The Economy, stupid

[NorthSideSox72]

If its about the economy and business generally, and not investing/stocks/commodities/prices, put 'er here.

 

[BigSqwert]

Guess we'll continue to use the Pennsylvania primary thread for all economic discussion.

[BigSqwert]

Anyone have thoughts on the Pennsylvania primary?

[mr_genius]

Guess we'll continue to use the Pennsylvania primary thread for all economic discussion.

 

good call, some of the Penn primary posts should be moved into here

 

 

Edited April 23, 2008 by mr_genius

[NUKE_CLEVELAND]

Thread should be changed to "It's the oil stupid" cause that's what's causing most of the problems these days.

[NorthSideSox72]

Speaking of which, oil is now around $118/bbl, and average price for a gallon of regular unleaded is over $3.50 nationally.

[Steve9347]

Speaking of which, oil is now around $118/bbl, and average price for a gallon of regular unleaded is over $3.50 nationally.

f*** George W. Bush and f*** everyone who voted for him for a SECOND TERM.

[NorthSideSox72]

f*** George W. Bush and f*** everyone who voted for him for a SECOND TERM.

Let's take it down a notch, k?

 

Bush's policies (and really, Cheney's) have certainly exacerbated the problem, no doubt. But the dependence on oil and other fossil fuels has been an issue for decades now.

 

[BigSqwert]

f*** George W. Bush and f*** everyone who voted for him for a SECOND TERM.

I'm typically the last person to stick up for GWB but what power does a president really have with regards to the price of oil? Isn't it all about supply and demand?

Edited April 23, 2008 by BigSqwert

[NorthSideSox72]

I'm typically the last person to stick up for GWB but what power does a president really have with regards to the price of oil? Isn't it all about supply and demand?

Well, this administration definitely could have done some things about it, but didn't. And they did indeed take some actions and back some policies that had a worsening effect.

 

[Balta1701]

I'm typically the last person to stick up for GWB but what power does a president really have with regards to the price of oil? Isn't it all about supply and demand?

Well, first of all, there's almost certainly a non-trivial "Middle East continues to be an absolute disaster" premium being paid, especially with all the pipeline bombings in Iraq. That does certainly hit GWB.

 

Beyond that though, one could certainly argue that the current energy prices are fundamentally related to the position of this administration (and, frankly, the last administration) in their early years where they argued that "Conservation is a great personal virtue but can not be the basis of a sound national energy policy".

 

Because they were so adamantly opposed to conservation or to any efforts to lessen our dependence on foreign oil in their early years, we missed the last opportunity, of the late 90's and early 2000's, where energy was still cheap, for the nation to actually put itself on a crash course to try to develop and put in to use renewable fuel sources. At that level, the energy policies certainly do relate to public policy.

 

On the other hand though, thanks to the skyrocketing oil prices, demand has actually stayed flat or even declined a little in the U.S., while demand has continued to surge in China and India, and except through the complicated process of currency valuation and its relationship to shipping and manufacturing, the U.S. government has very little control over that part. The U.S. government also can't just make more energy appear in the ground, and if oil production is peaking, then there's very little any government could do to stop it.

[NUKE_CLEVELAND]

I think the 1st thing the new President should do is strip all subsidies from the big oil firms and put the proceeds toward a viable alternative to oil. This dependence on foreign oil has got to end someplace.

[lostfan]

I think the 1st thing the new President should do is strip all subsidies from the big oil firms and put the proceeds toward a viable alternative to oil. This dependence on foreign oil has got to end someplace.

The oil companies' argument is something to the effect of "we need to use those subsidies to invest in infrastructure" or something like that. I don't remember what the exact argument was, it was actually pretty logical but the American public is not really trying to hear that right now.

 

I kind of feel like a hypocrite whenever I criticize Big Oil because I own about 40-ish shares of BP

[lostfan]

I'm typically the last person to stick up for GWB but what power does a president really have with regards to the price of oil? Isn't it all about supply and demand?

The weakening dollar and people investing in oil futures plays a part in it too.

