Bad Information on Good Morning America

Today on Good Morning America Mr. Michael Santoli,an expert from Barrons, offered some explanations on how oil companies use their profits.

While the analyst correctly explained where profits are used, he missed some key points.

He said that from 1-2% of revenue go into R&D. This is correct! The oil and gas industry is among the lowest in funding research and development. According to Technology Review the industry spends 2% of sales on R&D. Compare this to biotechnology (21%), computer software (18%), and telecommunications (11%). Perhaps this is why the industry's innovation index is 112th. Much of the research for the industry is done by service companies such as Halliburton and Schlumberger. They sell their research to the oil companies in the form of new/improved products and services. Data reported by Technology Review indicate that petroleum companies spend the lowest amount on research compared to other high-tech businesses. Schlumberger spent 5.12% of revenue and Halliburton 1.79%of revenue. Compare this to ExxonMobil (0.32%), Royal Dutch/Shell (0.29%) and BP (0.22%).

The gentleman from Barrons said that oil companies have used their money to re-purchase their stock. This is true, however his explanation that the companies were returning money to the investors because they could not find uses for it is wrong. His statement would be true if the company increased dividends.

Oil companies have several sources to increase their reserves: drilling to find new reserves, buying reserves from other companies, buying other companies, and buying back their own stock. Of these options the only one that increases world oil reserves is by drilling. Buying back a company's stock increases ownership (control) of the reserves but does not add to company reserves. Companies do this when the value of their reserves on a per barrel basis is less than the cost of acquiring reserves by purchases or drilling. It is the least desirable of the the alternatives from an operational perspective, but makes sense from a financial view.

Problems Continue at BP Refinery

According to a study conducted on behalf of US District Court Judge Lee Rosenthal, BP "continues to operate its Texas City refinery in violation of federal process safety laws."

The report's author, Engineer Mike Sawyer, said that BP has failed to make "widespread improvements" at the refinery. He indicated that the refinery has an "abysmal safety record since the blast, which includes three more worker deaths and several fires and chemical releases."

It appears that BP continues to break the law in spite of pleading guilty to violations that killed 15 people in 2005.

BP's behavior contributes to the industry's bad public image. Companies must conduct their operations in accordance to government regulations and society's expectations. In addition, BP's behavior could shut down the 475,000 B/D plant and nearby refineries at Valero (225,000 B/D) and Marathon (72,000). The loss of 772,000 B/D of capacity would reduce US refinery capacity by 4.4% and cause a jump in gasoline prices. Additionally, BP's problems harm chances of building new refineries to meet anticipated increased demand.

Storms Hit Texas Coast

As our friends and neighbors along the Texas Gulf Coast say “Hello” to Dolly, we are reminded about how weather influences oil and gas prices.

Temperatures affect energy use throughout the year. The summer heat increases the need for natural gas to produce electricity and for natural gas and refined products to operate peak shaving plants. In the winter natural gas is used to heat our homes and businesses.

The impact of hurricanes on the oil and gas industry is often forgotten by the public. According to the Energy Information Administration, the US offshore supplies about 25% of the nation’s natural gas production and about 24% of its oil production. When tropical storms threaten, the platforms must be shut-down. Severe hurricanes can damage platforms and underwater facilities and pipelines prolonging the recovery.

The difficulties in predicting temperature and severe weather help explain why forecasting oil and gas prices ranges from tricky to impossible.

Oil Prices Drop but No Relief at Pump

World crude oil prices have decreased by $16/B; however motorists are not seeing lower gasoline prices. Based on statistical analysis of past prices, the price of gasoline should have dropped by 43¢/gal. [Please visit Crude Oil and Gasoline Pump Prices for more information.]

Motorists haven’t seen this price relief because while gasoline marketers are quick to change prices when crude costs increase, they are slow to adjust prices when costs drop.

The reason is obvious. Marketers want to maintain profits as long as possible. Seasonality and margins have significant impact. If gasoline margins were low when crude prices started to drop, refiners and marketers will try to maintain prices as high as possible until market factors prevail. Drops in crude prices are less likely to impact pump prices at the beginning of the summer driving season. Declines in crude costs are more likely to be seen at the pump at the close of the gasoline season when inventories are high and demand begins to decrease.

Drivers may have to wait two to three more weeks to see significant savings at the pump.