212 PETROLEUM TECHNOLOGY, ECONOMICS, AND POLITICS
Regardless of the relative magnitude of oil company profits, many believe that a large percentage of oil company profits
today are unearned in the sense that little or no additional cost
or effort was incurred to generate them. Profits from the current
price increase are a windfall that does may not rightly belong to
producers, if they come at the expense of consumer welfare — or so
the argument goes.
Moreover, if excess profits are defined as returns above the normal profits that could be earned through investments in other
markets, then the extraction of those profits by governments is possible only through auctions in which participants bid for the right
to extract natural resources. Such bids take into account risk and
uncertainty about likely outcomes ranging from no discovery to
discovery plus low prices to discovery plus high prices.
Proposals to extract profits after the fact are not efficient because
they violate investor expectations and change the rules of the game
after investments have been made. If investors think that they
can keep natural resource profits, they will accept risk because
the rewards are potentially quite high. The government reneges
when investments are successful, but does not correspondingly
help investors when returns are below expectations; investors will
reduce their participation in energy markets because profits in
energy attract too much political attention relative to investments
in other areas of the economy.
Denying investors profits, but allowing them to book losses,
amounts to one-way capitalism. Denying the industry the opportunity to make substantial profits when supplies are tight is both
unfair and counterproductive, in that it will discourage investment
in the oil business, unless their losses are likewise alleviated during
low price periods.
The only question that remains is "how much is enough?" in
terms of profits realized by oil companies at the expense of the
consumer.
7.5 References
Ancheyta, ]., and Speight. J.G. 2007. Hydroprocessing of Heavy Oils and
Residua. CRC Press, Taylor & Francis Group, Boca Raton, Florida.
Baillie, R., Booth, G., Tse, Y, and Zabotina, T. 2002. Price Discovery and
Common Factors Models. Journal of Financial Markets, 5,305-321.
Regardless of the relative magnitude of oil company profits, many believe that a large percentage of oil company profits
today are unearned in the sense that little or no additional cost
or effort was incurred to generate them. Profits from the current
price increase are a windfall that does may not rightly belong to
producers, if they come at the expense of consumer welfare — or so
the argument goes.
Moreover, if excess profits are defined as returns above the normal profits that could be earned through investments in other
markets, then the extraction of those profits by governments is possible only through auctions in which participants bid for the right
to extract natural resources. Such bids take into account risk and
uncertainty about likely outcomes ranging from no discovery to
discovery plus low prices to discovery plus high prices.
Proposals to extract profits after the fact are not efficient because
they violate investor expectations and change the rules of the game
after investments have been made. If investors think that they
can keep natural resource profits, they will accept risk because
the rewards are potentially quite high. The government reneges
when investments are successful, but does not correspondingly
help investors when returns are below expectations; investors will
reduce their participation in energy markets because profits in
energy attract too much political attention relative to investments
in other areas of the economy.
Denying investors profits, but allowing them to book losses,
amounts to one-way capitalism. Denying the industry the opportunity to make substantial profits when supplies are tight is both
unfair and counterproductive, in that it will discourage investment
in the oil business, unless their losses are likewise alleviated during
low price periods.
The only question that remains is "how much is enough?" in
terms of profits realized by oil companies at the expense of the
consumer.
7.5 References
Ancheyta, ]., and Speight. J.G. 2007. Hydroprocessing of Heavy Oils and
Residua. CRC Press, Taylor & Francis Group, Boca Raton, Florida.
Baillie, R., Booth, G., Tse, Y, and Zabotina, T. 2002. Price Discovery and
Common Factors Models. Journal of Financial Markets, 5,305-321.