Exxon – $21 Billion… Of Taxes

Oil Drilling Rig

Oil Drilling Rig

Original Image

Sometimes two things arrive near enough to each other, in time, to make for an interesting insight. In this case, drilling costs, and oil taxes.

Exxon reported their earnings. OK, they earned a lot of money.

From these folks: http://money.cnn.com/2010/07/29/news/companies/Exxon/index.htm

we have:

Analysts were expecting earnings of $1.46 a share, according to a survey by Thomson Financial.

Earnings for the first half of 2010, excluding special items, were $13.9 billion, up 60% over the first half of 2009.

Just as a counterpoint, this is what BP suffered as a result of the spill in the gulf. They are about 1/2 the size of Exxon (hard to say now, as they are selling properties and bleeding cash…) so ought to have had profits scaled about the same.

The exception has been BP, which posted a $17 billion loss Tuesday due to charges stemming from the Gulf spill

And that’s why you don’t want to be investing in BP right now. You can swing trade it as it wobbles (it will have a bounce up when the “shorts” exit, but that pop usually doesn’t last more than a month. Sometimes just a week or two.) But a company making losses, selling assets, and with no dividend has nothing standing between it and a zero share price. You are betting on a race condition between the company selling assets and someone buying the company outright at a higher price than the share price today…

But what about the Taxes?

On the CNBC trader show “Fast Money” they had an oil analyst on who pointed out that

“Exxon to Pay $21.15B in Taxes in 2Q”

(that text is from another site, but the same facts). That is the total of all the various taxes being paid to all the various taxing agencies. Even with oil prices “pretty high” in the $70-$80 range (but far lower than the $150 / bbl peak) the tax bite is far more than the company share. So while folks on the left like to rail about Exxon as a profit generating entity, it is far more a tax revenue generating entity.

Then, the next night, they had a stock analyst on talking about the drilling moratorium. He pointed out that the rule of thumb used for offshore drilling for oil is 1/4 of the income goes to the drilling costs, 1/4 to the company, and 1/2 to taxes.

OK, Back at Drilling

The point the drilling analyst was making was that the removal of the $75 Million liability cap would do two major things:

1) It would put the small companies out of the business of drilling in the Gulf. Small companies can not play “bet the company” on each well drilled.

2) Insurance costs would roughly double the cost of drilling each well. Oil prices would have to rise accordingly.

What happens to that “1/4 to the company” when the drilling costs double? Who would drill a well then?

There was also the minor note that with present rates of depletion, we rise to some fairly large shortfall in oil in the next 2 years thanks to the reduced level of drilling.

So let’s put this together. The various governments get $Billions out of oil drilling in the gulf, and they are doing everything they can to drive it to other countries (rigs are already leaving). This will result in greater budget deficits and higher unemployment ( I think it’s about 10% of US employment is in oil and drilling…) along with much higher fuel costs (that will make all the other industry less competitive globally).

So prices of everything rises, employment drops, deficits rise, and we become more dependent on foreign oil.

This is good how?

OK, add more to those oil trust holdings (especially Out Of The USA) and Canadian tar sands companies (IMO, SU) and increase holding of Natural Gas as folks will use more of it as a replacement fuel. Oh, and put more money in offshore investments / other countries. They will be at an improved competitive advantage. China, Brazil, etc. (Though only as charts show good entry points. “Buy the dips”). Only buy oil drillers that work OOTUS (Out Of The US) and avoid small drillers tied to the Gulf. (Frankly, given the Sovereign Risk posed by the US Government, I see little reason to invest any money here until that risk is mitigated. Who knows what sector of the economy they will attack next.)

Why does all this sound like “Beatings will continue until morale improves!” …

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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5 Responses to Exxon – $21 Billion… Of Taxes

  1. Rui Sousa says:

    So, governments get paid by Big Oil, and then fund public research institutions… Meaning that public researchers are under Big oil pay.

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  3. Verity Jones says:

    Let’s strangle the oil industry and cripple the hand that feeds us.

  4. E.M.Smith says:

    @Verity:

    It’s not going to be pretty. The rigs have started moving to other drilling spots. Once there, they stay a few years. It costs $millions to move a rig (something like $500,000 / day of lost revenue for starters) so once in waters off, oh, Angola, they tend to stay until that field is all drilled out.

    So they will move, then contracts for years duration will be signed for the FIRST well, with more to follow. And that rig will be unavailable to the USA for a decade+.

    Between the drilling freeze, the cost hike from waiving the liability cap, and the general hostility of the administration toward oil, we are going to see a large drop in drilling.

    That translates into much less oil in about 2 to 3 years and no way to recover from that shortfall for another 4 to 6 years (or more). The drop in supply is a necessary result of oil field depletion. Every year a certain percentage of present supply ‘dries up’ and gets shut in as non-productive. All we need to do to have an oil shortage is stop drilling replacement wells. And the Gulf is our major source of un-drilled fields and new domestic supply.

    Basically, if this situation continues for about 1 more year, we’re screwed on oil prices and stay that way for the coming decade.

    Oil is “price inelastic” so whenever the supply is short by a little bit, the price rockets up by a lot. (It also rockets DOWN by a lot if there is a tiny ‘glut’… but folks forget that part and rush to embrace price controls… that results in less supply… that results in.. sigh…) So at the end of this, we are going to have very high oil prices, very strong inflationary pressures, very large capital outflows for foreign oil, non-competitive industries, and 10% of the US workforce asking why they got attacked by their government.

    November can’t get here soon enough.

  5. Verity Jones says:

    “Oil is “price inelastic” so whenever the supply is short by a little bit, the price rockets up by a lot. ”

    Don’t say this is the law of unintended conscequences (I don’t like this at all – you know I don’t) – they know exactly what they are doing:

    1. Environmental disaster – greedy oil companies get the blame.
    2. Oil price hike – greedy oil companies get the blame.
    3. Higher oil prices make renewables ever more attractive (and cost effective).
    Sounds ideal to some – eh?

    This also means when the govt has spent all our money it can reduce it’s spending on subsidies for renewables as it has got us all to pay for them.

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