It was tempting this morning to write a highly sarcastic post about Exxon reporting $10.5 billion in profits for the 3rd quarter of 2006. You know, greedy sumsabeaches, and all that. But since I'm trying to be a little less cynical these days, instead I want to talk about this:
Although oil prices were higher in the third quarter of 2006 versus the fourth quarter of 2005 and Exxon produced more crude, the costs of getting that oil out of the ground skyrocketed as oil firms raced to ramp up output, causing a huge demand for workers and equipment.
This is exactly what economic models of depletable resource extraction predict.
While temporary supply shocks--Katrina, the BP pipeline, Middle East instability--can be blamed for temporary price increases, long-run price increases in the oil industry may be more due to the increased demand coupled with increased costs of getting oil out of the ground. One of these two is out of consumers' control.
As prices increase, oil companies search for more oil. Since the easy oil has already been drawn out of the ground, the tough oil requires more labor and more equipment--higher costs. We see these higher costs passed to the consumer in the form of higher prices. That's not a bad thing, just the natural workings of scarcity combined with inflexible consumers. But naturally, oil companies are going to profit from these higher prices--otherwise, why would they bother looking for more oil?
