some big price drops again in the future.
I don’t think this surge in profitability will last forever anyway, even if prices do stay high. Service companies, technical staff, tubular steel manufacturers, lease and royalty owners, governments, etc, are all getting their piece of the pie. Exploration is an easy business to enter. All you need is a few guys with ideas and some seed capital for data and drilling. More wells will be drilled and reserves booked. All of this is unfolding now. Eventually a new equilibrium will probably be reached. You are thinking in terms of a snapshot in time. We in the business have lived through a lot in the last 20-30 years and we have a longer term perspective. We know this boom is not going to last forever. That perspective probably plays at least some role in investment decisions.”
Your post here is irrelevant to the economic reality. Profits gained due to oligopoly are not earned.
“Look, I don’t have particularly strong feelings about the need for this subsidy. It could be that the integrateds are more constrained in their investment by technical staff or available opportunities, and perhaps it’s not in fact “necessary”. Removing it though will almost certainly result in at least some lost opportunities at the margin. But I think we ought to be fair. You present this discussion as a rational debate on tax code. But the reality is that it’s perceived as a punishment by the public and politicians who want to implement it. They think the oil companies are guilty of intentionally setting high prices and want to get even. The CEO’s are put on the defensive by all of this, and they’re probably thinking, “A deal’s a deal, and this is unfair. We’ve done nothing wrong.”
This is part of our political system regardless of the industry you are in. If your industry/company is upsetting the government or its constituents (regardless of the reason) you get called up for a grilling. A lot of people that work(ed) in the securitization and mortgage origination business could have taken the same position that you’ve laid out.
“Considering Chesapeake, Anadarko, and Devon outproduce most of the integrateds in US natural gas and are increasing their production and reserves I find your attitude quite arrogant.”
You have a lot of numbers, but I don’t think you quite grasp how exploration works. It’s not an arrogant statement, it’s economic reality. Industry CEO’s have fiduciary responsibilities, and for very large companies the only way they can realistically grow is by finding very large opportunities to replace production in the millions of barrel per day range. The majors have for years gradually been focusing more on international investment, because that’s where these large opportunities mostly are. It just doesn’t make sense for an Exxon to consume hundreds of scarce geoscientists and engineers and corresponding overheads on lots of relatively small projects. This makes better sense for smaller companies, who usually don’t have the resources and capital to go after the really big international projects. A company like Chesapeake (which by the way was severely criticized, wrongly, by the governor of Connecticut for alleged price manipulation) doesn’t have to replace the production Exxon does. It doesn’t have the overheads Exxon does. It has staff familiar with onshore US plays. The very observations that you make support what I’m saying. And yet, seeing how Exxon’s exploration budget has increased, it appears they have looked for more opportunities and have focused on a few that they think are appropriate for them.
I happen to think your presumption that you know best where they should invest is arrogant. They are making the decisions they think are best for them. If they thought they could make more investing in the Barnett Shale than Qatar LNG projects, they’d be doing it. What is your issue here? They’re doing something wrong? What, exactly? And how does a government have the right to make a company’s investment decisions for them?
“Look at their financial statements rather than their press releases to find the real story. Capital employed in the US in the upstream segment has been nearly flat the last five years.”
I got the numbers from their recently published 2007 Financial & Operating Review. Why do you focus only on capital employed? I think their investment is also telling a story.
“How about as aggressive as the independents?”
See above. I don’t think your position makes good business sense. If it did, the majors WOULD be more aggressive. Sorry, but I suspect their exploration management has a better grasp on the business than you do, and unless you have evidence of criminal activity or collusion, I still don’t see what your case is. You can’t just throw money at rocks and make hydrocarbons appear. Competition in US onshore exploration is fierce, and I seriously question how many large opportunities are going undeveloped due to the decisions of the majors. They are just being done by someone else.
But, if you want to see large increases in US exploration, open up ANWR, offshore California, offshore Florida, or offshore US east coast. Here there is hydrocarbon potential probably of interest to the majors. But these areas are off limits, and I’m sure you want to keep it that way. You want to have your cake and eat it too.
“Exxon claims that capital employed in their downstream business generated the best returns of all the segments. Again, you have to look in the financial statements to find even a little bit of truth. Stock prices are not necessarily related to earnings and risk.”
