FSO Editorials: "Peak Oil: Congress Declares War on Big Oil" by Dr. Joe Duarte 04/29/2006

FSO Editorials

PEAK OIL
Congress Declares War on Big Oil
by Joe Duarte, MD
Joe-Duarte.com & IntelligentForecasts.com
April 29, 2006

Editor�s Note: Congress is turning up the heat on large oil companies, again taking the opportunity to use the public�s discomfort as a political tool. In this article, Dr. Duarte explores the dynamic fully, bringing it full circle to the real reasons why crude oil prices are high, why oil company profits are near record highs, as well as revealing some interesting statistics that link the U.S. government and the big oil companies. This analysis originally appeared on 4-27-06 at www.joe-duarte.com. Get Dr. Duarte�s Latest book "Futures And Options For Dummies" at Amazon.com

Other key installments of this increasingly timely series include:

It's A Bad Time To Be Exxon Mobil

Have Oil Company Profits Peaked?

Exxon Mobil (NYSE: XOM) reported revenues that were $12 billion below Wall Street estimates, citing lower than expected production numbers this week. Not only does this raise the possibility that the oil cycle might have peaked, but it also raises questions of whether the Peak Oil phenomenon is starting to unfold.

Exxon Mobil is not so much a company but a money printing press, to paraphrase Jim Puplava. To be sure its 1Q revenue of $88 plus billion attests to the company's strong position in the market, but it was some $12 billion off of Wall Street expectations.

Before anyone sheds tears for the oil behemoth, there is something to note here. Either Wall Street got too optimistic, or there is something else hiding under the hood.

To be sure, Exxon made plenty of money, some $8 billion in profits. But, the fact is that they missed Wall Street expectations.

In other words, something is not right.

The key level to watch is the 60 area on the stock. If sellers take Exxon below this key price, we'll see damage to the Dow Industrials, the S & P 500, several exchange traded funds, and sector indexes, such as the Amex Oil Index.

What the company says to analysts throughout the day and what happens as the buzz builds in the next few days will be of utmost importance to traders, investors, and the economy.

Certainly, this could be an Exxon specific set of results, but BP also reported less than Wall Street expected, while Conoco and others met or exceeded expectations.

Yet, this remains an increasingly interesting set of developments.

Congress Declares War On Big Oil

Danger is rising for the energy industry as Congress has found a cause as midterm elections near. This is an interesting development, since Exxon Mobil and BP have reported less than expected results, raising the question as to why Congress is suddenly reviewing oil company financial statements, when it is possible that oil company profits and revenues may have peaked for this cycle.

In yet another sign that a potential change in the oil markets is coming, Congress is increasingly aggressive in its rhetoric and potential action against oil companies.

The rising hostility has been brought about by record profits reported by the majors, as gasoline prices have risen to record prices resulting from a perfect storm in the oil markets.

The sentiment against big oil is best summarized by the Quotation Of The Day in the New York Times: ["Nobody has any sympathy for oil companies on Capitol Hill right now. You talk to someone driving to work in an F-150 pickup and paying $75 to fill up his tank, and everybody's on his side." JACK KINGSTON, a Republican congressman from Georgia.]

It's Take Back Time

As the news has gotten more sensational, so has the drama titer risen inside the beltway. Reuters reported on 4-26, that some California drivers are running out of gas on the state's highways in order to get free gasoline from rescue teams that offer it as an emergency measure to stranded motorists.

It in this kind of climate that is fueling the feeding frenzy on Capitol Hill, which has prompted Congress to ask for oil company tax records from the I.R.S.

According to the New York Times: "As anxiety spread in Congress on Wednesday over soaring oil prices, lawmakers in both parties said they were ready to take a tough look at oil and gas incentives they passed as recently as eight months ago."

Indeed, lawmakers and politicians on all sides are doing a very quick and nasty turn on big oil: "Leading Republicans echoed President Bush's call Tuesday to trim about $2 billion in tax breaks Congress passed as part of the energy bill last August. Several prominent Democrats, not to be outdone, pushed for repealing oil and gas tax breaks worth more than $10 billion over the next five years."

Disorder Rules

Still, a closer look reveals that all the bluster is, at least at this stage, little more than noise, and a prelude to a fall from Chaos into Disorder.

According to the New York Times: "Both parties jockeyed for political advantage even as they were grasping for ideas. Most experts contend that the government has few options that would quickly reduce gasoline prices, and competing party agendas could block Congressional agreement on any meaningful legislation."

Indeed, as the midterm elections approach, Congress has clamped on to oil prices as a key issue, as "Lawmakers have introduced more than 30 energy bills in the last several months. But they reflect often -conflicting goals of reducing prices, increasing production and soothing consumer anger about oil industry profits."

