Record Oil Company Profits and High Gas Prices: A Connection?

[editor's note, by Yankee] This story was originally posted on September 6, 2005, when the politicians first began talking about price gouging and windfall profits taxes after the price rise due to Katrina. Since we're back where we started, I thought this post should resurface. I would just like to remind everyone to look at the dates that comments were originally posted in order to keep your timelines straight.

There's been some grumbling in the media about how Big Oil is gouging the public by charging record prices for gas while they reap record profits. For example, this article from The Nation says

There is no evidence of a willingness on the part of these highly profitable corporations to sacrifice in a time of national emergency.

Make no mistake: These corporations should be able to absorb a hit. Over the past year and a half, the four largest oil companies—ExxonMobil, ChevronTexaco, Royal Dutch/Shell Group and BP Group PLC—have pocketed close to $100 billion in profits. During the first quarter of 2005 alone, those firms pulled in a cool $23 billion.

But instead of sharing the pain, they appear to be moving to squeeze every cent they can out of the crisis.

No one can dispute that oil companies are doing really well. And certainly no one can dispute that gas prices are high. But is the connection as straightforward as the article suggests? If the oil companies were less greedy, would we see lower prices as the pump?

Find out below the fold...

Now, rather than actually figure this out for ourselves, the TOD editors conducted a brief email interview with a TOD reader that works in the oil industry. He explained that in order to answer these questions, you have to understand the path that oil takes from the ground to your gas tank. "Oil companies sell to refiners. Refiners sell to distributors. Distributors sell to retailers." Whoa. That's a lot of steps. Let's break it down.

Oil companies sell to refineries

Not all oil companies own refining companies. In fact, a very few actually own their refineries. They just find, drill and produce crude which they sell on the NYMEX or other markets, to refiners. A refiner can take crude from anybody—Exxon from Shell, Chevron from BP, etc.

Refineries sell to distributors

This means that an Exxon refinery can sell gasoline to a Shell distributor. The distributor chooses where to buy his products from. Naturally, Shell Oil Refining would offer a Shell Distributor a pretty discounted price, but not necessarily the lowest he might find. Thus distributors can buy from anybody and sell to anybody, regardless of their "affiliation" with a given oil company. A distributor may be an "Authorized Chevron Distributor", and thus he can sell Techron type gasoline. But that doesn't mean he is restricted to just selling Chevron products. Independent distributors (more of them than any other type) are listed in the Yellow Pages under Fuel Companies or Fuel Distributors. These are the middlemen.

Distributors sell to retailers

These independents actually buy gas from whoever they get the best deal from, then sell it to their customers. If you have ever wondered why there is an Exxon tanker filling up a Fina gas station tank, it is because the distributor is an Exxon affiliate, but the Fina station owner got a better deal from Exxon than from Fina. This happens all the time. Distributors also sell grease and transmission fluid and hydraulic fluid and motor oil to industry. You can often see distributors trucks servicing construction sites or businesses operating a fleet of vehicles.

Retailers can buy whatever they want from whoever they can get the best price! These corporations are usually very divorced from the nuts and bolts of oil companies, that focus on retailing gasoline and convenience store operation. The retail chain may be a Shell-owned convenience store, supplied by a Shell affiliated distributor, but he (distributor) may buy his oil from Murphy Oil Refining. So while the buyer thinks he is getting Shell gasoline, what he is getting is gasoline from a Shell Distributor, but produced by Murphy Oil Refining.

I have loosely used Big Oil Company names here to make a point. However, many of the big guys keep a close reign on their distributors. But that does not preclude them selling whatever they want to independent retailers, like Samir's Quicky Mart.

Thus unless a gasoline has a patented ingredient (like Techron) or other additive, it will not necessarily wind up being sold by the affiliate retailer. And we haven't even gotten to supply contracts yet, which further complicate things.

Summing up...
At every level of these distribution chains, people are trying to buy low and sell high. This is extremely confusing for everybody, but it is the way it works. But if you keep this in mind—oil companies sell to refiners—you can quickly see why oil companies get pissed when the finger pointing starts.
So, if there is gouging, where is it happening?
My opinion is that the gouging, if any, is going on at a very local level, no higher up than the local gasoline distributors. The most opportunistic way to maximize your cash would be to buy this week's gasoline for $2.50 a gallon, and then if something (like high oil prices) allows you to, mark this shipment of $2.50 gas up to $3.00. [Keep in mind that some states regulate the maximum profit on a gallon of gas.] Normally gas markup is about a nickel a gallon or such. The convenience store makes much more on food—the gasoline is the draw to get them into the store to buy cigarettes or candy or a coke, which have much higher profit margins.

The people who control the final price at the pump are the retailing companies or independent store owners. And these guys are more than happy to put it off on the oil companies, as they are very removed from them!

I know—as clear as mud. But it is the "free economy" at work...

Why are oil companies making record profits?
Because the wells they are producing from today were drilled in past years, where they used $15-25 per barrel as their estimated selling price for the oil. Thus when the market got tight, they have cheap oil going at a higher price. Why? Simple—demand is high.

Now this higher priced oil is filtering back to them in the form of higher priced goods, so the profits decline slowly over time as higher priced energy enters the economic mill. But right now, they are making a lot of money.

So, it is not the case that oil companies are incurring high exploration costs and passing these costs onto the consumer?
No. Oil companies are not setting the retail price except via the NYMEX, where they sell to refiners.

When the traders run the price up, oil companies naturally win. But the crude price is set by market demand i.e., what will they pay today?

So, let's say, very hypothetically, that Exxon Mobil wanted to make a gesture of good faith. Could they sell the crude for cheaper in hopes of lower prices at the pump, or does the nature of the futures market and all of the middlemen make that impossible?

It would not work for exactly the reasons you think.


ExxonMobil, owning their own up and down stream divisions, could sell at a loss or reduced profit on the retail end, provided they compensated their convenience store owners for their lost gasoline revenues (these stores are franchises). But that would make whatever cut they did offer twice as financially painful—they would take the announced cut and associated reduction in profit, and then have to pay the store owners their traditional profit to keep them happy.

So you are not asking them to just fall on their own sword, but to get back up and hurl their bloodied body on it again...ouch!

So—if ExxonMobil did do this, it would be a huge gesture! But only those in the same business would understand the magnitude of what they had done. And whoever did it would shortly be replaced by the Board of Directors as the principal shareholders all called for his head on a pike! Remember, outside of the energy sector, the stock market is a total losing proposition.

If Exxon were to deliberately sell oil at less than the market price on any scale as "The Nation" calls for, they would face a class-action lawsuit from their shareholders in short order. Corporations have a fiduciary duty to their shareholders to operate the business for the maximum benefit of those shareholders. Giving away the oil cheap clearly does not qualify as in the interest of the shareholders. Therefore, no executive in her right mind would do it (and her bonus and option structure are not likely to make this a personally rewarding course of action either).
I have no doubt what you say is true. But how come a CEO doesn't get fired every time a corporation donates to charitable causes? How does such an action "maximize shareholder value"?
It has PR value, so they can do it in moderation. They tend to focus on doing things like supporting the arts (which benefits and is visible to the shareholding classes), more than doing things like helping starving kids in Africa (who are fairly invisible to the shareholding classes).
However, there's nothing stopping Lee Raymond from giving away some of his own $400 million nest-egg to the poor.  And there are certainly plenty of desperately poor people on the planet who would stand to benefit greatly from Mr. Raymond's largesse.  

On the other hand, I don't see why it would do Mr. Raymond himself any harm to give away $200-300 million of it.  What sort of material deprivations, exactly, would he incur by doing this?

This is exactly - exactly - what Hugo Chavez is doing. The desperately poor only benefit from a day's bread and circus. The givers of largesse have bought permanent power.

While your compassion is admirable, I would prefer to live in a place where everybody can decide how much all the fatcats get taxed, rather than dragging the scapegoat-of-the-day-CEO through the mud.

This campaign against Lee Raymond is being orchestrated by two rather strange bedfellows, Bill O'Reilly and Charles Schumer. Raymond has been retired since January for God's sake. Nobody knew his name before last week. But now his $400 million is the solution to our energy problems? Ridiculous.

It's true that Lee Raymond is currently an easy target in a manner similar to the way Martha Stuart once was, and that some politicians and pundits are exploiting him in an opportunistic way.  But to me, these people are merely symbols.

I myself think there is something truly shameful and disgusting about the way ALL of the very rich hoard wealth, and use it to appropriate a morally unseemly share of the planet's finite resources to themselves, and away from billions of others that need it.  It may not be obvious that this is shameful and disgusting in a society as saturated with wealth-worshipping free market ideology as American society is, but for that very reason, what I just said sometimes just needs to be said.  To a lesser extent, I think what I said is true also of all lesser degrees of affluence also.

