Oil Companies’ Investment Exceeds Profits’

The Washington Times reports on an interesting study by Ernst & Young that supports oil companies’ argument that substantial profits are necessary to support oil exploration and development efforts:

Big Oil’s record profits attract attention and outrage, but an independent study has found that oil companies do exactly what economic textbooks say they should do with all that money: They invest it in oil exploration and development efforts that eventually should relieve pressure on prices.

The top 20 U.S. and Canadian oil companies actually invested 50 percent more than they earned in the past 10 years in efforts to produce more oil, but adverse geopolitical developments conspired to give them fewer opportunities to expand production while fading oil fields in the U.S. and elsewhere forced them to spend substantially more just to maintain current production, according to the study by the Ernst & Young accounting firm.

The study found that the top companies — including Exxon Mobil, ConocoPhillips and Chevron, among others — took in a mind-numbing $5 trillion in revenue from sales of oil and related products between 1995 and 2005. After subtracting the cost of equipment, leases, labor and other operating expenses, the companies posted whopping profits of $336 billion.

Over the same time span, however, the companies spent even more than they earned — $550 billion — on oil exploration and development. Some of them went deeply into debt to finance new ventures, especially during times of lean profits.

Despite the massive sums of money oil companies spent trying to find more oil for the world’s fuel-thirsty consumers, returns on investment over the past 10 years declined sharply because most existing oil fields in the West are in decline and the most promising new discoveries are not available for development, Ernst & Young found.

“Most of the new reserves are outside of North America, and much of the global reserve base is off-limits to Western oil and gas companies,” said Mr. Swanson. Moreover, oil-rich countries such as Venezuela and Russia are exacting onerous licensing terms and costly royalty payments from Western companies seeking access.

Our government is part of the problem, not part of the solution. It could go a long way toward easing the gas crunch and lowering prices by authorizing development in Alaska and offshore, but the Democrats (abetted by a handful of Republicans) won’t permit it, preferring to force the oil companies to enrich foreign governments, often governments that are hostile to American interests. It would be hard to think of a more perverse policy. And, under these circumstances, the worst possible policy would be a “windfall” profits tax. One thing we know for sure is that the government, unlike the oil companies, wouldn’t use the money to drill for oil.

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