Question by truthisback: When Libs refer to “the oil companies” whom do they mean?
The retailer, which is typically independent? The jobber who brought the gasoline to the retailer’s tanks? The wholesaler / terminal operator? The pipeline or barge company? The traders? The refiner? The tanker company? The exploration and production company? The contract driller? The seismology firm that advises the exploration and production company?
Do Libs even realize that for the most part, even though there are some well-known forward integrators, the industry is largely NOT vertically integrated, and is very fragmented?
Do they realize that in most cases, title to the molecules you put in your tank has changed about a dozen times since it was pulled out of the ground?
At which of these levels do they think all this price fixing or gouging is going on?
And do they realize that when prices rise, that’s when retail margins are SQUEEZED?
The point isn’t the narrow point of “big oil” but the larger point of why anyone would post assertions about an area about which they know very little? Why even form an opinion on something you could research in a few hours without first doing that research? And if you can’t be bothered to do that research how do you become so passionate about the issue that you post online about it?
I guess I just don’t understand the mentality – – – – you don’t see me posting about the medical research industry because I don’t know much about it, and if I cared enough about it to want to form and post an opinion, I’d care enough to read up on the industry and become informed about it before forming an opinion. And I wouldn’t want to embarrass myself by posting factual assertions that were demonstrably false.
Punxy, I’ll explain the “record profits,” which are being experienced only at the E+P and contract driller level. Retailers have had a volatile environment the last 5 years, while heating oil marketers with a lot of storage have done well when the futures curve has been in contango (the cost to buy and store the fuel is less than the increase in price from the date they do that to the winter season and they can lock in that increase by buying puts – but the cost of puts has increased so it’s not as much of a benefit – but I digress).
Oil wells are 20-25 year investments. Most of the wells producing now were drilled 10-15 years ago. Oil prices were lower then and so were drilling costs. With the rising price of oil, the profit on those wells has increased.
But so has the cost to drill – – – not just because of the rising price of oil but because we’re using up the oil that’s close to the surface – so drilling costs are up even more, which is why contract drillers’ profits have risen even faster.
BUT most such costs are CAPITALIZED. Thus the cash goes out the door but it doesn’t affect the bottom line immediately – – – the costs become an expense on the income statement only as the well is depreciated, over a 20-25 year life.
THAT’S why E+P companies that have maintained their reserves show much thinner cash flow statements than income statements (but most haven’t maintained their reserves which means the company will make less in the future). And that’s why they trade at such low P/E multiples.
Nurse betty again, who is the “they” – – only the E+P companies and the drillers – – – and see above, “profit” doesn’t equal “cash flow” on a year to year basis which is why these companies trade at such low P/Es.
“That’s revenue, money they get to keep”
NO – it’s money they get to reinvest in new production, the cost of which has gone up even faster than the price of oil, but which is a cash flow statement item, which is why it doesn’t immediately flow through to the income statement, which is why you see “record profits.”
If oil prices dropped to $ 50/bbl, then in 5 years you’d see “record losses” – would you support a bail-out?
I wouldn’t, for the same reason I don’t support a “windfall profits” tax.
Answer by lib/con=0
Yeah and the tooth ferry is real too.
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