There was an illuminating article just recently about what the very rich actually DO with their wealth:

I can't understand why it's always the rich that are targeted.  If you were rich and had $400M payday, you wouldn't be too anxious to give that up, especially if you worked for it.  It's all part of the entitlement mentality and since we don't make $400M, Americans are looking to point fingers and blame somebody since they can't afford $3 a gallon.  The solution: make more money and the price of gas won't bother you.  
So someone working as a fireman, nurse, doorman etc. does not make 400m because they don't work hard enough.  Absolute bullshit.  Are you really saying that the benefit to society from Lee Raymond and others of his ilk is really worth thousands of times the value of people who do everyday jobs and take home a normal wage.  I agree that there has to be reward for enterprise and for taking responsibility, but the growing disparity between the highest and lowest earners is nothing but an abuse of power.
Especially since one of their contributions was to explicitly undermine the science of global warming.  We also see their possible misinformation campaign on peak oil.

When a company dominates a national industry for decades, and the population and GNP grow over that time, they get to see very big numbers on their balance sheets.  There are more people, making more money, and (with current prices) Exxon is pulling down a higher portion of family income.

The numbers are driving a greater concentration of wealth and power for Exxon, and the way they are using that wealth and power is ... simply evil.

The share of national income pocketed by the top 0,1% in the US has grown from 2% to 7% since 1980. There's been nothing like the same change in any other rich country. The UK is closest, where that share has grown from 2% to 4%.
Yeah, and the ratio of incomes from the least paid in a company to the highest paid in the same company has exploded as well.

I think it is an unanticipated consequence of the stock market boom/bubble, and the well known connection between available shares and an aging baby boom population.  Money flows into the stock market, supporting the bubble, and giving companies huge capitalizations.  Management compensation, as a fraction of capitalization, is nothing ... while at the same time it is huge from a 'real world' perspective.

I was actually in a small company, and saw a couple guys turn into billionares on the day of public offering.  It was actually freakier that a couple guys who knew me, who would say hi to me (a working engineer) in the elevator, were suddenly billionares.

Why did they get that rich?  Well, they were certainly smart and hard workers ... but not even they expected that much.  It was the dot com boom, and the market just threw money at them/us.

It's a strange world.

Let's see what would happen if Lee Raymond's $20 million/year were distributed to the Exxon customers ...

There are probably 100 million Exxon customers in the U.S., so that would come to 20 cents per customer per year, or about a penny and a half per month.

But why only the U.S. customers ?  Exxon probably has a billion customers worldwide for its various products.  So that would make 2 cents per year per customer.

And what if his pay were distributed among all of the poor in the world ? How many poor are there ... perhaps 4 billion ? They would each get a half-penny per year.

How about distributing it to just his shareholders, you know, the people who placed their capital at risk so he could sit on his arse through the largest price boom in decades but still not grow ExxonMobil's share of the market?
Yes, that's another reasonable option.

There are about 6 billion outstanding shares, so each of those shares would get three tenths of a penny per year, or a roughly 0.005% annual dividend.  Before taxes.

That gets back to what I said about market cap.  They've got a value of 393 billion ... actually to give away 1/1000 of their cap to a non-founder is pretty impressive.

The question should really go to shareholders though.  It could be that 400 million to a environmental program or etc. would stand them in better stead 10 years from now ... when people figure out Exxon's social responsibility has really been.

And I personally think Lee should be able to have a pretty happy retirement on 30 or 40 million.  If he can't he has other problems.

Quick reminder:

Much of Lee's $400 million is actually in stocks and stock options -- meaning that he has wealth, but not cash, and the company has given up shares of its stock (shares that were already outstanding), or options on shares, but not in the same way as $400 million in cash would have.

I don't know enough about the accounting behind it all, but they didn't give 1/1000 of the market cap away -- the market cap remained the same (unless investors decided they didn't like the $400 million, and, thus, started selling/not buying, driving the price and, thus market cap down), their profits barely took a hit, and they retained value in the company.

And the company is perfectly within its rights to provide absolutely ridiculous amounts of compensation to people. And, if I was offered $400 million, I'd take it.

As for taxes on the wealthiest, I concur -- taxes at the high end need to be raised. With the one caveat that the taxes need to be consumption-based, not wealth-increase based. If Lee keeps all his $400 million in stocks, etc., or gives it all to charity (while driving an '83 Honda Civic and living in a trailer), then I don't want him taxed -- let him build businesses, support charities, etc. If, on the other hand, he throws a $15 million birthday party for his dog (as far as I know he hasn't, but it's a hypothetical), then that whole $15 million gets taxed -- and I really don't give a hoot in a holler about whether it was made as salary or as capital gains.

$400 million doesn't bother me (don't invest in ExxonMobil, don't buy their gas). Reducing incentives to invest and save bothers me.

Oh oh.  And while they give Lee 400 million, they are leaving their pension plan for ordinary folks unfunded:

"Exxon alone is currently staring at an unfunded pension obligation of $11.5 billion," says The Post article.

Let's see how Lee distributes that 400 million to charities, but at this point it doesn't look like he's going to shape up as my paragon of virtue.

So Exxon could fully fund the pension plan with about 2 weeks profit yet they don't. Immorality causes poverty, immorality at the top.
No, $11.5 billion is about 1/3rd of last years profits or 4 months, not two weeks. Still, it's patently obvious that yes they could cover the unfunded part of the pension fund.
Thanks for this. It saves me from having to repeat myself ten times a day, and much clearer than I usually tell the story.

There will be calls for windfall profit taxes, but they tend to drag on after the windfall has blown through. If I were the COB of XOM, I'd be seriously thinking about cutting off the call for taxes by making a jaw-dropping donation to Katrina relief/NOLA rebuilding, like a billion dollars or so. They need NOLA rebuilt so they can have plenty of staff for their Louisiana infrastructure, and they get a tax deduction instead of tax increases that don't go away.

I suppose Ralph answers my question to Stuart above. But I wish reporting on charitable giving by corporations would make it clear that they are not being generous. They are doing what they need to do to "maximize shareholder value".
Marketing a corporation involves much mote than spending money on advertising, and PR from corporate giving works in that mix, but sometimes other strategic reasons make their way into the 'charitable' mix.
Making profits for shareholders is what they are hired to do. When they do something else, they are either fired or, when their company goes under a la Enron, they face jail.

Does anybody think that, if shareholders were polled, there would be a consensus to donate, say, 10% of profits to some worthy cause? And, if so, do you think a majority of these could agree on what is worthy? Why not simply ask the shareholders themselves to donate? Some of these think they already have, through the taxes the oil company already paid plus the taxes the shareholder him or herself is about to pay - it might be worth noting that, without any new tax, the sum of taxation - federal plus state plus royalties, is clearly more than 50% of total net revenues.

Instead of a windfall tax why not a stock split with the new shares going to the federal, state and local governments? The voting power of these shares could change what is of most benefit to shareholders.
Great idea! Let's try having voting governmental control over oil/gas/etc. companies!

Oh, wait -- we have those. They're called Gazprom, Transneft, Rosneft, etc.

Governments act in the interests of their constituencies, based on the entire array of government services. Therefore, they become instruments not only of "social good" but also of foreign policy, economic policy, etc. And when was the last time you saw a non-rigged election where more than, say, 70% of the people agreed on the direction of a company?

Thought experiment: Put the oil countries (the American ones, at least -- so take out Fina, Shell, BP, etc.) under the control of the Bush Administration (has to be executive branch; legislative branch was designed not to produce rapid consensus). They now materially support (not sell to, support) the Iraq War, the response to Katrina, ANWR, etc. Happy? I'm sure not.

That's why taxes are the way to go. Companies keep doing the company things, governments do the governmental things, and the two understand the relationships (yes, yes, to a point, to a point). Government can regulate, but not completely control. And, if there's a party in power that you don't agree with, you can still be pretty sure that you're not going to see the "Republican Discount Day" at ExxonMobil.

The current system may not always produce what I want, but that's better than the alternative.

Everyone wants to make a profit, but I'd guess that anyone who has run their own business has had losses.  Eventually, you grab the chance to make an exceptional profit as a hedge against the inevitable losses.  So I doubt anyone sees themselves as gouging.  And I don't expect anyone along the energy chain to admit to and stop gouging anytime soon.

We'll just have to reduce our dependence on their products.  That'll get their attention.

Shell Mars platform, before and after:

With exceptional profits sometimes come expectional losses.

Sure, OK, so the oil co's are taking a bigger profit than they are used to. But oil/gas is still way too cheap.
The other thing I would add is that we want the energy sector (both companies and their investors) to be making obscene profits at the moment, because we need them to fund a bunch of astronomically expensive projects to develop oil in the arctic, 10000' under the sea, make oil out of coal, tar sands, etc. They'll only do that if they're feeling really good about how much money they've been making and how much more they are going to make in the future. Taxing the hell out of them is not going to help that good feeling.
A rational government would cancel the subsidies they just provided in the last Energy Bill, for all those projects you just described.
Hey, I wrote this ^^^ back in September 2005, and I still agree with myself.

