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Why Big Oil Isn't Buying

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By jammerh
March 21, 2005

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There's no shortage of people who will tell you that oil prices are going to the moon. Their reasoning goes something like this: Supply is drying up and world demand is increasing rapidly due to development in places like China and India.

But let's take a closer look. Things aren't always the way they appear to be on the surface.

Ask yourself this: If oil is in such short supply, and the price is expected to go through the roof, and remain high, why aren't the big oil companies busting their butts to find what little oil may be left?

I suggest it is because they know this is only a short-term spike based largely on a confluence of temporary bad news events that are disrupting supply. As I explained in an earlier post, temporary bad news events have a way of being, well, temporary. From tax scandals in Russia, to political upheaval in Venezuela, war in the Middle East, or hurricanes in Florida.

Despite a huge influx of cash as a result of current high prices, major oil companies are not reinvesting this money in new exploration to find more oil. Why is that?

Typically, cash sitting on the company's books earns far less than cash invested in oil or gas projects. Exxon, for example, ended 2004 with $23 billion in cash on hand - double the previous year, and yet the company isn't pursuing acquisitions or boosting spending on production.

What's up with that?

Seems internal planning at most major oil companies assumes that prices will in fact, drop from today's highs. So big oil itself doesn't expect prices to remain high. These are the very guys who have lived and breathed oil for decades, and yet they aren't expecting the surge to go a lot higher or even remain high enough to make it worth their while to acquire smaller oil companies or to invest in further exploration.

So who do you believe, the speculators who have a vested interest in scaring you into thinking there's no end for ever higher oil prices, or the people actually in the business who know better?

"Oil is a commodity" says Exxon CEO and Chairman Lee Raymond, "and it's hard to identify a single commodity that has maintained a very high price over a very long time."

Exxon says it has plenty of oil to pump, but it won't accept what it considers to be insufficient returns to compete for projects at today's high prices. The company says we have access to about 14 times the amount of oil the world has consumed since the first "gusher" in 1859.

The last time oil prices surged and remained high for any sustained period (early 80's) Exxon used the cash to buy back its own shares. It did not use it to do acquisitions or to invest in further exploration because it knew the surge was temporary and that such a move would mean paying a high price - based on today's projected returns - which would be unlikely to materialize once the bloom was off the rose, and prices returned to more moderate levels.

Long-term, the prospects for finding oil may not be as bad as the speculators would have you believe. So far oil exploration has taken place largely on or near land. But the earth's surface is mostly water. Are we to believe that there is no oil under the oceans? Or that it would be too expensive or difficult to extract it?

With each decade new technologies improve our ability to extract oil. In addition to new techniques such as horizontal drilling, and new methods of recovering oil from vast tar sands of the world, new developments in the development of synthetic oils, oil substitutes, wind energy, cleaner nuclear power, solar power, energy conservation, hydrogen fuel, improved battery technologies, and energy conservation show rapidly increasing promise.

We use oil today only because it is the cheapest, and a ready source.
Over the long haul, human ingenuity will prevail.


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