Oil company profits go into the bank

31Oct05

James Hamilton at Econbrowser.com asks an interesting question:

Why aren’t the big oil companies reinvesting their huge profits?

So what’s the story? Maybe the oil companies are hoarding the cash in preparation for big investments just down the road. But we really could have used those investments several years ago, not several years from now. Or perhaps companies see enough danger of an oil price collapse that they are unwilling to make investments that would only pay if oil prices remain high. But if that’s the explanation, it’s unclear why they don’t take the sure profit and hedge that’s available from using futures prices. Alternatively, some might say that the only remaining plays at this point are in the control of governments, not oil companies, with the incipient decline in production by the international majors another milestone on the path to peak oil.

A detailed discussion precedes this quote, but there are conflicting reasons why big oil is being so reticent to re-invest their profits. While the press has focused on the amount of oil company profits, the more interesting question has to do with what they intend to do with this “windfall” of cash.

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