Friday, June 06, 2008
Congress Blames the Hedge Funds, Part IV: This Isn’t Complicated
We’re still scratching our head at the conspiracy theories now being tossed around for the egregious price of energy.
Seems like everybody—even readers of this blog—would like to blame hedge funds, traders and speculators for what is, in fact, a natural result of two factors: supply, which, as we have seen with Indonesia, is not exactly shooting the lights out; and demand, which until very recently was.
So let’s go back not quite 24 months ago—when oil was $70 a barrel—and review one of the issues that really got us here.
Hint: it has nothing to do with traders.
Monday, July 31, 2006
Until This Changes, Don’t Expect $2.00 Gas…
Not quite a year ago, in the halcyon days when oil was trading at a mere $65 a barrel, we reported (in “Why We Have an Oil Crisis, Or; Wait 'Til Chuck Schumer Gets a Load of This,” September 25, 2005) that British So-Called Petroleum was spending more on dividends and share repurchases than on finding oil.
Seven billion dollars more last year, in fact.
We are not making that up.
The Investors Relations person of British So-Called Petroleum told a group of investors back then that it made no sense to plan its exploration spending based on $65 a barrel crude oil when everybody knows crude oil prices fluctuate—so BP was using a more conservative oil forecast when calculating where and how to invest its unstoppable cash flow.
If you guessed $50 a barrel, you would be wrong. If you guessed $40 a barrel, you would also be wrong. Not even $35 a barrel would have been close.
No, the crude oil forecast British So-Called Petroleum was using in its forecasts was $20 to $25 a barrel.
We are not making that up, either.
We suggested that BP should change its name to “British Dividends & Share Repurchases,” our point at the time being that the energy crisis wasn’t like to end so long as the major oil companies felt compelled to return more money to shareholders than they spent exploring for new sources of crude.
Now, you might think that given, 1) the rising political heat, and 2) the fact that crude oil is now over $70 a barrel, the majors would have re-thought their low-prices-forever forecasts and started pushing the pencil on more expensive projects that would help bring more supply on the market.
But just last week, Exxon Mobil announced earnings, and while the headlines in the mainstream media all focused on the so-called obscene profits now falling into the lap of the world’s largest oil company, not much has changed: the world's largest bank—er, oil company—spent $5 billion on capital projects, including oil and gas exploration.
But it spent $8 billion making its shareholders richer.
Our official view here at NotMakingThisUp is that the U.S. government's Detroit-Friendly energy policy of the last 30 years has been dead wrong, and we're getting exactly what we deserve; also, the windfall profits tax stuff floating around Washington these days is the usual shoot-the-messenger grandstanding our own “Senator Forehead,” Chris Dodd, practices every time a crisis comes along that he has been doing nothing about when it was not a crisis.
But with Big Oil getting $70 a barrel and giving more of it to shareholders than to drilling companies...they're asking for it.
I Am Not Making This Up
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The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 7:38 AM