[vandy125]

The oil companies' argument is something to the effect of "we need to use those subsidies to invest in infrastructure" or something like that. I don't remember what the exact argument was, it was actually pretty logical but the American public is not really trying to hear that right now.

 

I kind of feel like a hypocrite whenever I criticize Big Oil because I own about 40-ish shares of BP

Not buying it when we keep hearing about record profits that they are making (not just for themselves, but records as far as any company is considered).

[NorthSideSox72]

Not buying it when we keep hearing about record profits that they are making (not just for themselves, but records as far as any company is considered).

Exactly. I don't favor any sort of "windfall tax", because you should never penalize businesses for succeeding. But, the government sure as hell doesn't need to be giving them more money, when they have tens of billions in profits they could plow back into infrastructure if they so desired.

 

[Balta1701]

Exactly. I don't favor any sort of "windfall tax", because you should never penalize businesses for succeeding. But, the government sure as hell doesn't need to be giving them more money, when they have tens of billions in profits they could plow back into infrastructure if they so desired.

Just randomly thinking off the top of my head here...would it be possible to structure a windfall tax such that a company had to either choose to invest some of its profits in a particular sector of the economy (i.e. renewable energy) or give it to the government?

[NorthSideSox72]

Just randomly thinking off the top of my head here...would it be possible to structure a windfall tax such that a company had to either choose to invest some of its profits in a particular sector of the economy (i.e. renewable energy) or give it to the government?

Sure, but it would be near-impossible to effectively enforce. I think the interested party method is just easier... the government won't force the oil companies to invest in certain things - they just won't reward them for not doing so.

 

[NorthSideSox72]

According to CIBC, a major Canadian bank, they expect oil prices to reach $150/bbl shortly, and $225/bbl by 2012. This due to huge increasing demand pressures, minimal production increases, and the dwindling oil left in major reserves.

 

I cannot say enough times... finding alternative energy sources HAS to be a gigantic priority for the next President and Congress. The consequences otherwise will be dire.

 

[jackie hayes]

The NYT states the obvious. Everyone's lying about taxes:

 

http://www.nytimes.com/2008/04/24/opinion/24thu1.html

[southsider2k5]

Interesting write up on XOM. Two things really stand out in here. #1 is that these companies are having a really hard time finding places to spend their profits, because of the privatization of oil industries in nations, and #2 the thought that XOM could become a private company, and pretty much be hidden away from the government after that. At that point they would be under zero obligation to report anything in the way of accounting or profits publically or to the government.

 

http://articles.moneycentral.msn.com/Inves...Dry.aspx?page=2

 

Is ExxonMobil's future running dry?

 

The petroleum giant is shying from risky exploration and spending money on buying back stock. Over the long haul, those moves could lead the company to go private or disappear.

 

By Jim Jubak

 

Are we witnessing the death of ExxonMobil (XOM, news, msgs)?

 

Strange question to ask with oil above $120 a barrel and ExxonMobil reporting $11 billion in first-quarter profits?

 

Not if you understand that ExxonMobil's management has bet the company. If that bet is wrong, over the next 15 years or so, investors will get to watch the gradual disappearance of ExxonMobil.

 

In one scenario, the company disappears as a public company, going private by 2018 after buying up all its public stock. In another, the company simply liquidates as it distributes its cash to shareholders until there's nothing left.

 

Far-fetched? Not at all. The warning signs were pasted all over the company's May 1 earnings report.

 

Yes, revenue for the quarter was up 34%, to $117 billion, from the first quarter of 2007. And, yes, net income climbed 17%, to $10.9 billion.

 

But production of oil and natural gas was down almost 6%.

 

ExxonMobil had an explanation, of course. The company's lower production was a result of resource-rich countries' demands for bigger shares of oil and natural-gas production as prices climbed, the decline of older fields and the loss of production when Venezuela nationalized ExxonMobil operations in that country in 2007.

 

All true. There were short-term, one-time reasons for production to fall in the first quarter of 2008. But don't conclude that ExxonMobil's problems are limited to that quarter. All the evidence argues that the company will report lower oil and natural-gas production for all of 2008, even though new projects are scheduled to come on line in the second half of the year. Looking just at oil, the company's production will not grow at all through 2012.

