Big Oil, Big Bucks

Yesterday's New York Times had a very short piece in the "Week in Review" section about the windfall profits (yes, sorry for my obsession, but I'm trying to get wrap my head around this issue). I submit for TOD readers the following passage:

But analysts also say the companies shouldn't be blamed for their profitability, which is largely a function of the price of crude oil.

That price is set by the worldwide interplay of supply and demand for energy, forces that even ExxonMobil and its peers cannot control, said Mr. Fadel Gheit, a senior energy analyst with Oppenheimer.

"It's like the guy who won the lottery, and now everybody hates him," Mr. Gheit said.

"Call it dumb luck, call it anything, fine," he added. "But don't accuse them of all this outrageous behavior, price gouging and collusion."

This is yet another reason why I believe it's wrong for politicians to "investigate" whether Big Oil is participating in price gouging. How can that be when Big Oil has very little to do with setting the price of oil?

However, if any readers have inside information about how Big Oil has a (nefarious?) hand in affecting the price of oil on world markets, please let me know.

I have a hard time not believing that the Oil Companies have created shortages to run up profits and feel strongly that they should be investigated, and have no sympathy for them. Similar bedfellows such as Enron did this with electrical power generation in California and created rolling blackouts. If they have nothing to hide and are innocent - this will be found out in the investigations.

My guess is that they will use every trick to obfuscate. Oil Companies such as Exxon invested more in lawyers than in technology: withness the number of fishermen who lost everything after the Exxon Valdez disaster who are Still waiting years later for any settlement from Exxon. Exxon's strategy is to appeal and appeal and apparently outlive their victims. In the meantime these families still have to pay the mortgages on their now useless commercial fishing licenses and equipment.

the Oil Companies have created shortages to run up profits

There are cabals everywhere .. obviously.
It is not even remotely possible that things happen due to chaos, random luck, sheer human stupidity and greed in our societies.

Yes. It was at the dawn of the stone age that the Ax-on tribe got together in a smoke-filled cave with the Chevron-gathering tribe and they began to plot.

"One day soon," began the Ax-on chief, "our children will move from the current wood burning technology to coal and then to oil. We must establish a secret star commission that manipulates markets and forces a scarcity in oil so that our tribes will propsper while others suffer. Hah hah heeh hah. [evil laugh]"

Yup. That's the way it always happens.
Everything is a well-oiled plot.
Nothing happens by dumb good-or-bad luck.

You're so so so wrong.

The plot was made by dinosaurs - they created oil (by burying their sh*t in the ground) so that we can cause Global Warming, so that they can come back to reign the Earth.

Now THAT is good economic planning. :)
Has anyone picked up on this:

By Fred Jacquot

October 30, 2005


Congress is being stupid again by suggesting that the oil/gas industry
be subjected to a windfall tax. Where was congress when a barrel of
oil slid from $80 to $10 back in 81'-82'. Where was congress when 20
percent of the houses in my city of Casper, Wyoming were for sale? To
put this in Biblical terms, oil/gas has been through the seven lean
years. During that time seventy five percent of existing drilling rigs
were scrapped! SCRAPPED! Now oil/gas is seeing the seven good years,
and Congress wants to punish oil/gas for having the foresight to drill
that well fifteen years ago when the product was not worth nearly what
it is worth now.


It seems that in Eastern Montana an oil company has been drilling in
and around a shallow existing field. This drilling project was about
to be shut down because the company hit nothing but dry holes. The
engineer on the project was really puzzled by this because he
absolutely knew there had to be oil down there.

Here is the puzzle. You have existing wells that are still producing.
You have brand new wells that are dry. Why? What is the difference
between the old wells and the new ones? The engineer knew all about
the new wells. So he looked at the old ones. It turns out that they
were much older than he thought, and had been drilled with cable tool.
A cable tool drill simply picks up the bit about ten feet and drops
it. If you have ever drilled a hole through a concrete wall with a
hammer and a star bit you know the process intimately well. You just
keep whacking at it and eventually you have a hole. In the case of a
cable tool you have a hole that goes down to as much as 5,000 feet.
These old wells in Eastern Montana only went down about 800 feet.

