By my simple layman’s calculation, the price of a barrel of oil has gone up around 500% (or more) over the past 8 years. I do understand that this rise in cost is driven by an increased demand of a commodity trading with an artificially limited supply. Here is what I’m hoping someone can explain. You’ll hear very wealthy, self-interested, folks parrot each other about these small profit margins. What is causing their operating expense to go up SOOO much that their profit margin is shrinking? The only commodity that has gone up during this time is because of their own price gouging. Something is not adding up. If you sell something, and the demand causes that something’s price to skyrocket, your margin should increase. Unless, of course, you’re hiding your profits in bonus programs and gifts to board members and executives… (just my own theory – as an outsider looking in)
Gadfly, I won't address whether profit margins have grown or shrunk, because I don't know, but I will tell you that as the price of oil has increase, so has the oil companies demand for services and supplies. For example we hired a drillig rig that cost $90,000 per day 2-3 years ago. when it came time to renew, the rate jumped to almost $400,000/day . Why, because the demand for rigs skyrocketed. Today there is at least one rig that is being leased for almost $650,000/day. Although this is a dramatic example, other costs have risen as well. Obviously the above example relates to crude production, but if you are an oil company that predominately refines (say Valero), obviously the cost of your feedstock has risen, and squeezed you margin to almost nothing.
Fair enough. So the rig owners are the ones cashing in? I’m sure there are others. I honestly thought the oil companies built the rigs. Somebody is cashing in somewhere in a big way. Maybe it’s the kings in the Mid-East. EDIT ---- 77 - I’m referencing the explanations from the oil company executives that were interviewed in congress. They claim their profit margin has shrunk - which I can't understand why..
I sell nuts and bolts. Mainly to the oil & gas industry. Everything has risen. Price of steel has gone up exponentially thanks to China. Price of Nickel and Molybdenum and other alloys that create fasteners are all skyrocketing. All of this makes the drilling for oil more expensive. Don't forget, most drillers need stainless steel or its derivatives especially if they are offshore. Every aspect of stainless steel is going up. Can you imagine the cost of something as big as a stainless steel drill when the little 1/4" bolts have increased 50-100% over a year??
Seems to me the oil price increase preceded (thus caused) these other increases. Correct me if I’m wrong. Our main problem is that China is sucking the world’s resources dry? As a resource rich country, shouldn’t this be good for us?
To add - the industrialization of China started long before this jump in oil prices. Shanghai has been a major trade center and HUGE city for a long time. I know I understand little about world economy, but I’m trying.
As 77 said, I'm raping everyone on service rates. You screen out your million dollar honey hole? That's great. Call me, I'll send out a service supervisor to sniff around your wellhead and tell the treater to move his raggedy ****. That's 25k right there. You want a rig? You can't afford one. Deeper but not necessarily for cheaper. Thru tubing = arm, casing exists = leg, fishing tools or pressure control equipment = your first born. Downhole motors, shock subs, or a dude called T-rex to turn and push the bit = your soul. A pump truck runs 11k per day and provided it doesn't cut a seat, blow some packing, or get grumpy with the iron, that's 11k pure profit. If your north of 20 you're going to need about 10 of them. All the fishhead Dallas bankers and rich California widows paying 40k to find top leases never see me coming. These are great days for us fun hogs.
There is another significant factor into the rising costs that oil & gas companies pay as well....people. Not just the higher ups either. Because of the slump of the industry in the 80s, very few people went to school to study petroleum engineering and very few people began working for oil & gas companies. A a result the average employee age in most oil & gas companies is greater than 45 and in most cases approching 50. Companies realize that they need to hire massive numbers of new employees right now so, when most of their current employees retire within 10 years they will not be SOL. The problem is that supply of new petroleum engineers right now is no where near meeting demand and the cost to hire these engineers is astronomical compared to 5 to 10 years ago. I graduated with a petroleum engineering degree in Dec 2004 and started working immediately. In the 3.5 years since, my compensation has doubled. That comes out to about a 30% increase in compensation per year. I am constantly being solicited for employment by other oil & gas companies and the price they are willing to pay me just keeps going up. The massive loss of people (because of retirement), that oil & gas companies are facing in the near future, is forcing massive expensive hirings now so that new hires can gain experience and be trained so these companies can continue operating at the same or greater levels in years to come.
77 hit a really good point that I almost missed. As a percent, the oil companies appear to have lower or stagnate profit margins. The actual profit $ per barrel of oil has increased significantly (scaled with the price of oil).
Gadfly What a great topic you introduced! Thank you to all who responded with good understandable information we average people would have no way of knowing otherwise. How nice is it to have good threads without insults and snide remarks. I am thinking we should send this thread to all the Politicians and Candidates blaming oil companies for the high prices and threatening to socialize oil companies or impose windfall profits.
