“Gas to be at $20-$25 a barrel” - guess who predicted this?

Let’s face it, gas is pretty darn expensive. My car only takes premium, so I just paid $4.60 a gallon. In fact, I’m going to start carrying my camera with me so I can take a photo the day I pay $5.00 a gallon.

I find a lot of the conversations around gas prices to be rather interesting. Personally, I think in many ways we brought this upon ourselves - for example, you wouldn’t pity the crackhead who complains that his dealer just hiked prices 2 fold. And still, gas is cheaper than brown water (aka coffee).

That said, there are a lot of arguments I find rather peculiar: one that I hear is that this is because evil oil companies colluded to prevent refineries from being built. A similar one is that crazy environmentalists who seek to destroy our nation prevented refineries from being built. From what I’ve read it’s a little of both, plus a bunch of business thrown in: refineries cost hundreds of millions to build, have a low profit margin, and in the 1990’s there was a glut of them, so they actually lost money. Oh, and getting permits is non-trivial due to community opposition (would you want to live next to a refinery?) So why would invest in something that has worse returns than tax free, risk free T-bills?

Another argument I heard recently was that gas prices are so ginormous because we failed to provide the right subsidies to encourage exploration and discovery of petroleum.

Really?

Here’s a nugget of info from one of my favorite blogs - here’s a snippet from a piece that published on 7/31/2006 about something that happened in 2005:

Jeff Matthews Is Not Making This Up: Congress Blames the Hedge Funds, Part IV: This Isn’t Complicated
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.

How conservative?

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.

Now, frankly I don’t think there’s anything wrong with paying off profit in the form of dividends. After all, a publicly traded company exists to deliver positive financial results for shareholders. If the company decides that dividends is the best way, and the shareholders agree then they all win.

So back the original point - would subsidies and tax credits for exploration really have helped?