The scandal here (still in April 2006) is that we gave those Energy Bill handouts, and now are surprised at the money they have.

isn't it pretty cool?  I love seeing something I said a year ago that I still agree with in these old's also interesting to see how's people's voices change over time too.
I think I've actually caught myself reading old forgotten comments and thinking "hey, this guy is onto somthing."  Sad, I know.
Stuart, the other way of looking at that is that if you do tax the hell out of them then they won't invest in exploration or infrastructure so the price of oil will go up and alternatives come on stream as they become relatively cheaper. Seems like a good strategy to me (as long as the alternatives are CO2 neutral). "Oil is too valuable a material to burn" (William McDonough)
My sense is the big problem is making sure the back side of peak oil is gentle enough that we have time to adjust rather than very abrupt (so there's no time to adjust). Polar oil, tar sands, etc all help with that. I think the best way to handle climate change issues is directly penalize the thing we don't want (eg CO2 emissions) and then let the market figure out how best to produce energy without CO2 emissions. Unfortunately, human nature being what it is, I don't think that will be politically feasible on the necessary scale until after global warming is clearly a serious problem to humans (and to wealthy ones at that - Inuit and Pacific Islanders won't count). That will be rather late in the game, after perhaps irreversible changes are in motion (eg methane releases from melting permafrost). I guess hurricanes are the leading contender to be the deliverer of the bad news.
Re: The bad news

See the most recent post Hurricanes and Global Warming - Is There a Connection?. And also, melting permafrost in Western Siberia is indeed an irreversible (but little appreciated) change.
Nowadays, as goes Florida, so goes the nation. When this state realizes gw will cause sea levels to rise such that Tallahassee becomes a (small) island, we will see an abrupt change in policy.
My sense is the big problem is making sure the back side of peak oil is gentle enough that we have time to adjust rather than very abrupt (so there's no time to adjust). Polar oil, tar sands, etc all help with that.

Capital is also a limited resource. I worry that if we throw too much capital into arctic oil and tar sands to slow the post-peak decline, we won't have enough capital to still make the transition to whatever comes next. Whether you believe in Bush's cellulosic ethanol or Lovins' hyperefficiency or the Engineer-Poet's wind and zinc fuel cycle, there's a lot of capital that has to be spent (especially if you believe it will take all of those). It certainly seems possible that misallocation early on could preclude us from reaching a reasonable end state...

Don't forget to factor in "GLOBAL DIMMING"


Believe it or not, the price of oil used at oil companies to calculate "return on investment" for capital projects is still only $20!  The fact is that the oil industry is so goddamn conservative that they will NOT make the investments that they need to be making NOW (or more accurately, YESTERDAY)!  There is hardly any capital projects in the U.S. when it comes to coal-gasification (syngas to fuels and power), tar sands, etc.

My fear is that after Katrina, that even deep sea GOM is going to be considered risky investment.

When I ask my boss why oil companies are so conservative, he says it's because of what happened in the mid-1980's.  That's when they had invested in non-crude alternatives, when price of oil crashed and they lost significatnt amounts of money.

So in that sense, NATION magazine is right.  The oil companies can do us all a favor by taking risk (if assuming $40 oil is risky!) and investing in non-crude fuels now!  Note this is not charity, since they are bound to make money, though perhaps at 20% ROI instead of 40%!

Oil Companies got very badly burnt in the late 90's and early 00's. This is especially true in hazardous demanding areas. They are very conservative when planning a new development and follow rather than lead on prices.

It is now more like $35 /bbl for planning purposes.

Dont forget, 17 out of the last 20 years have been very sluggish years and were hallmarked by industry layoffs and low investments.

It is what they will do with the money that will be important. Me? I would start up the Exxon Nuclear Power Division. Now give me my $ 400 million...

When I ask my boss why oil companies are so conservative, he says it's because of what happened in the mid-1980's.

What happened in the mid-1980's?

OPEC opened the manifolds and flooded the world with cheap oil. This was a deliberate act of economic warfare intended to destroy any diversification into alternate energy or renewables, and to cut the legs out from under any non-OPEC producers.

Was OPEC successful? I know two colleagues who committed suicide after they discovered thier skills, hard work, and dedication meant nothing outside of the oil industry. You need to understand the scale of what occured. If GM fails the employees can go to another auto firm, or to similar employement in another sector. The oil industry has a great many specialized skills that do not transfer. Even when  they do transfer the scale of industry undertakings is such that outsiders have trouble coming to grips with it. I know a former Training Co-ordinator who fought for a similar position outside the industry only to find the interview coming to a quick close after he described the extent of his responsibilities. His annual training budget was more than the annual gross earnings of the firms to which he was applying. Of course he was a "co-ordinator" and not a "manager." But this was in a firm where to hold the title of "manager" you had to have independent sole discretion signing authority for $500,000. And you didn't have to sign a damn thing; once you give your verbal committment the deal was done.

Was there any outcry over this destruction of a key industrial activity? Anybody raise a cry over all the rigs that got stacked and scrapped? Any concern with all the famalies that were impacted, torn apart? Heck no. Gas was cheap, life was good, and who cares if your neighbour takes his own life.

When your being is scarred in this fashion it will take some time before your intellect can convince you that it will not happen again. If you think the current generation of industry leaders too conservative and you want to understand the reason for that convservatism, then you have to understand the emotional and deeply personal impact of the 1980s.
Of course, the obvious reply to this is that they aren't making those investments.  Indeed, using future oil prices of $28/bbl for evaluations insures that they will never have to.  After all, it's so much easier and quicker to do nothing.
As long as they do invest in ways that enable us to move beyond oil.  But don't count on it.  By the way, how do we count on it?
Hi Stuart,

I thought the high price of oil would represent a sufficient incentive to get oil companies to invest in new new exploration and research into exploiting very deep water and polar oil.  I don't see why they need the current level of profit in order to do so (although I admit it can't hurt).

Also, I'm curious.  What are the majors ACTUALLY doing with their record profits?  My understanding is that these profits are not, for the most part, going into R&D and exploration budgets, but are being transferred to shareholders in the form of dividends and stock buybacks.  But I heard this through the grapevine, so I'm wondering if anyone has the information to confirm it one way or the other.

Assuming for the moment that they are using the money to enrich their stockholders, then I don't see any problem with a windfall profits tax.  That way the gov't could use the money to fund research into renewables or other alternatives.

Of course, that assumes the gov't will use the money wisely instead of purchasing some new cruise missles to fire at Iran.

I'm not Stuart, but look at Exxon. I'm sure(?) they have had successful Wildcats in the last couple years, but the main wildcats I'm aware of was their 100 million dry hole in the Caspian in 2004 and their recent Norwegian North Sea failure, both very expensive.

Almost 70 wildcats have been drillen by various firms in the Barents Sea so far, and only one has found a marginally commercial amount of oil, contrary to expectations (some natl gas has been found).

I think the lack of drilling (for example in the purported oil-rich offshore Greenland per USGS)  is a result of great uncertainty over new prospects and the enormous cost each represents in these challenging and remote areas. Consider that no drilling is done without very expensive preparation using the most advanced seismic tech available, and even so results are far from guaranteed.

Let us build a model to understand why there may be some hesitancy to go punch holes in the ground.
The key variables in the model are estimated as follows:

  1. Wildcat Ratio: It takes a number of wells to identify and prove a prospect. Assume that 10 dusters are required for each gusher. Note that this does not refer to step out wells within an existing field. Modern technology may have improved this ratio somewhat.

  2. Cost per Wildcat. This value may show wide variation. For deepwater offshore the cost is around $50 million per well. For shallow water offshore and difficult mountain terrain the cost may be $25 million per well. The least cost may be as little as $2.5 Million.

  3. Prospect Size.  The Royals have all been found. Most of the nobles have also been found. This means that what we have left to find is smaller pools of 300 to 500 million bbls.

Now let us build an exploration table.

Period 1
Wildcat Ratio: 10 to 1
Cost per Wildcat: $2.5 Million
Prospect Size: 1,000,000,000
Discovery Cost per BBL: 10 x 2.5 = 25,000,000 /1,000,000,000 = 0.025

Period 2
Wildcat Ratio: 10 to 1
Cost per Wildcat: $25 Million
Prospect Size: 5,000,000
Discovery Cost per BBL: 250,000,000 / 5,000,000 = 50

Period 3
Wildcat Ratio: 10 to 1
Cost per Wildcat: $50 Million
Prospect Size: 1,000,000
Discovery Cost per BBL: 500,000,000 / 1,000,000 = 500

Plug in your own numbers. XOM drilled Mukluk. This was a billion dollar duster back when a billion dollars was real money. XOM could have saved themselves a big pile of money if they had just taken 3/4 of a billion greenbacks, dumped them in the parking lot and burned them. Drilling the actual well cost them an extra 250 million they could have saved by just having a big bonfire.

We all expected oil to get more expensive as the peak is reached - and that means folks with old (low cost of production) sources get to clean up $$$.

That's just the way it's got to be, if we want price to be our regulator on world consumption.

Now, I guess we could blue-sky a global allocation/rationing system, but I don't see that being politically possible for decades.

In the meantime we do have the ability to choose, a bit, who gets to make the profit on that inexpensively produced oil sold at high market prices.  We can let the oil companies here and abroad have it (under the assumption that everyone's pension fund owns oil stocks so it's all good), or we can decide that society (through government and taxes) should grab a bit.

You can grab a bit in import duties, gas taxes, or windfall profit taxes - but once you decide to do it those are just details.

