Last Week

Roll Out the Oil Barrel

Sunday, May 1, 2005

Oil prices and energy policy were front-burner issues last week.

President Bush started the week with a walk around the Crawford ranch with Crown Prince Abdullah of Saudi Arabia. Mindful of the damage $2.50-per-gallon gasoline has had on his host's poll numbers, the prince announced that the Saudis would spend $50 billion to expand production capacity 50 percent in the next decade. Acknowledging the Saudi expansion would have little short-term impact on prices, Bush weighed in with some fresh ideas of his own: have the government provide risk insurance for nuclear power plants, expedite federal approvals for new liquefied natural gas terminals and allow oil refineries to be built on mothballed military bases.

Back in Washington, the House had previously approved a massive energy bill providing $8 billion in tax breaks to encourage oil and gas drilling, conservation and use of alternative fuels. The White House applauded the progress but reiterated its position that there is no need for some of the tax breaks for oil and gas drilling now that oil prices are at record levels. Congress passed a separate budget bill authorizing oil exploration in Alaska's Arctic National Wildlife Refuge, ending a decade of controversy.

Several of the major oil companies announced another record quarter for sales and earnings, led by a 44 percent jump in profit at Exxon Mobil Corp. With $30 billion of cash in the bank, the company announced that it would boost dividends and buy back stock. But like other oil companies that are drawing down more oil each year than they are adding to their reserves, Exxon Mobil has been reluctant to step up its investments in exploring for new oil -- in part out of concern that current high prices will not be sustained over the long run, and in part out of recognition that any new oil will be more expensive to bring out of the ground than in the past. Industry critics suggest another reason: Big Oil earns its biggest profits when supplies are tight.

Meanwhile, the two largest independent refiners -- Valero Energy and Premcor -- announced a merger that would create a company with more refining capacity than any of the majors. Both companies have recently enjoyed the benefits of increased profit margins that result from a shortage of domestic refining capacity. But with existing refineries selling at 70 percent of the cost of replacement, Valero concluded it was better to invest $6.9 billion in stock and cash to buy rival Premcor than to try to build the first new refinery in the United States in more than 25 years.

As the week ended, oil prices fell below $50 a barrel on news that U.S. crude inventories were at their highest level in three years. But the recent run-up of energy prices has already prompted most analysts to lower their economic growth forecasts for the balance of the year.

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