I never thought I would be even tempted to defend the oil industry, and that’s not exactly what I intend to do here, but their situation, and the situation in which they have put us, need a little explaining. There are two major narratives about the oil business currently, spurred by spiking fuel prices and corporate profits. One is that President Biden is responsible for high fuel prices; there’s no point in even discussing that notion, it is simply too dumb to live. The other, embraced by a large number of very smart people, is that the oil companies are making obscene profits by price gouging — raising prices simply because they can, and using the profits to buy back stocks and pay higher dividends and salaries.
They are raising prices, and they are racking up historic profits, but to understand what’s happening to them, and us, we need to know, as Paul Harvey used to croon, “the rest of the story.”
Oil companies like to say they “produce” oil but they don’t — they have to find it and get it out of the ground. If they don’t find enough new oil to replace the oil they have “produced,” they are in trouble. And if that state of affairs goes on very long, they find themselves in involuntary liquidation. For several years now, they have not been finding enough oil to replace what has been used up, and 2021 saw the lowest level of new oil discoveries in 75 years.
For many years, one of the biggest expenses oil companies had was searching for new deposits. But these expenditures are categorized as capital expenditures (capex, for short) and do not appear in profit-and-loss statements. In recent years, however, most oil companies have virtually given up, and that is one reason they are diverting profits to investor and executive benefits. These are short-term benefits designed to distract everyone from the disastrous long term.
Experts from Oil Evex Profit talk about fracking which is another problem in the industry. The technology used by up to 95 per cent of new wells being drilled in this country today. Far from being a miraculous solution to everyone’s problems, fracking (the extraction of oil from oil-soaked rock using enormous amounts of water, sand and toxic chemicals) has turned out to be a virulent form of industrial cancer. The drilling rigs are hideously expensive to set up and operate, and they play out after only three years, on average. (Traditional oil wells usually “produce” for 20 years or more.) Thus, to stay in business, frackers have to spend outlandish sums finding and building the next well before the current well craps out. This also is capex, and does not appear on the P & L.
In 2020, the Washington Post estimated that to that time, frackers had lost $340 billion dollars in 10 years. Virtually no one had made any money, and just about everybody was neck deep in debt. Exxon, which gambled hugely on fracking, went from being this country’s most valuable company in 2009 to being dropped from the Dow Jones Industrial Average and was listed instead as one of America’s “zombie” companies, which every year borrow more money than they make. In other words, involuntary liquidation.
As if this were not enough, the refining industry is in the midst of its own mortal crisis. Refineries are being closed down and their property converted to other uses — five in just the past two years — mainly because the owners have allowed their machinery to deteriorate to the point where repairing and maintaining it no longer makes economic sense. In the midst of today’s historically high gas prices and oil company profits, an oil refinery on 700 acres in Houston Texas is up for sale. You’d think there would be a bidding war, but there has not been a single offer, and the owner is planning to shut it down.
With all its public-relations resources, that it has lavished for example on debunking global climate change, why does the industry not speak out in its own defense? Because to admit to any of these truths would be to admit that the industry is right now in the process of involuntary liquidation. Once you’ve admitted that, how are you going to get a loan?
It is said that for every problem there is a solution that is simple, obvious and wrong. Both “It’s Biden’s fault” and “It’s price gouging” are in that category. The underlying reality here is that the oil companies are running out of “product,” which means the world is running out of cheap fossil fuels, a problem for which there is no viable solution. None at all.
Spot on, the proof if you will is in the lack of pudding. Who knows the specifics but there is no doubt that the decline of industrial civilization based on fossil fuels has reached the point that it is unmissable. I think there will be good things about the de-industrial future but it would be better if we could degrow equitably versus lurching from crisis to crisis.
It is tragic that the bi-partisan denial of fossil energy depletion has precluded any useful response to our predicament. As panels and fans fail to ‘transition’ us to a ‘renewable’ future the predicted greening of nuclear has appeared as the latest, probably final, straw to grasp.
The one president honest and courageous enough to acknowledge the truth of finite fossil energy is used as an example of failure by elephants and ignored as an embarrassment by asses who should revere him.
There are useful responses such as changing how and where we farm but it would have to be led by a creative elite demonstrably sharing the work and pain of…oh never mind.
