The industry is not the source of all the country’s energy problems nor is it solely to blame for the rising cost of energy.... But the companies have only themselves to thank for the low esteem in which the public presently holds them.
The American Petroleum Institute (API), the Grand Oil Party and others have been in high dudgeon over what they perceive as an insufficient emphasis on domestic oil exploration. Their voluble irritation has increased since the November election, and has been little mollified by signs that the Obama Administration will not return to a complete offshore drilling ban. Industry groups such as the API have long fought to preserve and expand their special-interest tax treatment, even arguing against the payment of loophole-avoided taxes because it would reduce the incentive for them "to search for new energy supplies."
To hear the flacks tell it, Big Oil is only barely making it with their marginal incentives (e.g. depletion allowances and expensing intangible drilling costs); any restrictions or reductions in their favorable tax treatment could have dramatically negative consequences. API head Jack Gerard frets that such things as a windfall profits tax will leave the industry no incentive to invest in new supply:
It creates a double disincentive. It takes [away] the potential for us to invest in the future, and it also tells us that now we have to look overseas because we have to go look at more competitive opportunities than we have here in the U.S.
“We intend to continue to invest at these record levels at least over the next five years,” Ken Cohen, Irving-based Exxon Mobil's vice president of public affairs, told reporters recently. The company's $26.1 billion in capital spending last year was 25 percent more than in 2007.
Dave O'Reilly, Chevron's chairman and chief executive, told analysts that the San Ramon, Calif.-based company also will maintain spending levels of nearly $23 billion, focused on completing projects that have long been in the works.
Exxon Mobil and Chevron both said that while they'll keep spending on projects they had in their queues, they intend to chase every cost savings they can, including pushing oil field services providers to bring their prices in line with the fall in commodities. “Through these investments we continued to demonstrate our long-term focus throughout the business cycle,” Exxon Mobil Chairman and Chief Executive Rex Tillerson said in a statement.
Analysts largely view Exxon Mobil and Chevron as the strongest among the world's largest publicly traded oil companies, each with healthy cash on hand, low debt, a steady stream of project startups and the ability to acquire assets, including distressed companies, amid the recession.
API began spending tens of millions of dollar a year in advertising not long after Hurricane Katrina struck in 2005 to deflect calls for a windfall-profits tax on oil companies and proposals to end billions of dollars in tax breaks for oil producers. Mr. Obama advocated a windfall-profits tax, saying he would like to subsidize renewable-energy sources with the extra revenue collected.
Mr. Gerard said he planned to continue spending significant amounts on issue advertising, but declined not give a specific number. "I think we'll play offense where we can. We'll play defense where we have to," he said.
With oil prices low right now there is worry that Big Oil has insufficient incentives to drill and produce; but apparently this is a misplaced concern since their actual investment continues apace. The reasons are not hard to discern.
Goldman Sachs oil analyst Jeffrey Currie issued a report yesterday predicting a, “swift and violent rise” in oil prices in the second half of 2009. Currie told a conference in London that, “Thirty dollar oil reflects the same imbalances that got us to $147 oil. The problems haven’t gone away. We still believe the day of reckoning is to come.” What problems? There are still major infrastructure bottlenecks in the global oil network. Currie says that despite the big fall off in demand, “This is not 1982-1983 all over again. The supply picture’s radically different…the demand picture’s radically different. The key difference is that today there are no large-scale next generation projects that are going to save the world. Commodity demand is exponentially higher than it was.”
There is also a lot of oil arbitrage,
...where supply is stockpiled offshore, and thus withheld from refiners, allowing existing gasoline inventories to be worked down. Then in six to twelve months time, when crude prices have moved higher, you simply park your ship at the terminal and cash in on the difference between what you paid six months ago (today) and the new market price. It is normal for the oil futures to be in cotango, where spot prices are lower than futures prices. What’s less normal is the amount of oil being stockpiled offshore. “Frontline Ltd., the world’s biggest owner of supertankers, said Jan. 14 about 80 million barrels of crude oil are being stored in tankers, the most in 20 years.”
Contrast this with the grim mood in the orders-of-magnitude smaller renewable energy industry. Investment capital has dried up and companies have nothing close to the kind of cash on hand or profitable cash flows of Big Oil. At last week's Offshore Wind Financing Conference in San Diego the only deals getting done were for projects in the final stages with permits in hand, supply chain commitments, and signed power purchase agreements. Anything in any earlier stage cannot get funded in this investment climate.
IEA's Tanaka also noted the urgent need to invest in renewables:
Unfortunately we are seeing a deceleration occurring in the switch to renewables... While the economic slowdown itself serves to reduce CO2 emissions, if we don't invest now we will have serious problems in the future.
"Oil and gas is the backbone of the American economy. It has been for many years; it will continue to be for many more years," said Mr. Gerard, who has been at API for just a few weeks. "We could quadruple what we're talking about in the area of alternatives and renewables that were doing today, and what would that give us? About 3 percent of our energy production."