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Wednesday, May 10, 2006

Why You Should Worry About Big Oil

Beyond the fat profits, the giants are surprisingly vulnerable worldwide. That's bad news for business -- and consumers

You'd think the Apr. 26 oil summit in Qatar would have been an occasion for the industry to celebrate. The world's top energy executives were there, and they could all point to record profits and record demand. But rejoice? John Browne, CEO of London giant BP PLC, (BP ) says instead that the atmosphere was strangely glum. "There wasn't anyone smiling," he says. "They were worrying that the price was too high."

Browne's comments underscore a surprising point. Big Oil, that clutch of oil and gas giants in the U.S. and Europe, has big problems. Yes, we know it sounds ridiculous. Exxon Mobil Corp. (XOM ) has been reporting the lushest earnings in the history of the business, notching up $8.4 billion in its latest quarterly report. Combine the forecasted 2006 earnings of BP, Royal Dutch Shell (RD ), Chevron (CVX ), Total (TOT ), ConocoPhillips (COP ), and ExxonMobil, and you get roughly $135 billion, a sum greater than the gross domestic product of the Czech Republic or Israel. These companies, moreover, enjoy huge political clout in their home countries, have spotty environmental records, and staunchly defend outrageous prices at the gasoline pump. Why worry about them?

Well, you don't have to love the big oil companies to worry about their ability to provide us with the energy we need. That job is getting difficult, thanks to huge technical challenges, competition from national oil companies, and demanding, even hostile foreign governments. Just look at events in Bolivia on May 1, when the government abruptly nationalized the nation's gas fields.

So the majors may be making billions, but they are struggling to put them safely and soundly to work. Overall production at the oil majors is struggling to keep up with demand, and the reserve replacement ratio, the measurement of how well they are replenishing their supplies, is slipping. A healthy ratio should always be over 100%. But ratios for most of the six oil majors will slip below that level over the next five years, according to Sanford C. Bernstein & Co. "That's nowhere near the rate of reserves needed to satisfy world demand," says Robert E. Gillon, an analyst at oil research firm John S. Herold Inc. While most analysts think oil will hover at its current price, some think that if prices mimic the last big runup between 1970 and 1980, oil could hit almost $200 a barrel by decade's end, or about $6 for a gallon of gas. Some options traders are already betting that oil, now around $72 a barrel, could rise to $100 by December. Washington consultants PFC Energy figures the world is consuming oil at more than two times the rate of discovery of new supply. Conservation and efficiency gains have already saved billions, but they have not been enough to offset sharply rising demand from China and India.

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read the rest......
Why You Should Worry About Big Oil

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