 

How do we know? Because that's what the company told Wall Street at its March 2008 annual meeting with analysts. You should know as well that the company's projections have a history of being too optimistic. So there's a good chance that when ExxonMobil actually reports production for that period, investors will see not flat but falling oil production.

 

The company also reduced its projections for annual production to 4.5 million barrels of oil equivalent a day in 2012 from the 4.8 million barrels a day in 2011 that it projected a year ago. Just further evidence that ExxonMobil has a production problem.

 

But falling production is only part of the problem, the consequence today of a longer-term problem that seems to worsen each year. You see, not only is production likely to stay flat or fall through 2012, but proven oil and gas reserves are declining. Proven oil and gas reserves fell by 3.1% at year-end 2007 from the end of 2006, according to Standard & Poor's.

 

What's going on here? If any oil company in the world should be able to find more oil and natural gas, it's ExxonMobil, with its immense reserves of both engineering skills and cash resources.

 

Well, part of the problem is one that ExxonMobil shares with every other Western oil company: access to new places to drill. In the 1970s, Western oil companies controlled about 70% of all the world's proven and probable reserves. The rest belonged to the national oil companies of oil-producing countries.

 

Today, though, the positions of the Western and national oil companies are reversed. Now the national oil companies control about 80% of the world's proven and probable reserves, and they're keeping the most promising geologies for themselves. As a result, Western oil companies with the cash reserves of an ExxonMobil, a Chevron (CVX, news, msgs) or a Royal Dutch Shell (RDS.A, news, msgs) simply don't have enough places to put their cash to work.

 

Further, that money doesn't go as far as it used to when it comes to finding new reserves. The places Western oil companies can put their money to work are among the world's most hostile environments and most challenging geologies: in Siberia or beneath a mile of water and a mile of salt, for example.

 

And because so many oil companies, Western and national, are exploring for new reserves, and because so many companies are competing to use the world's limited supply of extreme exploration and production equipment in challenging geologies, the cost of exploration has exploded. Oil-field inflation is estimated at 15% or more in 2007.

 

So when ExxonMobil told Wall Street in March that it would raise capital spending to $25 billion to $30 billion a year from the prior $22 billion, it was really talking about an increase of 13.6% at the low end that actually lost ground to oil-field inflation and an increase of 36.4% at the high end. In dollars, that's an increase at the high end of about $4.7 billion above inflation.

 

That discipline has worked for ExxonMobil. This is an amazingly profitable company, even by oil industry standards. ExxonMobil's return on capital is a whopping 23.5%, when the average for major oil and gas companies is 17.7%, and the average for the companies in the Standard & Poor's 500 Index ($INX) is just 10.7%.

 

If you look just at returns on capital in the upstream business -- the oil exploration and production business -- ExxonMobil's returns are twice that of Chevron, the second-best company in its industry, according to Deutsche Bank.

 

Oh, there are large-scale, capital-intensive projects that promise the kinds of returns that ExxonMobil targets. But such big projects are few, often because rising oil-field costs have reduced the projected return below ExxonMobil's target. For example, in February, ExxonMobil and Qatar Petroleum dropped plans to build a plant that would have turned natural gas into liquid fuel after costs climbed to $18 billion from $7 billion, the estimated price tag when the deal was signed in 2004.

 

Instead of investing in projects that don't meet its target for return on investment ExxonMobil continues to buy back stock -- $32.6 billion worth in 2006, $31.8 billion in 2007 and $8 billion in the first quarter of 2008 alone. Those purchases reduced the share count to 5.38 billion, or 6%, in 2007 and to 5.28 billion by the end of this year's first quarter. As recently as the end of 2003, the company had 6.67 billion shares outstanding. That's about 1.4 billion more than today.

 

Where does ExxonMobil go from here? I see three possible scenarios:

 

* The company uses all the shares it's been buying up as treasury stock to do a really big acquisition like the $80 billion all-share deal in 1998 to acquire Mobil. An all-stock deal would be a way for ExxonMobil to work around the big run-up in oil company share prices because ExxonMobil would be paying in its appreciated shares for the appreciated shares of a target such as Occidental Petroleum (OXY, news, msgs). (By the way, at the time the Exxon-Mobil merger was announced in 1998, oil was selling for $11.28 a barrel.)