(I think the Europeans, and others, who have "prepared" with existing high gasoline taxes chose the right path.  It's left to us to catch up in America, one way or the other.)

Stuart, you make excellent points about the need for corporations to maximize profits, both for the benefit of shareholders and for incentives for new capital investments.  I can understand why some would feel that as ones who seem to be profiting from this situation someone might feel that it is the oil industry's  turn to pony up. But if an industry is subject to windfall profit taxes in the years of its upcycles, shareholders don't benefit from those upcycles, and who would want to own the shares?

Having said that, if we believe in peak oil, then at some point all these profits become pure windfalls, because all the profit in the world will not induce E&P spending if companies feel that no oil is to be found at costs below those that would lead to demand destruction if they were passed on to consumers. Of course I don't pretend to know when that point is. Simmons extensively discusses this point in "Twilight in the Desert."

The larger point is that having long since left the stage where we take care of each other in villages, the need to care for each other, for the weak to take care of the strong to preserve community is still there. Under the ruling Republican philosophy, community only extends to to those who can pay for all their own needs, the rest are excluded. We give lip service to this need for community but it really does not matter except perhaps as an afterthought. IN NOLA we may be finding out where the limits of this philosphy are.

As long as we depend so heavily on the profit motive (and for the moment, gioven the failure of socialism, we seem to have no obvious alternative) there are bound to be heavy costs to society which economists will fail to measure. We are seeing what the ruthlessly competitive society of Economic Men and Women looks like and we have not yet figured out how to live with the consequences.

Remember, corporations are not human beings, they are simply legal fictions. Their only legal purpose, as pointed out already, is to maximize shareholder value. If we want to make a moral argument that some of portion of "windfall" profit should be donated to charitable causes (other than those with PR value to the corporation), then that argument should be made to the shareholders who are receiving the windfall. And if we want to force some of the windfall to be shared with the less fortunate, then the better vehicle is the individual income tax. Placing targeted winfall-profits taxes on a specific sector merely distorts the economy.
Corporations are granted legal status by the state, to carry out the objectives specified in their corporate charter, presumably for the public good. When corporations act against the public good and/or are rich enough to and guilty of corrupting the government then their charter and the corporation itself should be revoked, by we the people.
Sure -- in theory. But when is the last time a state revoked a corporate charter?
Sadly, I agree. I just wanted to point out that Corporations don't exist solely for the shareholders; they are supposed to be for the public good.
Revoking corporate charters left and right would be a fantastic idea, in my opinion, but unfortunately the very notion of doing so is simply unthinkable in the current political and ideological climate.
"Go placidly amid the noise and waste, and remember what value there may be in owning a piece thereof."
          - Kehlog Albran, The Profit

In all seriousness, the possibility of "windfall" profits is one reason people invest in ventures.  If you tax them away, you won't get as much investment and you'll have even less supply than the problematically-low levels we've got.

Let the oil companies make money now.  All that money going to them is the one thing that's going to get free actors to conserve, switch to other supplies, and do the other things required to bring oil consumption down.

"Let the oil companies make money now.  All that money going to them is the one thing that's going to get free actors to conserve, switch to other supplies,..."

.. and Pay off more PR companies, Scientists and 'Biostitutes' to misguide the public away from solutions that are really good for the public, like LA's Public Transportation, or knowing about Global Climate Change.  SS said that the deep-sea finds and use of other 'big-project' fields will soften the blow of PO, but that's only if it's not handled the way it is now, ie, Business as Usual.. Consume-mass-Quantities, the Market and Science will assure smooth sailing.. to The Island!

EXXON's Mission;  To Serve Man  
     .. with fava beans and chianti.

In all seriousness, the possibility of "windfall" profits is one reason people invest in ventures.  If you tax them away, you won't get as much investment and you'll have even less supply than the problematically-low levels we've got.

Couldn't agree more.  

Should GOOG be subject to a 'windfall' profits tax?  After all, they are making nearly pure profit from their ad biz.  Investors who got into this stock are taking a big risks in hopes of making those 'windfall' profits.

Additionally, during the lean years, did oil cos get a special windfall loss tax credit?  Nope.

Oil & gas prices have not nearly reached the level where they need to be to change behaviors and constrict demand (at least here in the US). Keeping prices artificially low by using the SPR or penalizing Big Oil is not a good idea. The Nation has it wrong. It would be nice if these companies showed some sense of social responsibility but that's not the nature of this particular beast.

Americans like to have their cake and eat it too. They feel they are entitled to lots of abundant cheap oil/gasoline. It's time for these addicts to go Cold Turkey.
The problem I see is that oil companies don't believe that high prices are permanent, so they're not investing.  They believe this is a temporary windfall, so they're not raising the price assumption in their ROI calculations. There is a normal human tendency to be too conservative in taking positive risks, in this case on exploration.  No one wants to look like a fool - much safer to do nothing, and rebate profits to shareowners.

The solution here might be a windfall tax calculated on the difference between market price and the oil company long-term price assumption.  Just send the oil company a form in which they enter their price assumption, and current market price, subtract the two, and multiply the result by their sales volume.  Maybe let them keep some percentage...

This would capture the windfall for the public AND give the oil companies a big incentive to raise their price assumption, and invest in more exploration.  This would tend to counter-balance the human tendency to be too conservative.  That tendency would keep them from going too far.  And if prices dropped, the tax would automatically disappear.

They believe this is a temporary windfall, so they're not raising the price assumption in their ROI calculations.

Believe me, they are raising their price assumptions for future project economics. I know this for a fact. They aren't raising them to $70, but they are on the rise.


Robert, I would be interested in your thoughts if you would care to respond (or anyone else with an idea):

I've had this thought for some time, which is that when you plan for $20 prices, you will be relatively conservative in where you drill. You  will drill only the most promising, highest potential return prospects you have available. As you plan for something like $50 oil, you will drill increasingly risky, smaller and more expensive prospects. As has been noted, drilling and exploration never fully stopped, even at the lower price estimates. The Caspian was explored, Buzzard found, other fields discovered and developed in the gulf and elsewhere. My thought is that despite billions spent for exploration/development over the last few years on the very best prospects, using our best science & technology, discoveries have been significantly decreasing in average size and number.  How much hope do we honestly have of increasing discovery and production of new oil by expanding our search to progressively more marginal, less promising prospects, if our best prospects have yielded so little. Do we know that greatly expanding efforts will really find that much more?

How much hope do we honestly have of increasing discovery and production of new oil by expanding our search to progressively more marginal, less promising prospects, if our best prospects have yielded so little. Do we know that greatly expanding efforts will really find that much more?

No, I doubt that there is a whole lot of oil left to be found. But higher oil prices improve the economics on upgrading refineries to handle heavy crudes, and they make things like GTL projects look more attractive. So, high oil prices do improve the chances of increasing supplies, but not necessarily through additional discoveries.


Well-stated, RR!

Clearly, prices are still powerful. I am aggravated equally by the naive cornucopians who attack with no knowledge the concerns of petroleum geologists and the naive market haters who see all evils as resulting from a demonized "capitalism," which is perceived to be the source of all evil.

Of course, by itself the market cannot "save" us. Equally true is the proposition that without utilizing market forces there is no prospect whatsoever of making a reasonable transition to a world that does not use fossil fuels for energy.

The truth is complex and far distant from the ignorant fatuities of extremists on either side.

Thanks for responding. Pretty consistent with what I was thinking, then.
The U.S. gvt had their chance to raise fuel taxes to encourage conservation when prices were dirt cheap and they blew it.  

Americans, for some strange reason, feel it's their sacred birthright to have cheap unlimited fuel.  

Now that the horse of cheap gas has long left the barn the politicos are re-introducing the failed idea of a windfall profits tax to deflect the heat during an election year.

Nice try, but no cigar.  

it sholud be pointed out that shareholders are NOT getting their slice of the excess profits. Just check the dividend payments made by the majors:

Chevron pays 1.80/yr, a 2.9% yield;
Exxon pays even less, 1.16/yr, 1.9% yield;
BP is a little better, 2.40, 3.1%;
Total is about the same as BP, 3.92, or 2.9%;
PetroChina is the best of those I surveyed, paying 3.73 for an annualized yield of 4.6%.

Another way to assess this is to look at their balance sheets to determine their cash versus the dollar amount of dividends paid. But without even looking I can say that dividend payments could be tripled or quadrupled by most oil majors with little detriment since that cash is just sitting and not being used for any constructive projects.

Energy exploration requires significant cash flow, a metric by which most are measured. You can't explore if you can't afford to spend billions each and every year.

You can't grow reserves if you can't explore (and some can't do it even if they do explore).

Not all oil majors should be paying low dividends. If they can't show track record of output and reserve growth then they should convert to income trusts and spend the cash that would normally be spent on unprofitable exploration on the shareholders in the form of dividends or share buy backs or both.

Indeed, in Canada we have a HUGE class of such investments - they are mostly characterized by finite, fairly short term, reserve life. Some are attempting growth, but not all. They pay somewhere in the range of 6, 7, 10, 12, 14% yields depending on individual characteristics.

