Not Enough Oil Is Lament of BP, Exxon on Spending

Never have so many oil and gas companies spent so much to produce so little.

That's the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.

(...) Drillers could access only 7 percent of known world reserves in 2005, down from 85 percent in 1970 after Middle Eastern nations took control of their fields, according to a July report by the National Petroleum Council in Washington. (...) ``What is happening is something different. The international companies are denied access to areas of abundant oil within OPEC, and it's getting costlier in other areas.''

What this says is that oil majors are dying animals, with shrinking access to oil, and skyrocketing costs for those fields they still have access to. Indeed, a big sign of that is that they spend more of their money buying back their own shares (effectively liquidating themselves) rather than investing. Of course, the ever-increasing oil prices allow them to mask these worrying underlying trends under comfortable-looking profits.

Oil Producers Mask Decade's Worst S&P 500 Profit Drop Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

(...) ``The oil sector saved the market,'' said Dwane. ``Ex-oil, the numbers show falling earnings and with data highlighting a U.S. recession, we can expect more earnings downgrades.''

(...) Exxon, Chevron and ConocoPhillips, the three largest U.S. producers, all produced less oil in the first quarter. Chevron['s] reserves fell to the lowest in almost a decade last year

Interesting combination: lower oil production, exploding production costs and capturing a shrinking fraction of oil profits has not prevented oil companies from enjoying record high profits. And these profits have in turn masked the fact that US corporate profits are otherwise in the doldrums (even excluding the devastated financial sector).

So high prices are masking the slow elimination of the oil majors, whose profits are themselves hiding the weakness of the US corporate world.

Optimists cling to the notion that this is self-correcting, ie that the recession underway will cause oil demand to shrink and prices to recede, thus allowing all of these phenomenons to go into reverse. But this ignores the fact that demand is already shrinking in the US and Europe. We are no longer driving demand: beyond China, which could be argued to have an economy still to some extent dependent on the health of our own (even though this is highly debatable), it is oil producers like Iran, Saudi Arabia, Russia or others that are enjoying the fastest demand growth - and with current prices (both external, driving their revenues, and internal, driving demand as they are kept very low) this is unlikely to change.

With that in mind, you'd expect policy to start focusing on what we can control (ie our demand) rather than to keep on doing little but the all-too familiar - and unwholesome - combination of an arrogant sense of entitlement, casual recourse to raw threats and the most abject begging towards Saudi Arabia et al.

But hey, oil profits are flowing, supply-side policies are working!

Included in the irregular Countdown to $200 oil series.