Yeah, exactly….
We really are governed by morons. The denial and group-think mentality behind closed doors must be worse than it is in public.
https://www.msn.com/en-us/money/markets/top-us-energy-official-to-hold-emergency-meeting-with-oil-execs-in-bid-to-lower-gas-prices/ar-AAYMAA1?li=BBnb7Kz#image=AAYMpCJ|1
Oh, and how appropriate – the photo of the Exxon gas-station sign in the story is at the filling station in front of the Watergate, at the corner of Virginia Avenue and Rock Creek Parkway in downtown D.C.
Your points about “involuntary liquidation” and refineries are well made. But II don’t understand why you won’t call a spade a spade when it comes to price gouging. The top five oil companies alone—Shell, ExxonMobil, BP, Chevron, and ConocoPhillips—brought in more than 300 percent more in profits than the first quarter of 2021. That is a total of more than $35 billion in profits in just three months. We’ve all gone to the store and paid $90 for what used to be $40 worth of groceries. I don’t understand why you’d give Big Oil a pass from the generalized smash-and-grab theft by corporations everywhere.
I did not give them a pass. I specified in the piece; “They are raising prices, and they are racking up historic profits.” I just wanted to provide some context. Their growing desperation does not justify their greed. Ironic, though, that their price gouging is probably doing more than anything to reduce the burning of fossil fuels, which is what the world desperately needs.
The oil companies are in some ways just like the banking system: both act as de facto regulators, and both cream the economy.
The findings relative to CAPEX told the story decades ago.
What comes out next of the oil system is EXTREMELY expensive.
Wells need to keep flowing at specific rates to optimize extraction and cost. Demand necessarily has a floor that must be met, and oil companies have no interest in choking the economy to death. Their broader interests lies in predictable flows even if they punctuate the market with occasional cash grabs …
In a market led economy, price derived information; though imperfect on its own; is the crude arbiter of resources allocation.
The peak oil predicament; though long since out at this point; has not yet fully sunk in in the general public’s mind, but it probably won’t be long; and when it does, the political and economic landscape will be forever changed.
Until then, prices will be the not so gentle reminder.
And yes, they are roughly what they “should” be; and what boggles the mind is rather how incredibly cheap the stuff still is relative to what it provides, especially in the US.
What’s getting too expensive is our waste and our complexity…
Yup.
I would only add that it seems to me the fragility of the system will play a major role in this “peak oil predicament” at some point.
For instance, when “terrorists” unsuccessfully tried to truck bomb the Saudi oil refinery at Ras Tanura in back in 2010 (?), analysts at Goldman Sachs thought oil would’ve been at $400 per barrel the next day if they had taken out a single fracking tower.
Luckily, the two bombers were shot up at the gates (shot to pieces), before they could wreak havoc on the global economy.
It wouldn’t take much to set the tailspin into motion. Hell, Russia might decide to level some serious counter-sanctions against the West. What’s stopping them is anyone’s guess, but one could make the case they have every legal right to cripple the economies of the Nato-esque nations for treating them so poorly.
Now if they were feeling particularly nasty, they could at any time, try to collude with the Saudi’s to level the Western economies for good, and such a collusion does seem a possibility.
https://www.youtube.com/watch?v=rXiSafSqXAY
Of coure the nukes would start flying at that point.
And that’s what peak oil has always represented to me; the deeper we get in to the “predicament,” the closer were we are to the game ending global thermonuclear exchange.
Price gouging? Yes. Was a crisis caused by the idiotic actions of NATO and Biden in the Ukraine and the subsequent sanctions leveled against … ourselves? Yes. Is everything else that Mr. Lewis said correct? Yes. Can people consider 3 things at the same time? Some can, some cant.
Hi Tom,
” their price gouging is probably doing more than anything to reduce the burning of fossil fuels”
There is irony in that story. I recently read a book titled “Rummage” by the author Emily Cockayne. The book covered the history of the recycling of materials in the UK. One of the core themes of the book was that people tend to continue to do what they are doing, whilst they can economically afford to do so. When they can’t, they get serious. And from what I’m observing, things are getting serious.
Cheers
Chris
Thanks. I didn’t know about the the low discovery rate.