Why We Have an Oil Crisis, Or; Wait ‘Til Chuck Schumer Gets a Load of This

Chuck Schumer is, in my opinion, a blow-hard, a media hound and a showboat…pretty much your basic U.S. Senator.

But he does mix it up pretty good whenever he finds a cause that gets him publicity—which is more or less every morning—and here in San Francisco, at the BankAmerica conference, I came across a cause that’s tailor-made for Chuck: it is timely, easy to grasp and begs for righteous indignation.

I call it “Why We Have an Oil Crisis.”

The British Petroleum investor relations person presented yesterday at the BankAmerica conference, and during the breakout session she defended the fact that BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.

When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.

Since it takes five to seven years to bring a big project on stream, “it is reckless to be investing (based) on (today’s) oil price.”

That is true enough, I suppose…but when asked if $20 a barrel was not a little on the low side of recklessness, she noted that at the $20 per barrel “test” price, BP has enough exploration and production projects “to grow production 5% per year.”

And since world oil production is growing “at half” that rate—i.e. around 2.5%—then “we are doing more than our fair share.”

Now, this is where the numbers get easy to follow, even for a U.S. Senator.

How much of its cash flow is BP actually spending to explore for and produce oil this year, you might wonder?

“$9.5 to $10 billion,” according to the investor relations person.

And how much of its cash flow is BP “returning to shareholders” in the form of dividends and share repurchase, you might wonder?

$17 billion.

Therefore, British So-Called Petroleum is giving back to its shareholders 70% more of the cash flow it makes thanks to $65 oil prices than it is spending to find new sources of oil supply.

Perhaps they should change the company’s name to “British Dividends & Share Repurchases.”

Of course, as this blog has noted previously, BP is not alone when it comes to capital allocation weighted to shareholders at the expense of a resource we are rapidly exhausting: ExxonMobil likewise spends more on dividends and share repurchases than on wildcatting, as they used to call it.

Which is why—along with a ridiculously low gasoline tax that Chuck and his colleagues don’t have the guts to increase—we have an oil crisis, Senator.

Go get ‘em.

Jeff Matthews I Am Not Making This Up The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.