The new wells had been drilled with a modern rotary table rig. The
biggest difference between the two methods is that the old method is
dry. The new method uses 'mud' which contains water and a powdery gel
that contains bentonite that has been baked in an industrial oven.
Bentonite is a loose clay material that formed when a volcano blew a
cataclysmic amount of ash over the countryside. In the West, bentonite
is mined, baked, and pulverized to make drilling gel. It is quite
common to see seams and hillsides of bentonite. It has a distinctive
dark grey color and almost nothing will grow in it. It is very
difficult to drive on when it is wet. The experience is like trying to
drive on a twelve inch deep layer of snot.

The light went on in the engineer's head when he realized that the
layers of rock in which the new wells were drilled also contained
bentonite. The drilling mud was sealing off the wells, preventing the
oil from flowing into the wells. So he performed an experiment. He
drilled a new hole down to 800 feet with a rotary rig; this time using
mineral oil instead of water in the mud mix. He hit oil. Then he moved
the rig over 200 feet and drilled a second well using water in the
mix.....dry hole!

On the next well location he used mineral oil again and hit oil at 800
feet. And he decided to go deeper. At 1200 feet he hit a production
zone that is 300 feet thick. Below that he hit two more production zones.

The gist of this is that this engineer has uncovered a major oil
field. When I worked in the oil patch we produced zones that were only
10 or 20 feet thick. He is sitting on a zone that is 15 to 30 times
that. Wow! This may be the biggest oil field find in the U.S. in the
last 70 years, and may be turn out to be the biggest producing field
in the U.S. And the implications of the find are enormous.

The bentonite in the rock he was drilling came from the Yellowstone
caldera, the monster volcano that made up a majority of the surface
area of what is now Yellowstone National Park. When this volcano blew
- this 2 million acres of volcano - it shot ash clear into Illinois.
The areas most immediate to the caldera got most of the ash which
eventually became bentonite and is now trapped in hills and rocks in
the various states. So, the implication is that every dry shallow well
that has been drilled with rotary rigs in the past 50 years in
Montana, Wyoming, Colorado, Nebraska, South Dakota, and North Dakota
has to be looked at again. Just because these tens of thousands of
wells were 'dry' does not mean they did not have oil. A lot of them
did. The water in the drilling mud sealed off the oil and kept it from

Typically, in the 'old days', a company would only drill four or five
wells in an area it thought might contain a whole field. If they all
came up dry, the company would move on to the next potential field.
Now, with this discovery, whole new fields will be opened.

The Yellowstone calera was not the only volcano in the West. There was
one nearly as big in New Mexico, and it threw its ash all over
Colorado, Nebraska, Kansas, Oklahoma, and Texas. The further west you
travel the more volcanoes you encounter. All shallow oil wells west of
the Mississippi will have to be reexamined now.

This is very interesting. It is plausible? I noticed that the article has a title of "FROM THE OIL/GAS RUMOR MILL".

Seems almost to good to be true. Oil Drummers with drilling experience please sound off ...

The answer to your question.  Is it plausible? No.

Does that mean that NO wells have been incorrectly interpreted as dry that are potentially productive? No! However, this is a small subset, and not worth talking about in a Peak Oil Forum.

If this is a widespread issue and rock samples from the previous holes have been preserved, it should be a small matter to put the bentonite ones through a heater and gas chromatograph to see if there are any traces of oil in them.

If they haven't been preserved but the locations of the holes are known, sniffers could find the oil.

I'm all for looking at this, but until the possibility has been checked out it's not worth any large bets.

I won't argue that ExxonMobil has a very good legal team and strategy. But this has nothing to do with windfall profits. In fact, I would probably do exactly what ExxonMobil does with respect to settlements, were I one of their lawyers. It is a very common practice, and not restricted to oil companies. States and federal authorities do the same thing. Your federal taxes are another great example of this type thinking.

Oil companies must sell oil on the exchange to make profits. They do NOT control the price. Most do not control any aspect of refined products. Most are highly competitive in every other area. Their combined effect cannot come close to that of OPEC.

