Date registered: Apr 2004
Location: The BlueGrass State
Mentioned: 0 Post(s)
Quoted: 2 Post(s)
||LinkBack||Thread Tools||Display Modes|
NEW YORK (CNN) -- If you're a poor sap who needs to eat or drive in the near future, then you might want to consider taking out a second mortgage (assuming you could even get one) pretty soon.
Food and gas prices have been all over the news lately, and even a big dumb rodeo clown like me can see that it's all connected. Our policies, which try to cater to everyone from oil company executives to environmentalists, end up benefiting no one -- and now we're all paying the price.
I know that real economists probably will say that the causes of these skyrocketing prices are extremely complicated to understand, but the truth is that it's actually pretty simple: We've done this to ourselves.
I don't know if it's because of our arrogance, our stupidity or maybe both, but I believe that history may one day judge America as the most suicidal superpower of all time. After all, what country that cares about its future would do what America has done to its supply of food and fuel, two of the most critical things that any civilization needs to survive?
For example, look at the way we treat our food supply. We've spent decades giving billions of dollars in government subsidies with incentives for the wrong things, we've mandated that huge areas of farmland stay open for "conservation" and we're using grains that could feed tens of millions of people to make a crappy biofuel that you can't even buy anywhere.
That's not arrogance?
Our fuel policy has been even more absurd. We're completely dependent on foreign countries, many of whom hate us, to keep our trucks moving, our planes flying and our homes warm.
That's not arrogance and suicidal stupidity?
Take a look at the top five countries we currently rely on for oil imports. You tell me if these are the five you would choose if you were creating your own world superpower from scratch: Canada, Saudi Arabia, Mexico, Nigeria, Venezuela.
Aside from Canada, that's not exactly a "Who's Who" list of stable, America-loving countries.
And if you think I cut off the list at five because the next five are so friendly, think again. Here's the next five: Iraq, Angola, Kuwait, Colombia, Ecuador.
The point is that we don't control our own destiny, foreigners do. Despite bipartisan hatred for high oil prices, they've gone up 49 percent since 2006. If we could've done something, anything, to stop that, we would have. But the sad fact is that we can't.
That's why, instead of offering real solutions, most politicians offer something else: blame. Democrats blame Republicans, Republicans blame Democrats, and nothing ever gets solved. President Bush provided a good example of that last week when he was asked about high oil and gas prices.
"We've had an energy policy that neglected hydrocarbons in the United States for a long period of time, and now we're paying the price. We should have been exploring for oil and gas in ANWR, for example," he said. "But, no ... our Congress kept preventing us from opening up new areas to explore in environmentally friendly ways. And now we're becoming, as a result, more and more dependent on foreign sources of oil."
Personally, I think the president is right; we should be drilling in the Arctic National Wildlife Refuge. In fact, we should've been drilling there a decade ago, but that's not the point anymore. Opening ANWR now would be like stopping at the bathroom on your way to the electric chair; you're only delaying the inevitable.
Should we still do it? Yes. Frankly, we need all the time we can buy ourselves to find a long-term solution; our nation's very survival is at stake. But ANWR is not the answer, it's a Band-Aid, and I worry that our shortsighted politicians would use it as an excuse not to look for viable replacements for oil, which is what we really need.
Fortunately, there is some good news in all of this: Oil prices this high mean that a lot of formerly dismissed alternatives will finally make good economic sense.
For example, back in 1980, Congress passed the Energy Security Act, which led to the creation of something called the Synthetic Fuels Corp. (SFC). Lawmakers provided SFC with up to $88 billion in loans and incentives to get started (the equivalent of about $230 billion in today's dollars) with the goal of creating two million barrels a day of synthetic oil within seven years.
So why aren't you putting SFC oil into your SUV right now? Well, it turns out that members of the Organization of Petroleum Exporting Countries didn't appreciate the competition so they started bringing down the price of oil. From 1980, when SFC launched, to 1986, when it was shut down, oil went from more than $39 a barrel to less than $8 a barrel. Suddenly, synthetic oil didn't seem so important anymore.
In announcing the SFC's closure, then-Energy Secretary John Herrington said that oil prices had simply dropped too low to make it a viable business.
But the good news is that those economics don't work anymore. The state of Montana, which is leading the synthetic fuel charge, says we can now make it for somewhere around $55 a barrel. That's more than a 50 percent discount from what it costs to buy the real stuff.
It's the opportunity of a lifetime, a chance to use OPEC's price gouging and monopoly against it.
So let me be the big, dumb rodeo clown once again and ask the obvious question: Why aren't we doing it?
Why Exxon won't produce more oil
The energy giant is being managed to achieve an acceptable investment return for shareholders, not for the benefit of consumers. Less supply of crude oil means higher prices -- and record profits.
Reports of slackening demand sent oil down another 2.5% on Thursday to $101.84 per barrel. Crude prices have declined 7.6% since the beginning of the week. Not long ago, that would have been an astonishing plunge that shook the trading establishment. These days? Nah, that's just the ho-hum volatility in the oil market. But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?
If you want to understand that, it helps to listen in to ExxonMobil's (XOM, news, msgs) presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company's worldwide oil production staying flat through 2012.
Ponder that for a minute. Exxon is the largest publicly traded company in the energy business. In fact, it's the most profitable company in the history of capitalism, earning a record $40.6 billion last year on sales of $404 billion. Yet even with crude oil prices near all-time highs, Exxon isn't planning on producing any more oil four years from now than it did last year.
