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Tuesday, October 31, 2006

As The US Goverment Give Up On Royalties, Big Oil Needs Some Chaos

Stocks: (XOM)(CVX)(COP)

The US Government surrendered without lifting a finger. Its case that Chevron underpaid for use of federal land to pump gas in the Gulf of Mexico was dropped. Oil and gas companies are mandated to pay part of their sales for product brought out of land owned by the government. But, the calculations are fuzzy.

Big oil stands to add to its profits if the feds don't push for a higher rate of royalty. What's it worth? Perhaps several hundred million dollars.

But, it is a small gift. With falling oil prices, it will not make up from the likely drop in profits at Big Oil. Inventories are still rising. The fears that Saudi production could be hurt by terrorists is receding. And, OPEC's plan to cut production seems to have no teeth.

Ah, for a little, tiny war. Not one in which anyone gets hurt, mind you. Or, a little coup d'etat. Just something to grab the headlines for a day or two.

Of course, higher oil prices are not the only reason that Big Oil has had larger profits, but, there must be some reason that the stock prices of these companies are up an average of 40% over the last two years. But, that number was closer to 70% for Exxon just a few months ago. Before oil prices came down from over $70 to under $60.

Oil prices are now hostage to whether there is any chaos in the world events that would change oil prices. Threats of attacks on oil facilities in Saudi Arabia recently pushed prices up. But, it did not last. Oil companies need an event that no sane person would wish for. Mayhem.

Hard to say if it will come.

There is no evidence that oil executives are warmongers or anarchists. But, that does not mean that a touch of chaos isn’t helpful to raising the price of oil.

Douglas A. McIntyre can be reached at He does not own securities in comanies that he writes about.

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