Of course, their share price appreciation takes a hit.

Some investors (I am one) prefer short term capital gains. Give me 30, 40, 50, 100% in one or two years and I do not complain about the 1 or 2 or 3% yield I might get.

That might be a rational behavior if you thought supply was probably going to be permanently tight, but you weren't sure, maybe it's just a passing constriction (because you got burned in the 80s and 90s). Hold onto the cash, so you have it for E&P, but don't start up too much too soon, just in case.
Stuart, I don't think that Big Oil is holding on to cash so much with an eye to timely exploration or research.

Have you read Kelly's "The Divine right of Capital" or "The Corporation" by Joel Bakan?

These two books are (IMHO) the two "must-reads" for understanding corporate behaviour.

Our form of capitalism does not exist in the context of moral or intellectual integrity and so has devolved into a psychopathic corporatism. The key is to accrue all possible wealth and to externalise all costs without regard for any other concern.

Notice that Big Tobacco knowingly decieved people about the nature of their products.  I submit that Big Oil does the same.  (Global Climate Change is to Big Oil as Cancer is to Big Tobacco.)  So if criminal deceit is standard operating procedure for Corporatists, simple profit-taking is even more fundamental.

Here is the crux of the matter for me.  Bakan works with a criminal psychologist to establish the point that corporations arebehaviourally the worst sort of criminal personality type: the criminal sociopath or psychopath.

I've loaned out my copy of the book, or I could do a bit more detail, but the notion is that these "legal persons" may exhibit charm while using others, steal, inflict harm, or kill without remorse, and are concerned only with their own power and pleasure.  Often criminal psychopaths self-destruct.

The real difficulty is this: if we have created a Corporatist culture where this personality type is seen as successful, then we have created a homicidal (and eventually suicidal) economic model.  Furthermore, the values of the corporate/corporatist culture become the norms for personal behavior as well.

I suspect that we are at the point where the psychopathic culture we have created will destroy itself.

Big Oil -- like Big Tobacco -- has concern only for Big Profit.  The leaders we have cultivated have concern only for personal power and pleasure.

Record Oil Company Profits and High Gas Prices: A Connection?  Of course!  Explanation?  Business as usual.

nice beggar
Oil companies are very busy doing stock buybacks to protect their heavy cash positions right now - which most shareholders think is a great idea. Dividends are going up, but most shareholders count on stock splits to maximize their shares and an eventual sale of the shares for final profits. Most long term investors are also in dividend reinvestment programs, increasing their positions, and the increase in dividends has helped. But in general, most people don't buy a stock to live on the dividend.

Just 5 years ago many of these companies were paying dividends of less than 1% or nothing at all simply because the money wasn't there due to depressed prices. Remember - while the rest of the world has been booming, the oil industry has been in the longest contraction in history. Yet another reason CEO's, CFO's and COB's could care less about people complaining they are making too much money. We have starved for 20 years, with more sector attrition than the WORLD automotive and steel industries combined.....

Another item to consider is that our insurance rates are going up by hundreds of percentage points due to the hurricanes, and there are some projects out there for which nobody will write insurance. That means keeping cash in the bank and insuring yourself.

As oil becomes more scarce, how do you stay in business? You buy other companies or their assets. This cannot be done with a low-cash balance sheet.

And as a CEO/CFO/COB - if your cost of goods had risen 300% in a single year, wouldn't you hold on to additional cash reserves going forward? Because the oil business has seen 300% increase in COG in 2005!!

Just a few thoughts...

Hi GeoPoet,

Thanks for the info.

I say slap on the windfall profits tax.

Hi Karloff,

Looks like I should have read down a bit to get at least a partial answer to my question.

However, you still don't address the issue of stock buy backs, a very powerful way for a company to drive up the price of its stock and return money to shareholders without having to change the dividend.

So, the dividends aren't going up, so the question is, are they shoveling cash into buying back their stock?


From ConocoPhillips' CEO Jim Mulva's senate testimony last fall:

ConocoPhillips has been investing its earnings back into maintaining and expanding supplies. We had 2005 earnings of $13.5 billion - about $1 billion a month, but our capital investments also were close to $1 billion a month. In fact, over the last three years, ConocoPhillips' earnings were about $26 billion while investments were just over $27 billion. ConocoPhillips expects to grow its base with continued high levels of investment. In 2006, we intend to maintain our higher investment rate to increase supply of crude oil, natural gas and refined products.


Robert, they are going to try to expand supplies. I expect them to have no more luck at this than ExxonMobil, unless someone can demonstrate evidence to the contrary. Given that decline rates seem to be a taboo subject inside the IOCs themselves, is it any wonder that Exxon did so poorly compared to their own projections (as documented by Stuart)?

Can you give me a reason why ConocoPhillips is going to be different? Why should I believe ConocoPhillips when I can look into the history of the US lower 48, the North Sea, Cantarell, Exxon's inability to increase production over the last 6 years, etc.? The track record of the IOCs is arguably very bad on this topic regardless of dollars invested. What science says that this will be different this time?

COP has increased developed crude oil reserves in every year since the merger. Some part (maybe all of it) is due to acquisitions and JVs (like COPs investment in Lukoil). They have also increased the total barrels of refined products sold in each year since the merger.

Incidentally, Jon Stewart did have a funny line back in the fall after Mulva's testimony. After Mulva said "In fact, over the last three years, ConocoPhillips' earnings were about $26 billion while investments were just over $27 billion", Jon Stewart replied "What he is saying is, 'We're broke'."


Incidentally, the reason for the post is a rebuttal to claims that Big Oil is pouring all of their profits into stock buybacks, etc. A lot of money is being reinvested.


Hi RR,

Thanks for the info!  Sounds like my suspicions were incorrect.

I've read elsewhere that there's lots of investment going on in various ventures (oil, natural gas, a bit in alternatives) by most of the majors and given that corporations don't like to cease to be relevant this makes sense. But past investment didn't help ExxonMobil overcome decline rates, did it?

Then I look at what you mention in reply and you bring up acquisitions but these were of fields that someone else had already discovered. Now some may have been in production and some probably were not but is there a track record at COP of new discoveries to offset declining older fields or is this all "discover via Wall Street" type exploration?

Also, you being a COP employee, would you care to take a crack at an equivalent assessment for COP to what Stuart did for ExxonMobil and how new production barely covered existing declines? What was COP projecting (before and after the merger) versus what did they actually produce? How much new production did come online and how did that impact total MBPD pumped compared to projections? That alone would demonstrate whether COP has a history of properly gauging decline rates or not. We clearly saw that ExxonMobil was far too optimistic every year for the last 6. If you could do an equivalent assessment for ConocoPhillips it might demonstrate that at least one IOC has their heads on straight. Conversely if such an assessment demonstrates that projections were wildly optimistic even with new production that came online, then I think we'd have a case for dismissing any promised production increase from COP until they actually prove it.

Since you are a COP employee, perhaps you have such data available (publicly, of course)? If you can't share it, then so be it.

Seems like there's one thing missing in the analysis in the blog entry: the consumer.

Sure, maybe local retailers would like to mark up the gasoline. But why are profit margins usually only 5 cents a gallon or so? Why not mark it up higher than that, every day?

The answer is obvious: competition. Gas station owners can't easily collude because there are so many of them. Retail gasoline is a competitive market, made more so by government regulations that require gas prices to be posted on large, easily visible signs.

We have all seen that gas prices vary considerably over a mile or two, sometimes just a few blocks, or even across the street. And I'll bet most of us go out of our way at least a bit in order to save a few cents a gallon on gas. My observation is that cheap gas stations do far more business than expensive ones.

This means that a retailer simplly doesn't have the option of raising his gas prices just because he feels like it, even if there is a hurricane on the other side of the country. If he does, his competitors will take away his business by undercutting his prices by a few cents. The same competitive forces that keep retailers from increasing their profit margins during normal circumstances apply equally after Katrina.

Now, of course if the retailer's costs go up, because he is paying more to the distributors, then he must raise the price to his customers as well. But in that case it is OK because he knows all of the retailers in town will be in the same boat. As the article points out, retailers can generally buy gas from whatever distributor is cheapest. So they all have roughly the same costs, and their prices will be based on those costs plus a profit margin.

In summary, the conclusion in the article doesn't make sense and is probably wrong. Gas price increases are not due to simple profiteering on the part of retailers. Those small businessmen are not in a position to increase their slim profit margins because of the heavy competition in the retail gasoline business. If the prices go up, I would look at higher levels in the gasoline production and distribution chain.

The U.S. faces a 5 to 10 percent reduction in its gasoline supply for the next several weeks. Ultimately this is going to increase prices, and it is not a matter of profiteering by anyone involved.

You make a good point for store vs store competition, but play around with some game theory considering that some entities control many stations. If they see supply disruptions and consumer panic, the chain may jump the price by fifty cents at all stations. Let the guy with one station sell his remaining stock at a nickle profit/gallon and then the chain can sell their stock at ten times the profit. Then the solo guy bumps his price by .49 and everyone is happy except the consumer.

