Has the US gone communist yet? It's hard to tell.

[adios]

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HARDER WORK. Profits are booming, but energy outfits have to work harder—and spend lots more—to keep pulling ever-pricier oil out of the ground. That has fueled a spending competition for services such as drilling equipment, driving up companies' business costs for the past couple years.

I know that this is actually the case but not sure how this has affected margins but apparently not much:



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Theres not enough information here to come to that conclusion. The costs of expanding search and drilling capacity arent reflected as they are spent, they are capitalized over varying periods of time. They could (Im not saying they are, just could be under accounting principles) be as high as the entire profit for the quarter, but will only show up on a spread basis.

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Yeah good point and as a result it may inhibit the expansion of exploration and production activities which if expanded would probably lead to lower prices at least in the short run. I think it would be interesting to analyze how the price of oil would be affected if the oil companies got more incentives to expand their activities by accelerating the depreciation of the costs or better yet let them charge it in full when the investment is made. Maybe this kind of analysis has been done already, don't know. What it amounts to is providing tax incentives to oil companies which I suppose is politically unpalatable at this point.

Edit: In fact when I think about it, the riskiness of maintaining the current price of oil combined with the U.S. tax code almost certainly leads to higher prices for oil. Changing the tax code to eliminate depreciation schedules for investment in exploration and production of oil would basically lessen the riskiness of maintaining the price a great deal. It should also lead to investment in alternative forms. My sense is that this would get politicised as some sort of evil tax break for oil companies. What a friggen shame.

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It isnt just a tax problem its an accounting principles problem. The costs are capitalized because it is inappropriate to understate the profits from current activity with costs that are incurred for future activity (ie accrual vs cash accounting).

"Two sets of books" (or some would cyncically say a third set of books?) would at least lend some clarity to the current level of profits.

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Yep when looking at XOM cash flow statements capital expdentures have indeed consitently outpaced deprecition by a wide margin.