The Looking Glass World of Big Oil

`Well, in our country,’ said Alice, still panting a little, `you’d generally get to somewhere else — if you ran very fast for a long time, as we’ve been doing.’

`A slow sort of country!’ said the Queen. `Now, here, you see, it takes all the running you can do, to keep in the same place.

If you want to get somewhere else, you must run at least twice as fast as that!’

Charles Dodgson (Lewis Carroll), Through the Looking Glass 

James Hamilton of Econbrowser has a completely fascinating post on peak oil and the World According to ExxonMobil. Check out his graph of ExxonMobil’s remarkably consistent oil production over the last decade and take note of his analysis:

…comparing gross investment with net income is in some ways comparing apples and oranges. The reason is that oil companies must invest huge sums just to replace depleted oil fields and obsolete and worn-out equipment. These imputed depletion and depreciation costs are already subtracted from revenues before one arrives at profits. The question is not how big is gross investment relative to net income but rather how big is net investment– investment over and above what is required for depletion and depreciation– relative to net income.

In my view such consistency, like luck, is the residue of design and implies a corporate strategy of maintaining production rather than increasing production.

I also note that James needles me right back for needling him and his fellow-economists.

Here’s another morsel I found intriguing:

I would expect the long-run ratio of net investment to net income for a healthy industry with solid investment opportunities to be somewhere around 50%.

I wonder if that’s his expectation for the oil industry or something more general?  In particular, is it applicable to the pharmaceutical industry?  As I’ve mentioned before R&D budgets in Big Pharma seem to vary with inflation not with profits.