As it is, gas is being imported and there is a couple months of gasoline in inventory, so panic backs off and prices ease back a little. Was the extra money made an example of profiteering or simple economic theory where an imbalance of supply and demand caused a change in price?

A chain which had enough economic power in a region to jump the price by 50 cents post-Katrina could also do so even without the excuse of a hurricane. Companies are in business to make money and charge the highest prices they can. I think you are underestimating the effects of competition. The truth is that in very few places are there monopolies on gas stations of the type you describe. Retail gasoline is one of the most competitive markets in the country.
I disagree. With no crisis, if the chain tried to hike the price fifty cents, Joe Consumer flips the bird as he drives past the chain on the way to the independent. In a crisis situation, no station knows if/when they will get more supplies, so the motivation to sell volume is gone. Normal competitive strategies don't apply.
One place with nearly a monopoly at the retail level is the Grand Rapids metro area. There are only 2 distibutors making deliveries to about a dozen different brands in the area. Both distibutors fill their trucks at the same terminal in Muskegon. I once observed on the busiest street in the area dozens of stations raised their prices exactly 18 cents a gallon in one 90 minute period. The clerk at one station said prices are changed when an e-mail from a central location is sent out.
In michigan all retailers are allowed to mark up prices 6% over wholesale.
Yeah, I used to live in Eureka, CA where there's a similar effect. But in the big markets, I agree with Halfin.
I just want to point out that it's not the retailer making the windfall profits in this case, as the blog posting claimed. It is the distributors, or their suppliers, who are driving up the costs for all the retailers. The retailers are still making their nickel a gallon. It was the "insider's" claim that individual retailers are the ones jacking up the prices, and that's what I say is absurd.
You're nuts Halfin.

I saw a truck pull up and fill a station near my house last week - Friday. I asked the store manager - truck comes once a week.

YET - gas prices have gone up by $.30 in the last 4 days.

So who raised these prices?

It wasn't the refiner, and it wasn't the distributor - their price for the gas he sold this week was fixed prior to Friday delivery!!

Collusion and price fixing aren't always conscious - they are part and parcel of a free economy. It all depends on how much traffic your store has and why.

Some stores can simply raise prices because they are the only game in town...others can't due to competitors across the street.

But take each of these penny-level machinations and multiply them by millions of gallons, and it's a LOT of money in a corporate pocket by raising gas a penney. Maybe that's why Valero has an entire company division dedicated to fuel margins..??

Let me end by saying that any movement on the NYMEX is days or weeks removed from retailer pricing due to contracts and distribution. So, who is raising prices when gas moves WITH NYMEX crude on a daily basis?

If you believe that oil is too cheap to cause sufficient conservation, then the price needs to go up (in addition to other measures). Getting oil to a new higher equilibrium price means that one, some, or all of the players involved will make more money.

Owners of crude reserves (77% governments), oil companies, refiners, distributors, retailers, and governments (via taxes) look like most of the possible beneficiaries.

You can decide who you like more, or who you like less, and make public policy decisions based on that. But any way you look at it, in all cases there will be a massive transfer of wealth from ordinary people to corporate and government bodies.

Sorry, but doesn't the above discussion show the value of government regulation.

I know many people don't like the government mucking about in the markets.  Isn't this exactly what State and Federal government does best.  They can level the playing field.

IMHO, anything that is for the public good and needs to cut across multiple companies, industries or regions should have a floor imposed by government policy.  This goes for medical standards, toxicity levels, work standards, municipal water quality, and even gasoline consumption.  

Call me a left wing wacko but it appears that only regulation can moderate some of the excesses of business in their drive for profit in these situations

Government regulation cuts both ways.

In the olden days when there were too many gas stations in an area we had price wars. Ah, the good old days, before an all-wise, all-benevolent, never-corrupt;-) state government made it a crime--punishable by jail time, I believe, to sell below cost (or actually to sell below wholesale cost plus four cents a gallon, or something like that).

To get a surplus of gasoline would be sooooooo easy: Just put a government-mandated price floor of $5 per gallon, and make it a crime to sell for less.

Government can usefully regulate safety, which by increasing consumer confidence (eg airlines, food, drugs etc) encourages use. The hidden hand is a better regulator of prices and profits, with high profits encouraging new competition, and with the gov playing a useful role only when new competition is blocked by existing players.

Anyway, profits only move wealth from consumers to suppliers, whether gov or business, and these $ are subsequently spent/invested, so the overall effect on the economy is minimal provided the increase is not too abrupt - the main point of "The Oil Factor" is that the economy does fine provided the yoy price does not increase more than 80%, which we have not yet seen. Meanwhile, we no doubt all want prices to rise as fast as possible to encourage conservation, and the (US) gov will never increase gasoline taxes (discussing this topic is at best a waste of time, as Gore will attest), so second best is to print and send as many $ to OPEC as fast as possible.

There was in article in yesterday's Washington Post titled "Refiners' Merger Good for Business, Not Consumers".

The gist of the article is that consolidation in the refining business has resulted in significantly increased margins, and that the FTC has rubberstamped much of this consolidation. The article gives as an example Valero's recent purchase of Premcor for $8 billion.

The point is that due to the limited refining capacity in the US, refineries have a lot of pricing power.

This is a very timely topic. I just posted an essay on this yesterday:

My opinions are the same as most of the ones I see here. A windfall profits tax will decrease investments into risky ventures, and will lower supplies just like it did the last time we tried it. It really makes me wonder about the intelligence and integrity of our policital leaders to grandstand when they should be leading by telling the public "You are not entitled to low gas prices!"


Windfall profits taxes are not always a bad idea. In Britain during World War 1, for example, they worked wonderfully well.
But I agree that the current situation is not remotely comparable.
Here is a chart of Wholesale vs. Retail Gasoline prices. The yellow area is where the retail price moves abnormally above what it should be in relation to the underlying wholesale price.

Gasoline Excess Profits Update

This is a zoomed-in view of this next chart. For an explanation of data, check this previous post:

Wholesale vs. Retail Gasoline

The yellow areas show a price differential of between 10 and 20 cents per gallon times approximately 378 million gallons per day for the given periods.

Are these excess profits in the supply chain? I'll leave that up to TOD readers.

Super G, this is an excellent post. I wish some politicians, most notably Charles Schumer, would read stuff like this. Maybe somebody knows somebody on Chuck's staff and can pass this one on.

Are the yellow bits where the consumer gets peed on? Because that's how it looks to me.
I hadn't decided on the color for that reason. However you could say you are right. The image is indelibly imprinted in  my mind now.
What really irks me is that so many of these politicians will endorse free markets when it suits their needs, yet jump on the "oil windfall tax" bandwagon when that suits their needs.  You can't use the excuse of free markets to explain how we'll transition beyond fossil fuels, yet get alarmed when free markets allow fossil fuel producers to profit handsomely.
Our capitalist system does NOT represent a "free market".  It represents all the imbalances of a "free market".


There is no defense for capitalism, which is exactly what the enemies of the open society intended when they coined the term. Capitalism is the refinement of all the ills of the free market. Capitalism is an inhuman force that pushes millions into poverty. It is a force that leads a small group of extremely powerful men to dominate the majority. In the quest for power, the capitalist not only rapes and pillages a few small villages and towns. The capitalist rapes entire markets and nations.

A capitalist society is a society ruled by money. The prolitariat, which does not have access to the capital, are bantied about by economic forces. They are unwitting stooges-devoid of free will and hope. Capitalism is a society where an extremely small group of people live in unimaginable luxury and elegance while the rest of the world wallows in environmental degradation and increasing squalor. It is a society where the rich and powerful get richer and more powerful. It is a system where the ruling elite use their insider connections to grind the rest of the world under its heels. It is a world of monopoly, insider trading, financial scams and outright theft. Capitalism is an imbalanced mechanism for distributing power where the rich get richer and the poor to get poorer.

Capitalism is, by definition, an imbalanced system based on class distinctions. When the imbalances have grown beyond reason, the oppressed majority will rise and strike down their oppressor.

The Marxist model is alive and well. The revolutionary fans the flames of discontentment and brings about class struggle and class revolution. Each and every time there the public learns of a new imbalance or corruption of the economy, the revolutionary is to point and say the word "capitalism."

From a moral, economic and political perspective, there is no defense for capitalism. It is corrupt to the nth degree. It denies children education and health care. It wastes the world's resources. It impoverishes and leads to widespread misery. Capitalism is all the evils of the free market wrapped into a single handy term that can be bandied about and disparaged. Each time a CEO is hauled before the SEC to recount their lies and political maneuverings, we can point an accusing finger and lament the horrors of capitalism.

Those trying to defend "capitalism" find themselves mired in a tar pit screaming out irrational rants. The defenders of capitalism argue for the oppression of millions to enrich the few. Those supporting capitalism find their words twisted until they openly support military action against the people of the society.

There no defense for capitalism. Because, by definition, the term capitalism refers to every excess of the free market. Capitalism is social imbalance at its worst. Capitalism is the clash of classes on the world stage.

Please read this sentence several times. Capitalism is by definition all of the imbalances of the free market. Capitalism is by definition all the imbalances of the free market. Capitalism is by definition all of the imbalances of the free market.