Everyone is getting in on the action: "Democrats called for a 60-day halt on collecting federal gasoline taxes, which are 18.4 cents a gallon, but they were openly split about the more radical step of imposing a windfall profits tax on major oil companies. For their part, many Republicans are torn between wanting to show their sympathy for consumers and maintaining their longstanding support for the oil industry."

The oil industry is also divided, as smaller companies have benefited from the tax breaks and would like to keep them, while the majors are essentially neutral on them.

According to the Times: "the hundreds of smaller independent producers want to preserve as many incentives as possible. In singling out tax and spending incentives to be eliminated, Mr. Bush did not criticize a new expansion of tax write-offs for smaller oil refineries."

The Times added: ["The big companies don't want them, don't need them and are not asking for them," said J. Robinson West, chairman of PFC Energy, an oil industry consulting firm. But the smaller independents, he said, "are not going to give up easily."]

Conclusion

These are dangerous times, for the energy industry, investors, and the U.S. economy, as Congress is suddenly motivated to solve problems, mainly caused by piecemeal legislation that has been put in place for many years.

America's energy policy has been haphazard for decades, and it's time to pay the piper.

Indeed, we may be witnessing the start of a crisis in the energy sector, brought about by an overzealous Congress whose inaction for 30 years has brought us to this point.

As we stated on 4-26, this is complicated story which has been decades in the making. There are no quick fixes.

"The laundry list of why the U.S. is at this current juncture is familiar and includes political as well as intangible factors such as the weather.

Externally, there are two major factors. First, the geopolitical situation. The world has clearly changed after 9/11. Second, the U.S. faces competition from China, India, and other emerging economies.

Third, global oil production is decreasing, for whatever reason, artificial or otherwise. As we've said many times, the easy oil has been extracted, and although there may be plenty of oil left in the ground, it's either in places that are dangerous due to politics, or difficult to extract due to geological reasons.

The U.S. has not built a refinery in 30 years, due to the regulatory expense, put in place by Congress in response to the environmental lobby.

The damage from hurricanes Katrina and Rita to the Gulf of Mexico remains largely unrepaired as we stand on the threshold of yet another hurricane season which has been forecast to be as potentially devastating as last year's.

The phase out of MTBE blended gasoline to ethanol blended gasoline is now in limbo as President Bush has proposed a moratorium on the switch in order to boost gasoline supplies.

At the heart of the matter, then, is supply, which is decreasing, and which is being influenced by geopolitics, logistics, or technological limitations.

The bottom line, unless something changes in the near future is that for now, there is no evidence that we have reached a top in the oil market.

However, if consumers start to pull back as they fear further price increases in gasoline and heating oil for the winter, the economy will likely start to stagger.

With OPEC and other producers still pumping full tilt, we could then reach that point in which demand decreases as supplies remain at reasonably high levels.

If and when that happens, we could see a major top. Until then, we are likely to remain in the same overall pattern that we've seen over the last three years, a steady climb toward higher prices punctuated by occasional pull backs, with the maintenance of the long term up trend remaining intact."

Yet, at this point, since the Congressional genie is out of the bottle, anything goes.

Ironically, according to Newsbusters.org, in a blog penned by Rich Noyes http://newsbusters.org/user/15, this is the reality of the situation: �the U.S. government took in more than $7 billion from ExxonMobil during the first quarter of 2006, a jump of more than $2 billion from the same time period in 2005. And that doesn�t count the more than $7.6 billion in excise taxes � the gas tax � that ExxonMobil collected for the government during the same quarter. Plus another $11 billion in "other taxes" and ExxonMobil sent the government more than $25 billion in the first quarter of 2006 -- three times more than the amount network reporters seem to feel is obscene.�

Noyes added: �ExxonMobil, in 2005 the company reported paying just under $99 billion in taxes � $23.3 billion in income taxes, $30.7 billion in excise taxes, and $44.6 billion in �other taxes.� And yet politicians are preparing to extract still more in taxes from the big oil companies, as if those costs won�t ultimately be incurred by consumers.�

The irony of the timing is not lost on us either, as just when the anger level inside the beltway is hitting fever pitch, it looks as if the U.S. refinery cycle has turned and gasoline supplies are starting to rise, suggesting that a price decrease is in the cards.

When Congress gets involved in the markets, it�s often a sign that a top is closer than most realize.

Joe Duarte, M.D.

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Joe Duarte's Daily Market I.Q. is a premium service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com. Duarte offers free analysis and news coverage at www.intelligentforecasts.com . Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management. He is author of "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House). Duarte's analysis appears regularly in major outlets including CBS MarketWatch and Investor's Business Daily.