OIL DEPLETION

THINK ABOUT IT
If you read the Atlanta Journal, you may have seen recent full page ads paid for by the oil industry, dissecting the internal costs of a gallon of gas; which is now around $4.00 retail. According to the oil industry, they point out that around 73% of the cost of a gallon is for crude oil, the price of which is set by OPEC. This much of the story is true. What remains unsaid is how much of that crude is produced by our domestic oil companies for their own use, in their own production. According to money.cnn.com, our biggest company Exxon, produced around 44% of the oil they sold, and smaller Chevron, produced 48% of the oil they sold. While it is true that it may cost $5-7 per barrel to pump crude, and the government is looking for taxes; that still leaves a big piece for profit…Exxon made over $40 billion last year.
Geologist M. K. Hubbert had predicted US “peak oil” by 1970 over 50 years ago. What he said was that the crude supply was not everlasting and would run out. Truth is, he was right. Our highest internal production was about 1971, just before the last energy crisis. We have been decreasing since, and actually produced less oil domestically in 2006, than we did in 1950. But again, what is unsaid is how little our producers may be trying to increase production, while gaining favorable tax treatment because of it.
As early as 1913, they had convinced the government that oil would probably run out, and that they deserved an oil depletion allowance deduction on taxes amounting to 5% of sales. By 1926, this was increased to 27.5% of production. In 1976, Jimmy Carter managed to restrict this to only independent companies which don’t import or refine oil. But to make up for this, the larger companies were then given an intangible drilling cost deduction, 100% the first year, and tangible drilling cost deduction, split over 7 years.
Listen to a conversation from ExxonMobil’s recent presentation to financial analysts in New York last March. Halfway through the presentation, they flashed a chart showing production flat through 2012. According to Business Week, the first question was, “Why are you not showing any growth in production?” The answer of Chairman Rex Tillerson:
“We don’t start with a volume target and then work backwards,” he said. Instead, his team examines the available investment opportunities, figures out what prices they’ll likely get for that output down the road and places its bets accordingly. “It really goes back to what is an acceptable investment return for us.” Tillerson said. In other words, producing more barrels just to help consumers is not part of the company’s calculations. Apparently that acceptable return is 32% on capital, because that is what they reported last year.
I never thought I would agree with Hillary Clinton on anything, but if our oil companies are not enjoying “windfall profits”, they cannot be enjoyed. It’s time for them to pay the piper. Yes, I know that as individual investors, you and I probably own some oil stocks, but that is beside the point.
Lastly, we should let our political leaders in both parties know we are disgusted with their inattention to this crisis which was predicted 50 years ago by a respected geologist.Had we been working on solving the crisis with determination, it would have been solved years ago, but it seems it takes financial Armageddon to get Washington’s attention.