Do you see the trick? The people who defend "capitalism" think they are defending the free market. In fact, they've been tricked into defending the imbalances of the free market.

There is a new fad today called click training. With click traing, you learn to manipulate animals and people with clicks (a click is a simple confirmation that they are on the right trick). The process isn't new. It is essentially how we learned to speak. Are you ready. Here we go: Every time we see an imbalance in the free market, I will point and say the word "capitalism."

A sinister villain steals the trust fund from an orphanage... "capitalism."
A representative of the US government cons an Indian tribe out of their home land - "capitalism."
A slave owner in the south whips a black man - "capitalism."
A asbestos mine hides the dangers of asbestos from its workers and they die - "capitalism."
A monopoly extends its reach into a new market with an insider deal - "capitalism."
A farmer bribes a meat inspector to hold his competitor's meat in storage an extra day so that it will go bad - "capitalism."
A drug dealer offers a fifteen-year-old girl crack hoping to trick her into a life of prostitution - "capitalism."
An company falsifies its corporate reports and investors lose millions - "capitalism."
So what is "capitalism"? Uh? Let's see....Every time an evil occurs in the free market, someone points and says "capitalism." I know! "Capitalism" is a word that refers to all imbalances in the free market!

Do you see the trick yet? Apparently very few people do. Capitalism is not a synonym for the free market. Capitalism is the accumulation of all the imbalances of the free market. Capitalism is everything that is bad about the free market.

The term arose in a failed theory that predicted all of the imbalances of the free market would eventually lead to a class struggle between the haves and the have nots. Defending "capitalism" means that you are defending imbalances.

It is a trick. It is a slight of hand used to manipulate and confuse people.

By its very definition, capitalism is a failed system. In The Dialectical model the capitalist system rises then falls from its own internal imbalances. It is not the free market.

I'm totally with you in your critique, but I have a question for you:  Do you see any hope for the future of civilization?
For the record that critique is not mine.  I agree with every word of it that is posted here.  I do not have the "meat" to put it to paper so well.  The link is at the bottom.  I have no hope for the current civilization beyond 15 years, maybe sooner.  When the social environment turns for the worst so will our behavior.  The current time of plenty will return to its natural state or, since we use war as politics, the superpowers will destroy what is left habitable for humans...


"The total amount of suffering per year in the natural world is beyond all decent contemplation. During the minute it takes me to compose this sentence, thousands of animals are being eaten alive; others are running for their lives, whimpering with fear; others are being slowly devoured from within by rasping parasites; thousands of all kinds are dying of starvation, thirst and disease. It must be so. If there is ever a time of plenty this very fact will automatically lead to an increase in population until the natural state of starvation and misery is restored."
~ Richard Dawkins: River Out of Eden, page131-132.

Competition for finite resources necessitates suffering.  The winners of these competitions in nature get the big prize - they pass on more DNA to the next generation than the losers, thus strengthening the blood lines.  Capitalism among humans is simply the expression of the natural competitiveness that drove evolution, it is as natural to humans as head butting is to big horned sheep.  We are capitalists because we have a powerful innate drive to survive and win.  That natural, genetic drive allowed humanity to win the evolutionary sweepstakes;  humans are the masters of the universe, we have the winning DNA.

But like you AngryChimp, I worry that we are not able to control our natural tendencies to fight and win.  I worry that angry, stupid, and lying chimps, like those running this country now, will let their capitalist DNA (on steroids) control their cognitive abilities. Will there be (more) wars over oil and gas? Will the US dollar collapse and create a depression? Will the big monkey key press the 'nukelar' button in the next three years?  

Only the Shadow knows what evil lurks in the hearts (and genes) of men.

I believe the old radio show quote goes like this:

"Who knows what EVIL lurks in the hearts of men?"
[dramatic pause]
"The SHADOW knows . . . he, ha,ha,ha,ha,ha. . ." [diabolical laughter]

As possible as it is to have an 'objective' point of view:

I have heard it well argued that bacteria continue to be the dominant critter here on earth; furthermore, we exist solely to do their bidding - feeding, transport, habitat creation and modification, etc. (anti-bacterial Handi-wipes aside)...

I have another word to describe our syste:

Social Darwinism. The idea of a society with a "law of the jungle" economic system with no safety nets at all and no regulations either. The plutocracy keeps bribing the politicians with campaign money and PAC money to buy laws to create just that scenario to enrich themselves (as they are already the "fittest") at everyones' elses expense.

Look how it's impossible to pull yourself up from the bottom. You make ONE mistake, and suddenly you have a bad economic gene. With our job market with an overload of workers, employers can cherry-pick all they want. Without a healthcare system, employers are increasingly deciding on the health of potential employees - the epitome of Darwinism! That's to say nothing about ex-cons being literally unemployable except in prison camps when they re-offend to survive.

To be a yuppie making $100,000/year, you must:

Have an Ivy-League degree, higher grade the better.

You must look like a movie star, hence plastic surgery booming.

You must come from the right background in general, this suburb, not that one.

You must be over-gregarious. Shy or even normally social people need not apply.

You must satisfy all of the above (and extras for particular companies). All others are relagated to minimum wage - if they can find a job at all.

But Social Darwinism can backfire. As the peak does its thing and the economy breaks down, as Jay Hanson would say, we'll see economists lynched from the street lights! And gated communities raided out of anger, and with 200 million guns and millions of veterans, workplace suicide gunmen and bombers are liable to flurish.

If you want to see a capitalistic system with no safety nets, look at supposedly socialist china. The us has a more dynamic economy than europe precisely because it has fewer nets, but in china they're all up on the high trapeze with nothing below. And, Russia is quite similar - if you think it is tough to live on US SS, try Russia's net, which helps explain their rather short lifespan.
Now are the times that try  a "free market's" soul.

If huge profits are there for the taking by any enterprising entreuprenuer who comes up with an "alternative [liquid] fuel", then surely this is the time when the market must provide such a fuel, as it is foretold by the prophets of Adam-Smithism.

In other words, the "profit signal" is singing loud and clear to all innovators: "Come and get it. Come and get it." Yet they do not come. Why? The profit motive should be driving them into a wild frenzy of invention, innovation and use of "advanced technologies" (as Bush may think about "electrochemistry" and other such "interesting" stuff stuff). The frenzy should provide us all with the Quantities (Q) that we Demand of liquid fuels at the Price point (P) where the new inovators can also make huge profits ($$$) just like the oil companies. And yet the innovators do not magically appear before our eyes. Why? Why?

I'm so confused.
(just kidding there.)

Did the economics professor tell us all a tall tale about free market forces and about the power of capitalism to provide to all that which they demand at a fair price point?

Let me guess. The apologists for Adam Smith are going to drag out that old song about "allocating" scarce resources to those who can make the "best" use of them a.k.a. burning oil in your SUV to make this a better/best planet for all of us.

The best alternatives start with wind and sun. No one has yet figured out how to make wind and sun proprietary so the free market/invisible hand types aren't much interested. Localized/decentralized also looks good for the future. If something like that caught on there could be independent actors exercising ingenuity, resourcefulness--soon consumers wouldn't need corporations. Better to stick with free markets, reliable ideologues, commisars, PR hacks, massive profits and fossil fuels.
endorse free markets when it suits their needs,

A point someone else made on TOD that I liked so much I'll repeat it.

Everyone loves the invisible hand when it is pushing you up and no one likes the invisible hand when it is strangling you.

Polititions arn't any better than other humans WRT the reaction to the hand.   Its just that force multiplier of laws makes their failings more dangerous.

Try looking at Brad Setser's provocative and suggestive piece at

I realize this is perhaps a vain fantasy, but is there a chance that if the oil companies are really pressed with the possibility of a windfall profits tax, they will publically admit that Peak Oil is nigh?

"Look, while we benefit from high oil prices--but that's not something we control.  The reason oil prices are so high is that supply is having trouble keeping up with demand, and unfortunately it's only going to get worse.  Let me explain to you the concept of Peak Oil and why we believe we are at or near the peak ..."  Is this something we'll ever hear from an oil CEO when he is hauled before a Congressional subcommittee?

Assuming industry insiders and high governmental leaders know all about Peak Oil, why is it such a state secret?  (I know this question has been debated before at TOD.)  Will widespread panic really ensue?  Isn't there a chance that we will instead roll up our sleeves and try to find some way out of this pickle.  Because pretty much the only sleeve-rolling-up we're doing now involves regime change in oil-rich nations.

Like what Uncle Toby said.
 I have faith in fellow Americans and think that if confronted with truth, real actual truth of Peak Oil they would get serious and begin working on soft landing, i.e., "roll up sleeves and find a way out of this pickle."

Especially if it were put to the populace-- "In order to save the world, we've got to deal with this peak oil thing..."  

Americans aren't evil, they are being lied to.

The last thing americans want to hear is the truth about any topic that implies tougher times for themselves. Try talking about PO to anybody - I have, and nearly none want to listen. Politicians might look like fools, but they're not - they have seen colleagues who tried to wake up their constituents, most of whom are no longer colleagues.

Pogo's "We has seen the enemy, and it is us." has never applied more.

