Friday, August 07, 2009

 

Low Oil Profits and Energy Development

Lately there has been a spate of reports on the plummeting earnings of oil companies. Many people will no doubt experience a moment of schadenfreude in the belief that the oil companies deserve this for sticking it to us and basking in fat profits. But let’s think carefully about this for a moment. Since all the easy oil has been found, this means that finding and developing new oil fields — which is essential if we want to continue using oil — will become more and more expensive over time. Therefore, oil companies will have to dedicate increasing amounts of money to exploration and development, and that money will come from their profits. So in that sense, their inability to keep being very profitable will translate into their inability to keep up the pace of finding and developing new oil fields.

As I write this, the world economy is still in the toilet, but oil is over $70/bbl. That’s because it’s costing more to find oil and get it out of the ground — and increasingly, to get it out of the sea bed. So profitability for oil companies is now more important than ever.

Think about that the next time you gas up your car.



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