There will be calls for their heads. The usual suspects will be rounded up, and a show made of investigating, even prosecuting those dumb enough to actually cheat. But in the end, the price is set not by the oil companies but by the world demand and the ability of OPEC to moderate it.

Right now, they (OPEC) cannot moderate price, and this translates into obscene profits. These are the same companies whose business has endured a quarter century of job loss, consolidation, and declining prospects. Do not expect them to feel guilty for finally becoming the darlings of Wall Street after enduring decades of decimation.

They all see where the reserve picture is heading - do not expect them to give up their profits. It's their last hurrah, and they know it. And after all the crap heaped on them for the last few decades, they do not care about their reputation, except in a very borderline way. They care about their shareholders, a group which is growing for the first time in a long time.

If their profits anger you, then get some for yourself by investing in their's the American way. Don't bitch about it, buy in and get some of your money back...

get some for yourself by investing in their's the American way.

If you develop an equity position in oil,
you become one of "them".

Now you have a strong "profit motive" to NOT warn the world of peak oil and to not encourage others to switch to renewable energies.

Now you want the ignorant masses to continue to buy SUV guzzlers and to continue the suburban sprawl.

In buying oil stock -- you become one of "them".

Really? Tell that to Dr. Deffeyes, who freely admits investing in oil companies (and many other things).

Others here in these forums have invested in oil companies as well as work for oil companies yet they freely and openly talk about peak oil. Dr. M. King Hubbert worked for oil companies for years, or is that fact so easily forgotten? A.M. Samsam Bakhtiari currently works for the Iranian National Oil Company.

I think your logic, such as it is, fails to hold water (or oil).

Not quite agreed.

Maybe the short-term interest of oil companies is in oil scarcity but I see them soon to be the first to ring the bell - and to invest their ever-increasing profits in renewables. They know best what the situation is and know that possibly they will be out of business in 10-15 years maybe less. It is their vital interest to stay alive - at some point long term security becomes more important than short-term profits. It is that the critical mass for the switch from short-term to long-term has not been gathered yet.

RE: Buy Big Oil stock and becoming one of them...

That's sorta' what Jay Hanson has been advocating. Deplete as fast as possible to help minimize the human impact on the carrying capacity of the planet.

The problem is NOT oil demand or oil supplies, but too many people demanding too much.

Faster consumption of all resources brings us to a fast, hard population crash whereas slower consumption brings on a long, slow population crash which seriously damages the carrying capacity of the planet.

I don't know. Sometimes the best answer is one that we humans would NOT prefer. For the long term the prognosis is not good. Not with 6-7 plus billion people wanting more and more.


Let's see.  Matt Simmons, T. Boone Pickens, Ken Deffeyes, and to a lesser degree myself, all have been tried to write about and warn the world of Peak Oil.  On the other hand, we have all tried to tell anyone who is listening that money is going to flow into companies who either own reserves of energy or technology to efficiently utilize energy.  Conversely money is going to flow away from companies who rely on cheap oil.  If you want to use that information as investment advice, more power to you.  It certainly has helped me.
How are people who are hard pressed to buy gas for a trip to Walmart going to afford to buy stock in any oil company. The purchasing power of the average paycheck has declined for the last 30 years due to union busting and exporting jobs to slave wage countries and you expect working families to invest in the stock market????
I don't understand this obsession with oil companies making profits:
1- most of the oil is produced by NOCs (60%)
2- If you want to invest in new projects, you need to make some profits!
3- satisfy demands in the next 30 years will require at leat 5 trillions of dollars, it has to come from somewhere!
4- Oil companies don't control prices.
5- a lot of companies in the distribution chain are also making profits (refiners, gas stations, etc.).
Yes, agreed. Now, if only the government understood your 5 points so they'd stop their ineffective pandering.

(Although, I'm not so sure what to make of 2 and 3. There aren't a whole lot of new projects to start, as Stuart and HO have pointed out many times, and I don't think we should be satisfying demand at its current levels for the next 30 years. But if you're talking about alternative energy, then I'm with you.)

here's Russel Roberts speaking on the topic this morning on NPR.
Take your oil company profits and put them in renewables as your long term strategy. That's using the market and putting your money where your mouth is.