 

* ExxonMobil gets the kind of collapse in oil prices the company seems to be planning for and can pick up the exploration and production assets it needs on the cheap. It's hard to tell what price for oil ExxonMobil is using in its long-term calculations for return on investment. But many oil analysts speculate the company is using a planning price of somewhere between $30 and $50 a barrel as its long-term price of oil.

 

* ExxonMobil doesn't get the collapse in oil prices it seems to be planning for and can't find a merger candidate willing to sell at a price that meets the company's targets for return on investment. In this case, ExxonMobil continues along its present course, buying back stock and paying out dividends to shareholders until, sometime around 2015 to 2018, it goes private or, having turned itself into a trust years earlier, liquidates and disappears.

 

I don't think the last of these alternatives would be a disaster for the economy or for shareholders. Companies should return money to shareholders -- for those shareholders to put to work in other investments as they see fit -- if they can't find a way to earn the appropriate return in their business.

 

The history of oil company diversification, some of it at ExxonMobil as early as the 1970s, suggests oil companies are not particularly good vehicles for developing new energy technologies. We all might be better served if ExxonMobil gave its shareholders the cash and let them invest in the most promising solar or battery or hydrogen technology companies.

 

None of these alternatives should deter investors from holding ExxonMobil stock. In fact, they demonstrate the unique role the company's shares have to play in an energy portfolio. ExxonMobil's conservative approach to reinvestment means these shares are the least risky shares you can own in the sector, if the sector does suffer a major correction. (I think the odds of that are small, but the chance is greater than zero.)

 

In the long run, the world needs oil from Canada's oil sands and from deep-water drilling in the South Atlantic, but the companies that have invested in those areas have taken the biggest risks.

 

ExxonMobil hasn't. That makes it a haven in any energy storm. And a likely big winner from any correction.

 

And if that correction doesn't materialize? Well, there are worse things than collecting the returns from owning shares of the oil industry's most efficient cash-generating machine as it gradually disappears.

[kapkomet]

I've been long waiting for the day that XOM goes private.

 

People, you need to realize that privatization is becoming a huge thing. And I can tell you from some "inside" perspective, it's not a bad thing... for the COMPANY. But, the shareholder - now that's a different story.

 

 

[southsider2k5]

I've been long waiting for the day that XOM goes private.

 

People, you need to realize that privatization is becoming a huge thing. And I can tell you from some "inside" perspective, it's not a bad thing... for the COMPANY. But, the shareholder - now that's a different story.

 

This is the direct result of two things... Sarbines Oxley and Windfall profits tax.

[NorthSideSox72]

I've been long waiting for the day that XOM goes private.

 

People, you need to realize that privatization is becoming a huge thing. And I can tell you from some "inside" perspective, it's not a bad thing... for the COMPANY. But, the shareholder - now that's a different story.

It can also be very, very bad for employees. If privitization occurs as part of a pure investment strategy, where an equity partnership buys the company, the employees can typically expect a world of hurt. The goal is usually to cut costs to the bone, rev up a few high profile projects to make the company look shiny, then sell it. And that can be a touch work environment, I can tell you from experience.

 

[NorthSideSox72]

Interesting write up on XOM. Two things really stand out in here. #1 is that these companies are having a really hard time finding places to spend their profits, because of the privatization of oil industries in nations, and #2 the thought that XOM could become a private company, and pretty much be hidden away from the government after that. At that point they would be under zero obligation to report anything in the way of accounting or profits publically or to the government.

On the idea that they are having a tough time investing, that shows clearly just how against alternative energies this company's culture is.

 

One other thing that stuck out in the article, to me, is that projection of $30-$50/bbl oil price assumption. Given the increasing demand pressures overseas, the continuing flow of big equity money into the commodities markets, the apparent near-term peaking of many main oil reserves, instability in the middle east and other oil producing areas, and on and on and on... I just don't see their assumption as remotely realistic.