And how long has that performance lasted? How long will it last? It seems to me that refinery investors disagree with you, as the share prices suggest. I suspect from your continued focus on the present, that you are pretty young. You haven’t lived through an oil price bust.
“Considering the subsidy was to encourage US jobs I find your argument extremely weak.”
It’s not a particularly strong argument, but I think it’s a valid point. Every marginal barrel of oil discovered overseas marginally increases supply and marginally reduces price, in the US and elsewhere. And some companies may have fairly large domestic staffs supporting overseas operations. Your comment again suggests unfamiliarity with the way exploration is run. Chevron, for example, had a large staff in San Francisco responsible for international new ventures. Conoco did the same at one time. I don’t know what they do currently.
“Your post here is irrelevant to the economic reality. Profits gained due to oligopoly are not earned.”
On the contrary, it’s very real. This is the business landscape the integrateds are in. It is what it is, and it has been the same since the early 1970’s. Over the last 35 years, there have been about 10 years in which you could say that oil prices are booming and profits are high. For the other 25 years, profits were unspectacular and prices did essentially nothing, but OPEC was still there. So what’s your point? The oligopoly is not the fault of the integrateds. The oligopoly is not restricting new entrants into the business. The major oil companies, US and foreign, still compete heavily for projects. And history shows that oligopoly has been only partially successful. You repeat that “profits are not earned” as if it’s some sort of mantra handed down to Moses. Expand on it.
“If your industry/company is upsetting the government or its constituents (regardless of the reason) you get called up for a grilling.”
Few industries are as misunderstood as the oil industry. Everyone buys their products but very few appreciate the nature of oil and gasoline price markets. If the “upsetting” is due to some real misbehavior, then the industry deserve to be grilled. But when the “upsetting” is mostly due to complete ignorance and political agendas, or to certain hostile individuals’ ideas of what the companies should be investing in, then it’s not fair. If you have a beef with how the industry is conducting its business, meet with the industry reps and discuss it. But that’s not what’s happening. What we have are public kangaroo courts.
Sure, a government has the right to do anything it can get away with, but they ought not to do something out of ignorance. They had better have thought through the possible unintended consequences, which can only be done if the industry is well understood. If you try to fix something you don’t understand, you might just make it worse. Ask our president about Iraq.
“A lot of people that work(ed) in the securitization and mortgage origination business could have taken the same position that you’ve laid out.”
A lot of people did take your position, and stronger positions, in the early 1980’s, accusing the industry of conspiracy and price fixing and greed and being in bed with OPEC and all the rest of it. In 1986, they were all proven wrong. For the next 15-20 years they were strangely silent. Now they are back, repeating history.
I’m sorry, but I don’t find your assumptions and advice to the oil industry to be particularly compelling. You have done a lot of homework, which I appreciate, but you’re making a case built on what sounds like dogma, while ignoring the day to day realities of operating a large integrated oil company. You don’t say why the integrateds might not be doing what you prescribe. Are they lazy? Colluding to drive prices up? What is it? Because you don’t seem to believe they are making proper business decisions to benefit their shareholders.
It’s clear that you have a built in bias against the industry and wish to see them pay for their profits. Of course, I may have a built in bias the other way, but then again I have lived it for 30 years and know it pretty well. Your experience seems to be the type that is learned remotely, from studying data, reading books, and talking to contacts. But I’m not going to deny reality if someone can convincingly demonstrate that the oil industry is doing something wrong. So convince me.
In an earlier comment I said
“Mark my words in the next five (and probably ten) years time all of the attempts to reduce CO2 emissions by replacing petroleum with other energy sources will result in two things.
1. Greater environmental damage then doing nothing would have produced.
2. No reduction in CO2 output”
Anonymous replied
You have no basis for these claims unless you are omniscient.
If anonymous would look around a little bit he would see that there is staggering amounts of real world activity and examples that provide a concrete support for the accuracy of my statement.
This information has been easily available to those rare people who actually bothered to pay attention and study the issues.
What About the Land?
and
Do we need to rethink the rush to biofuels?
It would be nice if all the people who bitch about the oil industry were as good at fact finding as they are at regurgitating the same worn out slogans.
TJIT