August 30, 2007
I Got Yer Peak Oil, Right Here
Posted by scott at August 30, 2007 11:44 AM
What was that you said about oil production past it's peak?
"Jack" is a recently discovered undersea oil field in the Gulf of Mexico that may exceed 15 billion barrels of oil. Given that water covers 2/3 of Earth's surface, it is not unlikely that more oil reserves exist underwater than under dry land.
The resources have always been out there, the technology just wasn't around to get them out of the ground economically. Technology, as with time, marches on, and now we have a mammoth reserve waiting for taps we're now able to build. Price goes up, profits go up, incentives go up. Incentives go up, searchers go out, more is found, prices go down. Consider it the economic equivalent of the seasons.
When it's allowed to work, that is. What many of you seemed to want was prices go up, profits go up, taxes go up. What you didn't realize was what happened after stage one of that "progressive" scenario: incentives go down, searchers stay home, and nothing changes.
Say what you will about "obscene" profits and "greedy" corporations. Just do it after I use my 0% APR credit card to fill my tank at the corner gas station. The fact that most of you refuse to see the connection is enjoyment enough for me to listen.
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What many of you seemed to want was prices go up, profits go up, taxes go up. What you didn't realize was what happened after stage one of that "progressive" scenario: incentives go down, searchers stay home, and nothing changes.
Actually what many of us want is
Prices go up
Profits go up
Reinvestment into actually exploiting the various finds in order to bring prices down (But this would mean profits don't go up as high)
Instead of the current scenario
Prices go up
Profits go up
Minimize reinvestment in order to keep profits up
The economy is just starting to feel the major pinch (The tip of the Iceberg) from this with the Credit and housing buble problems.
Folks bought new houses that they could just barely afford with the low interest rates.
Gas prices increase ~200% in the past 6 years but incomes haven't increased enough to cover the price of gas. Folks who were living paycheck to paycheck and hadn't budgeted an extra ~$100 a month for gas now lose thier homes etc etc.
Whatever - again, you fail at basic economics. When profit is found, businesses go after that. What happens here is that, now that a new source of income is known, research will be done to make sure that it's captured in the most economical way.
Profits are good. Learn this. Understand this. Just because something new is found doesn't necessarily mean it's the most economic thing to pursue at this time.
Seriously - do you even think this through?
The economy is actually growing. The housing bubble was a correction of over-optimistic buyers. It needed to be corrected, and it is being corrected. Maybe it'll go down (good for buyers), maybe it'll go up (good for owners). However, in the big picture, the housing bubble and the cost of gas aren't the only predictors of the economy. Learn to look at the big picture.
Gas prices may have risen - and incomes may not have risen as much. However, that doesn't necessarily indicate a bad thing, now does it (well, unless you have problems with basic math). Is it remotely possible that incomes were higher than the cost of gas and that the rise in prices is simply a reflection of correcting the cost of fuel as a percentage of total income? Have you even bothered to do the research on this? Is it possible that those living paycheck to paycheck are making bad choices and that a squeeze like this simply teaches them to be more efficient with the money they have?
Honestly, with every major sign in the economy pointing up, your tripe is simply an amazing sign of the length that some people will go to deny reality.
Good luck with that.
But who judges what is "maximum" reinvestment versus "minimum" reinvestment? Should this be legislated? Who would enforce the law? How would we know it was right?
"Minimize reinvestment to keep profits up" is to me a massive oversimplification. The profit to reinvestment ratio (if such a thing even exists) is one helluva tough balancing act. Reinvest too much, and you don't have enough liquidity to stay mobile in the marketplace. Reinvest too little, and five years from now an up-and-comer will go blazing past you at the speed of light, riding his newly invented SuperWidget3000.
For oil companies it's even more tricky. As I understand it, capacity building is very "inelastic" in that industry. Refineries, drilling platforms, and oil fields take years to build, cost millions (if not billions) of dollars, and must remain profitable for a non-trivial period of time before they're paid off and begin to make money.
So as an oil executive, one must be careful. Overbuild capacity (i.e. maximize reinvestment) and the price will crash, and now you're stuck with billions of dollars in bright shiny gear you can't pay for. This is not theoretical, it's part of what drove oil prices so low in the 1990s. It most definitely can happen again. As long as markets are allowed to work, it almost certainly will.
So, in my mind, I don't find it particularly surprising the oil companies have been banking profits. They know it's only a matter of time before one of these monster reserves is tapped, and the price goes down. They also know absolutely no-one is going to have sympathy for a broke oilman.
And really, I don't particularly care if they hoard their earnings. It's not like their digging a hole in the back yard and burying all the cash in it. They're putting all that money in banks, and stocks, and bonds, increasing the liquidity of the overall economy, allowing other people to take their cash and do something useful with it.
There are several concepts that speak to some sort of profit to investment ratio. One way of looking at it is Economic Profit (in essence, the difference between how much you'd make by simply investing that money in a bank or stocks vs how much you made by actually investing it in some other new thing. Turns out to be a comparison based on a 9% return. If your return is above 9%, YAY; below, BOO and you're fired). Another would be Return on Committed Capital (ROCC) - measures what you're getting for your investment. All of these different measurements play into the overall health of a company and decide how to move forward.
Delicate balancing act? For a major company, that doesn't even begin to cover it. Especially when "entitlement liberals" keep trying to take more and more money, or legislate where they should be spending the profits.