The Oil Industry’s Cautious Investing

8 Nov

According to a new study by the International Energy Agency and mentioned in the Wall Street Journal today, the world oil industry has “barely increased” investments in oil and natural gas production during the past five years after accounting for cost inflation. That is, just 5% between 2000 and 2005. Well, that’s all fine and dandy, but these companies do have to account for cost inflation because they are the ones who have to pay these increased costs. And these are up 70% between 2000 and 2005. So from the companies’ perspective, they are making increased investments in oil and gas production. And this report also doesn’t seem to be considering efficiency gains resulting from new technologies these companies are using – it simply takes the investment dollar figure and adjusts it for industry cost inflation.

What worries me is that this report could provide Democrats with added leverage in getting some sort of “windfall profits tax” out of these companies. That would be just what we need – more government involvement in private business (yes, this is sarcasm). Where was the government a few years ago when some of these companies were barely making their interest payments? Will they return these windfall profits back to the energy companies when (if) prices decline? It seems like the memories of our legislators are entirely too short. In the past, the oil and gas industry has been one of boom and bust cycles. Now that industry executives have wised up and are wading somewhat cautiously into new investments while prices are high, they may get punished by the government in the form of higher taxes. My advice to those who want a windfall profits tax? Leave the market be and go read up on basic economics.


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