OK, I will readily admit that in theory a corporation is a  legal fiction, has no soul,  and has no other obligation than to maximize benefits for its stockholders. I hereby duly pay my homage to Economics 101.

Now, let us look at this whole thing from another angle. The people who buy gasoline have a certain demographics. And that demographics more or less closely conforms to the general demographics of the US (the tails of the bell curve being somewhat cut off to account for the very poor who don't drive cars and the very rich who don't drive (their own) cars).

A huge amount of money is now flowing from the demographic group that can be categorized as 'drivers' to another demographic group that can be loosely described as investors in The OIl Industry.

I would submit that the socioeconomic status of the latter, the investors in the Oil Industry, is a just a few notches higher in wealth and power than the people who just paid for all that  very expensive gasoline.

So then, it appears what we have here is a massive transfer of wealth from the general population to the investor class. I think it's as simple as that .... the slow and steady destruction of what used to be described as the American middle class.

Forgive me for using an engineering analogy, but I just can't help it: what we have here is a money check valve - money now easily flows upstream, but it has a very hard time flowing downstream.

Then of course, we have the issue of the relationship between the large important corporations and the federal government. The distinction between the two is rapidly blurring.

ExxonMobil does not exist as a mere business entity trying to make a buck. It is an integral part of the fabric of the power establishment in the US, and anyone who denies that has his head up his ass.

In the US we are headed toward a fascist, corporate/financial-dominated society that will have its Disneyland elections every four years just to 'prove' the people really matter. But our rulers have only the upmost contempt for 'the people'.

It will only get worse.


By far the largest 'class' of US investors is pension funds. So, if you are a beneficiary of one, oil profits are helping to fund your retirement and decrease the chance of your destitution being a burden on society.

Those who did plan and save over the years have larger savings than those who did not. Is anything wrong with this? Try to remember that many who arrive at retirement age with decent savings were paid less than many who arrived with very little. Consider those chinese still in china - they are much poorer than americans, but have a positive savings rate while richer americans have a negative one. Should they now be taxed to help those in the us who were never able say no to a purchase? Should there be no consequences to our actions?

Jkissing -

Again, it's all a matter of demographics. It would be nice to be able to accurately track what direction and into which pathways the oil money is really going.

If the above could be determined, then I think you might be in for a big surprise.

I still maintain that the American middle class is being bled dry and will soon vanish in the form that we knew.  Maybe that was the intent all along.

''I still maintain that the American middle class is being bled dry and will soon vanish in the form that we knew.  Maybe that was the intent all along''.

Now that is an interesting statement and one I fear may have a lot of truth in it. Picture a post peak world.

An Elite, having extracted wealth , mostly from the now formerly middle class would probably prefer a quasi-feudal state and an end to the 400 year old experiment in democracy. Why so? In a feudal system , the elite can ossify in to a comfortable ruling class. With the help of a well fed military which is also part of the ruling elite, it can then control the peasantry. Once stable , with class strata written in stone, then this system can last a very long time. Entirely for the benefit of the ruling elite

The emergence of the middle class screwed it all up in Europe. Not content with being wealthy peasants (Kulaks, Yeomen etc) The emerged, educated, agitated, argued and wrote pamphlets and then, not before long, the elite were faced with bizzarre experiments such as the French Revolution, The War of Independence, 1848 - the year of revolution etc.

In the long run, Western Democracy may well be seen , not as the 'End of History', but as an experiment.

I went for a walk over lunch and listened to a recording of a public radio broadcast.  It had Robert Manning, author of Credit Card Nation, and a credit counseler on, talking about debt in America.

The interesting thing to me was when Manning named his theme in a nutshell:  That conditions have changed in America, and that we aren't as wealthy as we used to be.  People, not believing that, are continuing their old lifestyle, financed by debt.

Is that up our The Oil Drum alley or what?  I'm going to have to get that book, but obviously if that is what Manning sees from the financial trends, without peak oil, there is a double-whammy if you add peak oil into the mix.

I found the link to that interview, for those interested:

"Debt Nation"

And perhaps this one:

Along a similar vein.

You wont always agree with the essays on counterpunch, but your thoughts will be stimulated

Actually, it is not in fact true that the largest ownership of America is pension funds. Mostly it is inheirited wealth. Pension funds (other than those for tax reasons) are worker wealth. Most of the pension funds belong to upper rank workers who mostly did earn the money by working harder in school and afterwards, but it is a minority of the wealth in America.
This is wealth I am talking about, not income. Income is much more evenly distributed.
I'm a libertarian. I agree with your conclusion but I do not agree with your facts.
COP earnings release:

HOUSTON, April 26, 2006 --- ConocoPhillips [NYSE:COP] today reported first-quarter net income of $3,291 million, or $2.34 per share, compared to $2,912 million, or $2.05 per share, for the same quarter in 2005. Total revenues were $47.9 billion, versus $38.9 billion a year ago. During the quarter, the company reinvested 141 percent of its net income into the development of oil and gas resources and its global refining business, excluding the acquisition of Burlington Resources.

Emphasis mine.


I don't think consumers are "entitled" to low gas prices -- far from it.  And I don't believe in raising taxes just because someone thinks a corporation or industry is making too much money.  As Abraham Lincoln said: "That some should be rich, shows that others may become rich, and, hence, is just encouragement to industry and enterprise."

However, it's painfully obvious that Exxon and the other oil giants are not investing their profits in ways that will benefit anyone but those sitting in the executive suites or on the board of directors.  Therefore, I think a windfall profit tax might be appropriate if the proceeds from that tax were used effectively.

I wouldn't use it to lower prices at the pump.  I think every cent of it should be used to help prepare this country for the transition to post-peak oil.  That means investing in public transportation, research into alternative fuels, etc.

That's the kind of windfall profit tax that would ultimately benefit America.

I have a slightly off topic question.  Can anyone point mre towards information about the practice of big oil companies (specifically XOM, but others as well) buying reserves rather than exploring for them?  The reason I ask is that apparently this year's XOM annual report says that over the last ten years they have added 115% of the consumption of their reserves.  Given what I know about oil discovery rates in the last ten years, this can only mean that they bought reserves from other companies and are now claiming them.  Essentially they are lumping in acquisitions with discoveries to make their performance look better.  Can anyone point me to some corroboration or refutation?
Before anyone can answer your question you need to know what type of reserves they have added. The following definitions are summarised from the full length definition of that can be found on the Society of Petroleum Engineers website.

Proved Reserves
Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations.

Unproved Reserves
Unproved reserves are based on geologic and/or engineering data similar to that used in estimates of proved reserves; but technical, contractual, economic, or regulatory uncertainties preclude such reserves being classified as proved. Unproved reserves may be further classified as probable reserves and possible reserves.

Probable Reserves
Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.
In general, probable reserves may include (1) reserves anticipated to be proved by normal step-out drilling where sub-surface control is inadequate to classify these reserves as proved, (2) reserves in formations that appear to be productive based on well log characteristics but lack core data or definitive tests and which are not analogous to producing or proved reservoirs in the area, (3) incremental reserves attributable to infill drilling that could have been classified as proved if closer statutory spacing had been approved at the time of the estimate, (4) reserves attributable to improved recovery methods that have been established by repeated commercially successful applications when (a) a project or pilot is planned but not in operation and (b) rock, fluid, and reservoir characteristics appear favorable for commercial application, (5) reserves in an area of the formation that appears to be separated from the proved area by faulting and the geologic interpretation indicates the subject area is structurally higher than the proved area, (6) reserves attributable to a future workover, treatment, re-treatment, change of equipment, or other mechanical procedures, where such procedure has not been proved successful in wells which exhibit similar behavior in analogous reservoirs, and (7) incremental reserves in proved reservoirs where an alternative interpretation of performance or volumetric data indicates more reserves than can be classified as proved.
Possible Reserves
Possible reserves are those unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves. In this context, when probabilistic methods are used, there should be at least a 10% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves.

Got all that?  In short there doesn't have to be any big dark conspiracy when a company increases it's reserves, they may simply moved probable reserves, due to a beneficial change in technical, contractual, economic, or regulatory conditions into the proven reserves catagory since proven reserves is typically what companies report to the public.

Hope this helps

Thanks, that clarifies things a lot.  I think :-)
Even with "high" gas prices, Exxon's stock remains flat(to me at least):

Many say we will see $3.50/gal this summer.  If you factor in Iran, who knows how high it could go. Everyone knows America MUST get off the oil.  After September 11, 2001 I expected our President to call on Americans to GET OFF THE OIL.  I was expecting a speech like the one JFK gave that motivated us to reach for the moon. As you know, this never happened.  Eventually I realized that the only way this is going to happen is for us to do it ourselves.  To that end I created this idea and have been trying to make it a reality..

The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea.  I have sent an e-mail to a hand picked list of university professors who have experience with government research projects.  I'm looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.

All government grants are awarded based on merit of the proposed research.  I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback.  Let the professors and the EPA know what you think about WPH.  Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.

Do you have any ideas to improve the plan?

Share any and all of your thoughts.

Tell your friends and family about this Blog post and ask them to post their thoughts on WPH

Thank you