Oil: Behind the Big Numbers
At first, the fact that Exxon Mobil scored the biggest quarterly profit for any company in history may seem like the central (and maddening) point of Thursday’s press release, but looking past the top number shows several more interesting items.
First off, that record $11.68 billion is less than expected, sending Exxon Mobil’s shares down on Wall Street. Why did they underperform the analyst’s expectations? Well, with rising oil prices come rising amounts of overseas strife.
Production tumbled 7.8 percent after assets were seized in Venezuela, Nigerian workers went on strike and record prices triggered contract clauses that give oil-rich governments a bigger share of output.
Countries that are selling oil—from Russia to Iran—are getting richer as the prices climb, and they see less and less reason to give any of their wealth to the big international companies. Exxon Mobil, like other companies, finds that their leverage is slipping.
But there’s an even more interesting calculation at work. While Exxon Mobil was cranking out record profits on oil production, its refineries were actually bringing in less money than last year. Why?
Profits from its refining business totaled $1.6 billion in the quarter, less than half of what they were last year. ... Oil prices in the quarter were nearly twice as high as the same time last year, while gasoline prices were an average of nearly 30% higher.
Oil prices doubled, but the price of the biggest product produced from oil didn’t follow suit. Exxon was unable to maintain the same margins on their refining business that they have in the past. And there’s a good reason for that.
Americans drove 9.6 billion fewer miles in May 2008 than in May 2007, according to federal data released Monday. The 3.7 percent decline was the third-largest monthly drop in the 66 years the Department of Transportation has been collecting the data.
For decades, gasoline has been considered a commodity that lives by its own special rules. In a country that was designed around highways, gas was required to get Americans to work, school, and stores. It wasn’t fungible, and demand wasn’t tightly coupled to price. Whatever they asked for it, Americans would be forced to pay.
As it turns out, that’s not entirely true. The sharp decline in miles driven and even sharper turn away from low mileage vehicles shows that gas is not a product untouched by pricing. $4 gas turned out to be enough to make Americans simply park it. Which, paired with increasingly bad signs in the economy, was enough to spur a retreat in the price of oil. If the increased price of oil had been directly reflected at the pump this year, we’d be looking at $6 gas—and likely taking actions that would put Exxon’s future in serious doubt. They took lower profits at the refineries because they had to.
Even more interesting is where Exxon spent its money.
On an earnings-per-share basis, Exxon made $2.22. That was still lower than analysts had expected, but 24% higher than last year, a gain Exxon attributed to its aggressive stock buyback plan.
And where it didn’t.
“While oil companies are earning record profits and gas prices are soaring, the largest oil companies have invested more resources in stock buybacks than U.S. production,” said Congressional Democrats in a press release shortly after Exxon announced its earnings.
Other critics charge the oil companies with deliberately restricting production in an attempt to keep prices high.
The industry says it’s investing as much as it can in finding new oil, but is having a hard time given the shortage of workers and equipment in the sector.
Notice that Exxon’s complaint is a lack of workers and equipment, not a shortage of places to drill as the GOP would have you believe. The fact is, they’re producing all that they can, and aiming their platforms at the most likely locations. Neither tax breaks nor scads of new leases would have any significant effect.
But hey, let’s declare GOP Magical Fairy Drilling Day and say that suddenly there’s a drilling platform for every potential reserve out there. What could we get?
It’s hard to say just how much oil is there, but estimates compiled by CNNMoney.com from various government agencies indicate crude oil production could be increased between 1 and 3 million barrels per day.
Since it’s GOP Magical Fairy Drilling Day, let’s be generous and go with the top number. And lets assume, since those GOP magical fairies have plenty of magical powder on hand, that a mere ten years from now all that production comes on line all at once. Happy days, right?
Wrong. The US currently produces about 5 million barrels a day, which makes another 3 look like a big increase. But US production is in a sharp decline. Even if we held the 5 million/day level, adding in another 3 million would put us well below US production back in 1970, and far short of anything that would make a dent in our dependence on foreign oil. Imports increased 3.5 million barrels a day between 1990 and 2000 alone. If there were unlimited drill rigs, if there were unlimited resources for oil infrastructure, if every potential reserves performs at the high end of prediction, a strategy of “drill more” means we would still be importing more oil at the end of the decade, not less.
And that’s all GOP magic fairy land. In reality, opening up every single area for drilling, and doing it today, won’t even be enough to stop the steady decrease in US production. This production would come on line over a period of decades, during which other fields would fall off the radar. It won’t even make a blip in the decline. You might as well try to save a sinking boat by drilling holes in the hull to let the water out.
