Oil Futures Up, Oil Stocks Down

It seems a complete contradiction, but oil companies' stocks aren't keeping pace with rising oil prices. Far from it, according to the Wall Street Journal:

The stock price of major oil companies hasn't kept pace with the price of a barrel of oil, which is now 95% more expensive than 12 months ago. Investors are skeptical that majors such as Exxon Mobil Corp. and Royal Dutch Shell PLC, which do everything from drilling oil to refining it to selling it, are going to have big futures. The stocks are actually down this year.

Apparently analysts are saying that they face problems in oil production in the long term, "making some observers think these companies may not even be around in 10 to 15 years." Jeez, Louise. It makes you wonder why they aren't pumping huge amounts into alternative energy - or even something that seems totally unrelated. When your business depends on goop you pump out of the ground and you know supplies are limited, you might think that finding something with some long-term potential would be, oh, I don't know ... necessary?

ExxonMobile Tries Dodging PR Bullet

It's tough when your own business processes and success come back to bite you. That's exactly the picture that the Financial Times has painted for ExxonMobile selling off its 2,200 company-owned service stations. (Here's the link, but it does require a paid subscription.) The problem is having the company name sitting above those big $4+/gallon price signs. The paper does make one point I've been considering - that oil companies may make a whole lot in gross dollars, but the real price setting comes at the well head, not at the pump.

However, let's take a look at the ExxonMobile financials for a moment. When people have criticized it for windfall profits, it has argued that its prices have gone up as well - which is true, as the company buys gas from nations that own their oil. But look at the income statements from the last three years and you see an interesting pattern. If costs had gone up equivalently with profits, then the operating income should have been roughly the same as a percentage of total revenue.

In 2005, operating income as a percentage of revenue was about 16.4 percent, with net income before taxes being 9.7 percent. In 2006, that jumped to about 18.3 percent and 10.6 percent. And in 2007, the numbers were 17.8 percent and 10.0 percent. In other words, yes, the company has managed to raise its net income slightly. But even if you look at operating income, not net income, the jump is under 2 percent. A low price for regular gas in my neck of the woods is about $4.05 a gallon. Cut 2 percent and you get about $3.97 a gallon - a savings of 8 cents a gallon. Sorry to disappoint everyone who wants to raise taxes on "unjust" profits, but all that will do is transfer some of those profits to the government and not lower prices at the pump.

Do Rising Food Prices Add Up?

The news about rising food prices and the estimations you hear in the news have had me scratching my head. Here's something I wrote about the topic on my food blog. I suspect that the energy and exchange rate excuses, and the estimates at price growth, don't jive with what you see in the grocery stores, and I note how ADM's gross profit growth significantly outstrips its revenue growth.

Dollar Problems Become Self-Fulfilling Prophecy

As the Financial Times is reporting, oil topped $100 a barrel and gold hit an all-time high of $861.10 an ounce because investors are spooked over the dollar's weakness. The currency dropped against the euro and yen after a report that US manufacturing is at a five-year low. Investors think that means the Fed will lower interest rates - and mint more money - to compensate, and so they head to buy commodities that you can at least use to heat your home or adorn your wrist. The manufacturing report came from the Institute of Supply Management and is in the "contracting" range, a potential sign of a recession. And it's certianly a lot less messy than reading the entrails of some unfortunate bird. Of course, as oil goes up, pressure on peopel and businesses in this country continues, meaning that additional contraction in spending is likely, which will drive further currency weakness, resulting in even more flight to the gold cost - whether the conventional type or black gold. Confidence in the economy is sounding ever more forced, but I don't see that any presidential candidate will have a solution.

Fuel Cell Vehicles - and Who Will Sell the Fuel?

I heard a story today concerning GM and a fuel cell vehicle with a supposed 300-mile range on a tank of fuel. That's good to hear, but with all the attention on designing the vehicles, I've seen relatively little about the issue of concept viability: fuel stations. A few years ago I remember sitting over lunch with a PR person from ChevronTexaco as we were killing some time before I was to interview CEO David O'Reilly. We got onto the topic of alternative fuels and how difficult it would be to make that work until some had set up distribution for those fuels.

You can design cars from now to the next decade, and it won't matter if you can't get the substances to run them. That's where the oil companies should be spending some of those large sums of cash that have been coming in - particularly as their capital expenses seem to have been dropping over the years. someone has to build the stations, create the new storage tanks - generate the fuel that will go into those tanks.

It would be a logical step. Oil companies aren't really in the "energy" business so much as they're in the twin industries of chemical refining and transportation of those materials. Moving to a new set of chemicals will require a lot of work and investment, but in the long run, what else are they going to do?