Pity The Poor Oil Companies

According to a recent Business Week article, things are not all champagne and caviar at the oil companies these days. High oil prices are making it more -- not less -- difficult to secure new supplies. Governments and dictators who have dominion over the lands with the oil are finding it easier to drive a hard bargain at these prices. Oil companies are still entering into long term agreements as if the price of oil will be retreating to $30/barrel. Governments -- some of which are run by shady operators if not outright thugs such as Venezuela's, Libya's, and Ivory Coast's -- are deciding instead to insist on joint ventures that cut them in on a bigger share of the booty.

One important metric that got lost in all the hype about their $36 billion (with a "B") annual profit was Exxon's production volume, which dropped 3.5 percent in 2005 One would assume that, with oil at these prices, the company would be opening the spigot. Conspiracy theorists believe that the company is deliberately holding back to maintain the high prices. The truth is, the oil companies can't find enough new supplies to keep up. They are selling as much as they can get, but they can only get so much with their newly emboldened political partners. When oil was trading at $10/bbl, these governments needed all the help they could to profitably get their black gold from the ground, so the oil companies had them over a barrel (metaphorically speaking, of course). My, how things have changed.

On top of this morass, the oil companies must deal with political opportunists, who encourage oil companies to take on the risks of exploration, but when the project is successful, the rules get changed. Venezuala's Hugo Chavez is now forcing all oil companies to convert their royalty-paying projects to joint ventures, after the fact. Even in Great Britain, taxation on North Sea oil is now subject to a "windfall tax", giving the Brits a greater share of revenue. And, of course, one can't forget the saber-rattling in our own U.S. Senate over imposing a similar windfall tax. Seeing as the oil companies pump a declining share of their oil from U.S. lands, the U.S. version of the windfall tax would be on top of the other extortion from the host lands.

The bottom line is the oil companies have a reinvestment problem. They are sitting on a horde of billions in cash that are merely earning bank rates of interest, even after huge dividends and stock buybacks. So, even at these prices, they can't find projects that yield better returns.

Permit me to shed a crocodile tear. Unfortunately, I have to agree with the oil execs that a windfall tax is inherently immoral. Capitalism should not be about a game of "you keep the dryholes, and we'll take the gushers". However, there IS an acceptably moral way to capture more money for federal coffers. STOP SUBSIDIZING THE OIL COMPANIES! They get tax breaks for exploration to the tune of $5 billion a year. Many people (though not me) feel that the hundreds of billions of dollars spent protecting Middle Eastern oil fields, including the entire Iraq War, amount to a huge subsidy for big oil. There is no reason to continue doling out federal dollars at these prices. This subsidy should be eliminated, and there should be no more talk of a windfall tax.