Economic realities of the Industry

The Times crys over--what else--big profits for big oil:

Among the reasons for the huge profits is that when the price of a barrel of crude edges higher, oil companies not only pass along that price increase, but they pile yet more profit onto the heap by taking extra profits on the oil, and again when the product goes through the refining process.

Oil industry spokesmen defend this profit-on-top-of-profit strategy by saying it costs a lot of money to find, extract and refine fossil fuels. They rarely mention their obligation to stockholders and to line the pockets of oil company executives, who are among the highest-paid managers on the planet.

Oil companies' profit margins have remained at about 8-10% for years; it's what they earned when oil was $20 a barrell and it's what they're earning at $77 a barrel. In the meantime, a recent study conducted by Ernst & Young reiterates the economic realities of the Oil Industry:

The top 20 U.S. and Canadian oil companies actually invested 50 percent more than they earned in the past 10 years in efforts to produce more oil, but adverse geopolitical developments conspired to give them fewer opportunities to expand production while fading oil fields in the U.S. and elsewhere forced them to spend substantially more just to maintain current production, according to the study by the Ernst & Young accounting firm.

"Reinvestment is under way, and it's strong," said Charles Swanson, an energy analyst at the firm, but "average costs to find and develop oil and gas reserves have tripled since 1997, while total reserve-replacement costs have more than doubled."

The study found that the top companies -- including Exxon Mobil, ConocoPhillips and Chevron, among others -- took in a mind-numbing $5 trillion in revenue from sales of oil and related products between 1995 and 2005. After subtracting the cost of equipment, leases, labor and other operating expenses, the companies posted whopping profits of $336 billion.

Over the same time span, however, the companies spent even more than they earned -- $550 billion -- on oil exploration and development. Some of them went deeply into debt to finance new ventures, especially during times of lean profits.

Despite the massive sums of money oil companies spent trying to find more oil for the world's fuel-thirsty consumers, returns on investment over the past 10 years declined sharply because most existing oil fields in the West are in decline and the most promising new discoveries are not available for development, Ernst & Young found.

Yes, you read it right. More than one-and-a-half times as much dumped into exploration and development than what's taken to the bottom line.

Oil industry spokesmen defend this profit-on-top-of-profit strategy by saying it costs a lot of money to find, extract and refine fossil fuels.

Regardless of what we on the outside think, the reality is pretty straight-forward: Development is expensive, pulling oil out of the ground from older wells is not cheap. For all the money flowing through the industry, they still spend more--to the tune of 163%--on development than they earn.

How folks can continue believing they're getting gouged is truly beyond me.