The world's biggest oil companies are piling up cash faster than they can spend it, sparking a backlash amid sky-high gasoline and heating-fuel...
CHICAGO — The world’s biggest oil companies are piling up cash faster than they can spend it, sparking a backlash amid sky-high gasoline and heating-fuel prices.
On Friday, Chevron became the last of the Big Five to join the industry’s third-quarter-earnings boom, with its $3.6 billion bringing the group’s total take for the three-month period to a staggering $33 billion.
The oil industry’s profit gusher is angering motorists and homeowners who think they’re being gouged, prompting some congressional critics to propose seizing the windfall altogether.
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Yet beyond the strong emotions it provokes, the stockpiling of megabucks in oil-industry coffers may be signaling a downbeat trend in the economy.
While U.S. consumers and the federal government have been spending more than they have on hand, companies over the past five years have quietly amassed substantial surpluses. Corporate decision-makers have found nowhere to spend all their profits without taking on what they consider imprudent risks.
By failing to make productive investments while they’re flush with cash, businesses could be setting the stage for slower growth in the future. At the same time, they have indirectly encouraged an unsustainable housing boom by making more credit available at low interest rates, some economists say.
In a speech earlier this year, Ben Bernanke, the economist President Bush nominated last week to succeed Federal Reserve Chairman Alan Greenspan, linked the phenomenon to what he termed a “global savings glut.”
The oil industry is the most prominent example. Despite its massive earnings, none is rushing to build new refineries or plumb for oil in inaccessible places.
“They hit the lottery here, and they don’t know how to deploy these funds in the short term,” said Paul Kasriel, chief economist at Northern Trust. “It has implications for the longer term. What’s going to increase our ability to grow in the future? McMansions or capital equipment and research and development?”
Anger in D.C.
Those sentiments were echoed last week on Capitol Hill, where House Speaker Dennis Hastert, R-Ill., called on oil companies to build refineries and pipelines. “These companies need to invest in America’s energy infrastructure and resources,” he said at a news conference. “It’s time to invest some of those profits.”
Others go further, including Sen. Byron Dorgan, D-N.D., who proposes seizing oil-industry profits to fund rebate checks for consumers. That, Dorgan said, would provide an incentive for Big Oil to “not just keep the money but do the right thing — invest in new domestic exploration and development as well as new refining capacity.”
The oil industry has countered with the familiar argument that its profit margins are less spectacular than those reported by other companies outside the energy sector, such as Google or Citigroup.
Further, major oil companies plan to pump tens of billions into exploration, refining and other productive activities in coming years, noted John Felmy, chief economist at the industry-controlled American Petroleum Institute. “They are spending a lot.”
Even so, oil companies are spending less than they might — given their enormous profits, including Exxon Mobil’s third-quarter bonanza of nearly $10 billion. Analysts say Big Oil is gun-shy for good reasons.
When oil boomed in the 1970s, these same companies spent wildly. Oil companies now take a skeptical view of the latest commodity-price spike that has sent profits soaring.
Although oil prices hovered around $60 a barrel for most of the third quarter, the companies are approving only those long-term capital expenditures that would still make financial sense if prices were to drop to $25 or $30 a barrel, noted analyst Jerry Kepes, an executive vice president at PFC Energy.
That’s because big oil projects — expanding refineries, building pipelines, drilling new fields — take something approaching a decade to come on line, and commodity markets can change in a heartbeat.
“This is a long-term business. You make decisions now that see results in 2015,” Kepes said. “They can’t be seen to throw money away, no matter what.”
A further complication is soaring costs. The oil giants and companies that service them unloaded thousands of engineers and other experienced workers over the past 20 years, so energy-industry expertise now commands a premium. In addition, demand for equipment such as drilling rigs is so high that, “The same exploration well of 10 years ago will cost twice that much today due to location and higher costs,” Kepes explained.
Another dilemma for the oil giants is the inaccessibility of proven resources. Everyone knows Iraq has oil, and Russia, too, but the private sector won’t be pursuing those fields freely for obvious political reasons. Besides, most of the world’s oil and gas remains in the hands of states doing their own business, such as Saudi Arabia.
Companies in the U.S., Japan and Europe have shared their caution, sitting on undistributed profits rather than deploying them. “Investment is not keeping up,” said economist Robert Dederick of RGD Economics. “That could mean slower productivity growth and lower output.”