Our View - Thursday

Follow the money

‘Obscene’ gas and oil profits are reinvested

Readers frequently hear or read about the allegedly “obscene” profits oil companies have been raking in, but precious little about where all that filthy lucre is going. A recent article in The Houston Chronicle, which intensely covers the oil industry, provided a welcome glimpse into the other side of the story.

If you adhere to the Watergate-era adage and “follow the money,” looking beyond the envy-mongering rhetoric of the bigoil bashers, you will see the flip side of the coin.

More than half of the cash flow generated by the Big Five oil companies (ExxonMobil, Royal Dutch-Shell, BP, Chevron and ConocoPhillips) went into paying stock dividends and stock buybacks, according to the paper. And that’s good not only for investors, but for the entire economy, since most of those investors don’t horde the money. They plow it back into new investments and new ventures, creating new opportunities and new jobs, which keeps the economy growing and healthy.

Rewarding investors is a good thing, because it encourages investment, which creates more economic activity, more opportunity, more tax revenues and better circumstances for consumers.

Perhaps these profits look a little less “obscene” when viewed in this context.

The companies are also investing a good chunk of the profits in the search for more oil and new technology, which not only creates the conditions to generate the companies’ future profits, a necessity in a capitalist system, but will fall to the benefit of oil consumers, given that finding and developing new supplies is critical to holding down consumer costs.

“Our 2007 capital and exploratory budget is $20 billion, up approximately 20 percent from 2006 and more than 40 percent from 2005,” Don Campbell, a Chevron spokesman, told The Chronicle. And that expenditure will help guarantee supply and boost production, potentially lowering costs. “We project our production to grow by an average of 3 percent per year from 2006 to 2010,” he said.

The Chronicle reports that BP has invested $30 billion in new energy development in the past five years — and that’s just in the U.S. And Shell says it will invest up to $23 billion in capital projects this year, as part of an effort to broadening its energy portfolio.

“This will include investments in second generation biofuels, wind energy and unconventional fuels, such as coal gasification, oil shale and tar sands,” a company spokesman said.

And what, we wonder, is obscene about that?

Isn’t the diversification of energy portfolios and investment in new technology precisely what the big-oil bashers are always calling for? And it’s being done not because the government ordered it done, but because the companies elected to do it, responding to world energy forecasts, market conditions and what’s in the long-term interests of their shareholders and customers.

Some companies also have had to write-off significant losses because Venezuela and Russia “nationalized” (read: seized and stole) their assets. ExxonMobil and ConocoPhillips, for instance, were forced earlier this year to relinquish projects they had developed to Venezuela’s state-owned oil company, under orders from Venezuelan dictator-in-the-making Hugo Chavez. That reportedly cost ConocoPhillips $4.5 billion.

BP and Shell similarly had to surrender interests in several Siberian oil projects to Gazprom, Russia’s state-owned gas company, under orders from Russian dictator-in-the-making Vladimir Putin. This state-sanctioned theft undoubtedly cost them (and their shareholders) billions of dollars.

Now that’s obscene.

Google puts its money where its mouth is

Those who believe in free markets chafe at the idea of government directing the development of alternative fuels. That’s understandable; it stands to reason that if there’s a market demand for alternative fuels, someone or several someones will step up and provide it. Demand creates profit incentive, which spurs innovators to find a product to fill the need.

Sometimes, a corporation sees its own needs creating a demand and works proactively to fill that need. Others who can use that product benefit from the research and development. That’s why Google’s announcement on Tuesday that it and its philanthropic division would invest hundreds of millions of dollars in solar and other renewable electricity sources was heartening to environmentalists and free marketers.

According to an Associated Press report, the search engine company will introduce new products and services that will increase its already voracious appetite for electricity. It just made sense to company officials to invest some of the company's profits into research aimed a lowering the cost of generating power from renewable sources.

Larry Brilliant, head of Google’s philanthropic arm, the Google Foundation, said, “As Google grows, we don’t want the business to become part of the problem. We want to be part of the solution.” If the company’s plans work out, it will be a big part of the solution. Google co-founder Larry Page says one of the goals of the initiative is to lower the cost of producing solar power 25 percent to 50 percent. That’s a pretty big order, considering how cheap coal-generated power is. But if Google can do it, there’s a willing public ready to buy any excess electricity the company can part with. The idea is likely to be especially popular in Google’s home state of California, but would be welcome everywhere.

One of the best things about Google’s plan is that it’s not coercive and doesn’t, as far as we can tell, rely on government subsidies or mandates to be successful.