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Saturday, November 11, 2006

Weekend Edition: Cheap Oil Takes On New Meaning

Big oil has figured our a new way to get prices up. Don't invest in projects that will increase oil production.

According to a new study from The Internation Energy Agency, oil company investments in oil and natural gas production is only keeping pace with inflation. The study covers that period from 2000 to 2005.

The study points out that lean investing in production makes oil prices rise more rapidly when supply tightens because new supplies and facilities are not available to help meet demand. Oil demand has risen sharply over the five year period of the study. And, without substantial increases in production, this made in almost inevitable that prices would be "spring loaded" and would move up sharply as demand expanded.

The news may not be surprising to the Exxons, Conocos, and BPs of the world. But, whether the under-investment was planned or not, it has helped them create huge profits as they save money on capital spending by not bringing new production online while their revenues are driven up by the pricing created by new demand.

A look at Exxon's five year stock price chart shows that a picture is worth 1,000 words. The stock has moved from $38 to $73. Pretty nifty.

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