This blog is about discussing and making people aware. Once you have opened your eyes and been made aware, then you have no excuse or logical reason not to act on what you believe. Those engaging here should all be in agreement that long term, oil stocks will be hugely profitable, until something upsets the world market.

There is no reason not to fund your other alternative energy endeavors this way! Use your dividends to buy light bulbs even! But anybody out there wailing about obscene oil profits is just dumb or else too strapped to get in on the bonanza while it lasts. Take your profits and invest in an ethanol still, and you can make your own fuel cheaper than gas. Not in 3 years, but today. Take your profits and insulate your home more thoroughly, or sell your home, rake some profits, and move somewhere more likely to be sustainable.

All this "windfall profits" crap is just smoke and mirrors. If you think the politicians and corporate upper crusts AREN'T investing this way themselves, then you are incredibly naiive... There is absolutely no reason not to use your awareness to enrich yourself, especially when you know what is coming.

People, "windfall profits taxation" is simply a sideshow - it will be done simply to make "Joe Sixpack" feel his old buddy (the government) is protecting him from the evil oil mongers. Oil companies will not like it, but with profits such as we are seeing, it simply will not affect them (or your dividends) much at all.

Some of the biggest (if not the biggest) investors in alternative energy (for profit) are either big oilcompanies or large utility companies..  If they could make as much money in renewables as they can in non-renewables these companies would be all over them.
There's no conspiracy.  It takes years for oil to move from the exploration stage to the gas tank.  The oil moving through the pipeline now was deemed to be profitable when oil was selling for $20 a barrel.  Of course, that means it's really, insanely profitable now that oil is $60 a barrel.  

But I expect the American voter to blame 1) Big Oil or 2) Evil Arabs.  Or maybe 3) China, for using so much (never mind that they use much less than us, both in total and per capita).  

I found this Washington Post article interesting:

It's about Bush's troubles, and quotes a Republican insider as worrying about very big structural problems facing the president, including a looming winter energy crisis because of high heating oil and natural gas prices.

The politicians know what's coming, but they don't have the 'nads to tell the voters the truth about it.  No conspiracy, just sheer cowardice.

I just listened to an NPR commentator Russell Roberts, a professor at George Mason University (thanks mikesimonsen above). It was the usual story about how higher profits for the oil companies create incentives for them to do new E&P (exploration and production).

I wonder how many times some of us will have to say this before it actually gets through to people (sigh). I'll try this again.
  1. There isn't much new oil to discover and the oil companies know it eg. reduced reserves in the GOM
  2. Investment in EOR in existing (non deepwater) fields can reduce depletion rates and is worthwhile in the short run
  3. Consequently, oil company E&P is down over the last few years and they're milking those mature fields for all they can get at these high prices
  4. Therefore, Mergers & Acquisitions to buy other people's valuable existing reserve assets are up
There is simply no argument to be made vis-a-vis incentives. It is more delusional bullshit. That is all there is to it. This so frustrating to me that I may put together a post summarizing previously published material from TOD so people will understand this.

Finally, an old joke. An engineer and and an economist are walking down the street. The engineer looks down and sees a 50 dollar bill on the sidewalk. He says to the economist "Say, there's a 50 dollar bill on the sidewalk." The economist keeps on walking without looking down and says "No there isn't, because if there were, somebody would have picked it up by now." Think about it.
You also forgot about the politician walking behind them that hurried ahead and actually took the bill.
You also forgot ... the oilman ahead of the pack, who dropped the $50 there on purpose knowing only the politician would grab it. The economist and engineer would go on debating about it forever while the politician uses the $50 to sell himself on TV to the child-voters ("Read My Lips, No More Windfalls")
yeah a nice show we've got going on and I hope people will be able to keep their sens of humor in the times ahead :)
this is serious - sense of humor is much more essential to surviving than 100 solar panels on the roof... tested and verified :)
So Dave, I'm just wondering where the conclusion of your argument goes:

We know that there's no oil left, therefore nothing for those profits to incent. So let's take the profits away, use it for something that we clearly know is better than what Big Oil would use it for, and just shut the whole thing down.


