Big Oil's billions in profits draw fire

But economists view amassing of capital as part of a broader phenomenon that may signal a downturn in the economy

October 29, 2005|By GREG BURNS | GREG BURNS,CHICAGO TRIBUNE

The world's biggest oil companies are piling up cash faster than they can spend it, sparking a backlash amid sky-high gasoline and heating-fuel prices.

Yesterday, Chevron Corp. became the last of the Big Five to join the industry's third-quarter earnings boom, reporting a profit of $3.6 billion. The Big Five's total take for the three-month period was $33 billion.

The oil industry's profit gusher is angering motorists and homeowners who believe they're being gouged, prompting some critics in Congress to propose seizing the windfall altogether.

Yet beyond the strong emotions it provokes, the stockpiling of megabucks in oil industry coffers may be signaling a downbeat trend in the economy.

While U.S. consumers and the federal government have been spending more than they have on hand, companies over the past five years have quietly amassed substantial surpluses. Corporate decision-makers have found nowhere to spend all their profits without taking on what they consider imprudent risks.

By failing to make productive investments while they're flush with cash, businesses could be setting the stage for slower growth in the future. At the same time, they have indirectly encouraged an unsustainable housing boom by making more credit available at low interest rates, some economists say.

In a speech earlier this year, Ben Bernanke, the economist President Bush nominated this week to succeed Federal Reserve Chairman Alan Greenspan, linked the phenomenon to what he termed a "global savings glut."

The oil industry is the most prominent example. Despite their huge earnings, none are rushing to build new refineries or plumb for oil in inaccessible places.

"They hit the lottery here and they don't know how to deploy these funds in the short term," said Paul Kasriel, chief economist at Northern Trust. "It has implications for the longer term. What's going to increase our ability to grow in the future? McMansions or capital equipment and research and development?"

Those sentiments were echoed on Capitol Hill, where House Speaker Dennis Hastert called on oil companies to build refineries and pipelines. "These companies need to invest in America's energy infrastructure and resources," the Illinois Republican said at a news conference. "It's time to invest some of those profits."

The oil industry has countered with the familiar argument that its profit margins are less spectacular than those reported by other companies outside the energy sector, such as Google or Citigroup.

Further, major oil companies plan to pump tens of billions into exploration, refining and other productive activities in coming years, noted John Felmy, chief economist at the industry-controlled American Petroleum Institute. "They are spending a lot."

Even so, oil companies are spending much less than they might - given their enormous profits, including Exxon Mobil Corp.'s third-quarter bonanza of nearly $10 billion. Analysts say Big Oil is gun shy for good reasons.

When oil boomed in the 1970s, these same companies spent wildly. Risks were underestimated, and exploration mostly failed to pay off. Nearly two decades of sluggish results and consolidation followed. Burned repeatedly in the past, oil companies now take a skeptical view of the latest commodity price spike that has sent their profits soaring.

Although oil prices hovered about $60 a barrel for most of the third quarter, the companies are approving only those long-term capital expenditures that would still make financial sense if prices were to drop to $25 or $30 a barrel, noted analyst Jerry Kepes of PFC Energy.

That's because big oil projects - expanding refineries, building pipelines, drilling new fields - take something approaching a decade to come on line, and commodity markets can change in a heartbeat.

The oil giants have paid down debt and launched massive programs to repurchase their stock, as a means of sharing their windfall profits with shareholders. But those efforts absorb only a portion of the year's mammoth earnings.

Companies in the U.S., Japan and Europe have shared their caution, sitting on undistributed profits rather than deploying them.

Greg Burns writes for the Chicago Tribune.

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