That means the company's oil output won't even keep pace with its own projections of worldwide oil demand growth of 1.3% a year.
Imagine a chief executive of another growth company making a similar announcement to that of Exxon Chairman Rex Tillerson. What if Steve Jobs said Apple (AAPL, news, msgs) wasn't going to sell any more iPhones than it did in 2007? What if Howard Schultz said latte production at Starbucks (SBUX, news, msgs) would stagnate, at least until the next U.S. president embarked on his or her re-election campaign? Shares of both companies would plummet.
After the management presentations, Tillerson took questions from the audience. The first hand that shot up was that of Deutsche Bank (DB, news, msgs) oil analyst Paul Sankey, who wanted to know why the company wasn't showing any volume growth.
"We don't start with a volume target and then work backwards," Tillerson explained. Instead, he said, his team examines the available investment opportunities, figures out what prices they'll likely get for that output down the road and places its bets accordingly. "It really goes back to what is an acceptable investment return for us," Tillerson said. In other words, producing more barrels just to ease prices for consumers is not part of the company's calculations.
Last year, ExxonMobil led the industry with a return on capital of 32%.
Exxon's flat oil forecast was even more surprising because it came during a meeting when the company was trumpeting a big increase in capital expenditures -- to at least $25 billion a year going forward, up from $21 billion last year.
The company also outlined a slew of big projects, 12 of which are starting up this year. These include the 600 million barrel Kizomba C development off the coast of Angola that began producing on New Year's Day and another in a string of giant liquefied natural gas facilities in Qatar. Unlike oil, Exxon's production of natural gas -- much of it liquefied and shipped in tankers to Asia and Europe -- is projected to climb over the next four years.
But how could oil production be flat? Peer into Exxon's historical numbers and you see the problem Tillerson faces. Since 2000, Exxon's oil output from two of its largest regions, the United States and Europe, declined a startling 37%. That's 500,000 fewer barrels a day in just seven years.
Exxon reported 100,000 fewer barrels per day last year alone due to the nature of the contracts big oil companies sign with countries such as Angola and Nigeria. In such contracts, foreign companies put up the capital to fund new projects, and they are paid back in barrels. If oil prices rise above certain levels, Exxon gets to keep fewer of those barrels as profit for itself.
Exxon plans on bringing new fields online in Russia, the Middle East and Africa over the next four years, but they won't be enough to generate growth beyond what the company is losing due to the maturation of its fields in the North Sea and Alaska, the nationalization of its fields in Venezuela and volumes lost due to those production-sharing agreements with other countries.
"It has always been a challenge to grow volumes when you are working off of a base as large as ours," Tillerson told the analysts.
Indeed, Tillerson got more bad news Tuesday when a British judge freed up the foreign assets that Exxon had sought to freeze in its ongoing dispute with the government of Venezuela.
Exxon's flat forecast was, in a way, an admission of what's been an open secret for the industry. Big oil companies almost always forecast production growth but they rarely make their own targets.
In 2002, shortly after its big merger with Texaco, Chevron (CVX, news, msgs) was producing nearly 2.7 million barrels per day of oil and natural gas worldwide, and Chairman David O'Reilly said the company would increase its volumes by as much as 3% a year by 2006. Last year the company produced an average of just 2.6 million barrels per day. A spokesman for the company says it, too, lost barrels to production-sharing agreements and changes in contract terms in Venezuela. The company is maintaining a 3% annual growth target through 2010, however.
Could Exxon spend more and generate more growth? Probably. Even with its increased capital spending, the company still spent 70% more on dividends and stock buybacks last year ($38 billion) than it did reinvesting in its business. Tillerson noted that share buybacks in the past have boosted the average stockholder's share of the company's oil production by 20% over the past five years.
In other words. even though the company's volumes haven't grown, fewer shares outstanding mean more barrels per share for each remaining shareholder.
Lysle Brinker, who follows Exxon for the research firm John S. Herold, figures that given the company's capital outlays, Tillerson can keep replacing the oil and natural gas he sells. That way the company won't shrink, even if it doesn't grow.
Big oil companies can continually miss their targets or even target no growth and still shine on Wall Street due to the peculiar nature of commodity businesses. Less supply of a commodity means higher prices. Higher oil prices mean more profits for the oil companies.
Exxon shares have risen 18% in the past year -- and even closed a bit higher on March 5, the day of its analysts meeting.
This article was reported and written by Christopher Palmeri for BusinessWeek.
|Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)|
|K&N Air Filter vs. a Standard Beck/Arnley||SSgt Hurley||W126 S,SE,SEC,SEL,SD,SDL Class||19||06-25-2008 12:02 PM|
|Former All-Star closer Rod Beck dies at 38||GeeS||Off-Topic||7||06-24-2007 08:38 PM|
|HELP!!!! , Canâ€™t open beck doors||KD c320||W203 C-Class||6||02-11-2007 08:59 PM|
|Stumbles||thsncc1701||W124 E,CE,D,TD Class||0||01-02-2005 09:45 PM|
|Glenn, did you get your trophy for the acceleration runs at Tri-O-Rama?||Bruce R. - - D.C .||R170 SLK-Class||2||08-17-2001 02:16 PM|