There's no oil left, and they know it. So we should let them keep their profits, keep them on the crack pipe, so to speak, so that they'll be massively incented to keep their energy customers well supplied and will work like mad on the alternatives and help mankind make it through this crisis.

One factor that I did not mention (but Khebab did above) is that a large percentage of the remaining conventional oil production is in the hands of state-owned oil companies (eg. Aramco, Statoil, Lukos). The globalized oil corporations don't account for much independent production and are usually aligned (subcontracted to) foreign governments outside the US.

That said, I think I will post on this subject (as I threatened above) and not speculate off the top of my head here about current and future situations.

But I will reiterate -- the "incentives" based argument for maintaining a "hands off" attitude toward oil corporation profits has no merit. Whether we tax these windfalls is a political decision and has nothing, I repeat, nothing to do with their ability to do more E&P to provide more fossil fuels for our non-negotiable American way of life.
If you discount the price of soda in the winter that's ok; but if you raise the price of soda in the summer that's profiteering.

If mother nature takes a wack at the nation it's ok to spend billions on those who suffer great loses but it's not ok to raise taxes on those who reaped great benefits.

Now that we have cleared that up...

Given the situation we are in I can suggest something like a compromising solution - every $ spent on renewables to be tax-free, while for the rest of the profits a higher tax rate is imposed.

But I'd also suggest the same policy to the coal, gas and all other industries consuming non-renewable natural capital. That could level things up between our and the generations to come, while giving the oil companies a way out.

A question for someone out there who knows a lot about the workings of the international oil markets:

There is a typical daily volume of oil traded on the major international oil exchanges. Let us call this volume 'paper' oil.  There is also a certain daily volume of oil that actually gets physically delivered from a given producer to a given user. Let us call this 'physical' oil.

So, the question is this: what is the typical ratio of the volume of 'paper' oil to 'physical' oil?

It would seem to me that if that ratio is very large, then the price of oil has less to do with physical shortages and more to do with the speculative expectations of the people who play the oil market,  just like the day-to-day  price of a stock usually has little to do with a company's real value.

Unrelated question:  When there is a draught in your area during the summertime, shouldn't your water company be allowed to triple the price of your drinking water, just like the oil companies do with oil? Why not let the 'free market' also determine the price of your drinking water?

There is no such thing as "paper oil". If you buy oil futures you buy a contract to pay the fixed price for a physical oil delivery at some point of time in the future. Of course if speculators expect oil scarcity they can raise the price now by buyng oil futures but if they are wrong they will experience loss in the moment the contract is due - they will have to pay more for that oil than the current spot market price. The effect of the futures is to bring market expectations for the future demand/supply equation into the current price.

The price of oil you see quoted in the news is of that paper oil (I think the 6-months futures). The spot price usually follows the futures price. In normal market the future price is lower (discounted) with the market interest rate, but unusual events like expectations for short-term disruptions may reverse that. Possibly because of the accumulated awareness of PO lately futures have been actually traded with a premium over the spot price.

Actually, the futures contracts that are traded are referred to as "paper trades" since, in general they are not expected to go to delivery.  The ratio of the volume of such paper trades to the oil physically delivered is quite high, somewhere in the range from 50 to a 200 times depending on the level of trading activity.  This is seen as an indication of the liquidity of the market; the more liquid the market is, the less susceptible it is to manipulation.  Note also that oil price quoted is usually for delivery in the following month; so the price you see today is for delivery in December.  However, trading for Dec 2005 delivery started about 15 months ago (yearly contracts go out to 2011).  As such the total volume of trade is the total of contracts traded over the past 15 months.  

Note that the role of the futures market is primarily to manage risk.  If you have a need for oil and you are worried that the price might rise, you could sign a contract today at $59/b for oil to be delivered in Dec 2007. (As an example, Southwest have about 80% of their jet fuel needs hedged at $26/b!)  Of course, if you own an oil field and you worry that prices might fall, you could be the seller of that oil at $59/b and feel pretty good if prices fall to say $45.  And finally, you have the speculators who have neither oil nor a need for it; they merely "gamble" on what they think will happpen to prices.  However, they play a critical role since they bring information to the market and the additional trades they transact help to increase the liquidity of the market.

RayJ -

That was an excellent tutorial on the workings of the oil markets!

I am now  a bit  more knowledgeable on what is going on in that area.  Thanks!

Maybe I am not seeing things correctly, but there is one point that has been bothering me. Take a mega oil firm link Exxon/Mobil. They are involved in both producing oil (thereby being sellers of oil), and also in the purchasing of oil,such as from Aramco (thereby also being buyers of oil).

It has been posited that much of the run-up in oil prices is the result of the pass-through of increased expenses. But somebody like Exxon/Mobil already has oil wells (let's say in Texas and in the Gulf of Mexico), and the expenses
associated with producing oil from those wells has not appreciably increased. So then, that component of Exxon's production has not cost them appreciably more, yet they are charging what the open market will bear for that 'cheap oil'  Ergo: windfall profits.

In other words, they are mixing the relatatively cheap oil from their established production facilities in with the volatilely  high-priced oil on the open market. If all this run-up in price were the result of the passing through of expenses, profits would not be appreciably higher than they were a year or so ago. I suspect that it is this mixing of 'cheap' oil in with the high cost of open-market oil that is pumping huge amounts of money into the coffers of Exxon/Mobil and the like.

Again, this is just my amateur's hunch; and I would be quite open to be shown where I am wrong.

Luz had a 384 megawatt solar power plant in the Mojave in California. When the energy price spiked because the market was fixed, the governor of California arranged that Luz would not receive the higher, rigged market price, but the lower, unrigged price. He also arranged for the companies like Enron to get the higher, rigged price.
I withdrew my solar patent and waited for the antisolar people to get over it.
Now, with Katrina and Rita and losing those two railroads in the Powder River basin in May, we are going to have very serious power problems in California in the summer. My investors are going to get contracts before we build the plants. No money, no plants. They can't steal them before we build them. We are going to sell the power before we build them, in fact.
From an emotional and political standpoint the oil companies are in a lose-lose situation.  Everyone looks at the numbers and is shocked by the gross magnitude of these profits.  That said, for the last 20 years, until 2003,investing in oil had been a low profit affair.  These were low-return business that required massive capital investments every year.  Millions of investors would have been better off investing in most other sectors of the market than the energy sector.

Billions and billions of dollars of investment have been written off, hundreds of thousands of workers have been laid off, hundreds of companies have gone bankrupt or have been bought out.  Of course none of this matters, because we just need someone to blame for the fact that our gas-guzzling Suburban is costing $50 every 3 days to fill up for our 40 mile, one-way commute from our 5000 sq ft ranch house in exurbia to our job in the city.

Hey, it's not just big oil that got hit by the commodities crunch. Look at tungsten and molybdenum and bismuth!
The big tungsten mine in the US was screwed by it's customers in 2003. They said that the price of tungsten was too high now that the post dotcom recession was happening and they weren't going to pay their previously contracted price for tungsten.
So the mine shut down, leaving the production of tungsten mostly in the hands of the Chinese.
Who raised the price of tungsten ten times, 1000%.
It's also happening with molybdenum, but not as much, and the Chinese are also having a go at rising the price of bismuth, though that hasn't happened yet.
You starve the commodity companies and they go out of business and prices rise. What makes you think oil and gas is different?
So now instead of drilling for oil you have to mine for oil, like when we went from vein mining to open pit for copper, etc. Now we have to drill ten wells in tight shale in New York instead of one in sandstone in Texas for natural gas. This happens naturally.
I work in solar energy so I benefit from the price rise in natural gas, but it has been a lean twenty five years for me waiting. I would rather have had less money earlier than lots of money now. I could have got into a lot more trouble with a million dollars then than I can now with a billion. I'm going to be fifty instead of twenty five.