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The top companies justify their approach by blaming Wall Street's obsession with maximizing returns on investment, which are better achieved through buybacks than by exploration (since buybacks increase earnings per share). The much-touted ExxonMobil especially likes to emphasize its "capital discipline"—that is, its unwillingness to invest without the likelihood of giant returns. But this justification is patently shortsighted. Since the 1990s, publicly traded shares of the U.S. independents and of the NOCs have risen in value at a much faster rate than those of the Big Five. Long-term investors are starting to recognize what the rest of us intuitively understand: that oil companies should be looking much harder for more oil.

What should Washington do to make sure this happens? The United States has until now avoided taxing windfall profits out of the belief that U.S. companies should be allowed to retain their capital so that they can respond to higher oil prices by investing more. The problem is that the top companies are now clearly not responding as they're meant to. Government should therefore step in and impose a "use it or lose it" tax on oil profits, spurring companies to spend more on exploration or alternatives or face a punitive tax. Washington should also embark on a serious national effort to lower oil demand and increase federal spending on alternative energy sources.

But if we do nothing, the United States will continue to transfer more and more of its wealth to OPEC countries. That might not seem problematic yet. But with a mounting U.S. deficit and plummeting dollar, it soon will be.

JAFFE is Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy and associate director of the Rice University Energy Program.

© 2007

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  • Posted By: misterharban @ 11/27/2007 10:19:45 PM

    It really doesn't matter what Big Oil does because Big Oil is a two bit piker in the game anymore -- and will their role will only continue to diminish. The numbers we trot out concerning their profits and expenditures surely blow our hair back, but they are chump change to the real players in today's energy industry -- the national oil companies. We should focus more on who among these entities gets our money and what they plan to do with it.

  • Posted By: mandinga @ 11/21/2007 5:37:20 PM

    There IS a "dirty little secret" about petroleum reserves, and it has a lot to do with the pricing of this dirty stuff. The fact is that there is rising evidence about the "abiotic" source of petroleum (what you gringos call "oil") which in turn would mean that there ARE limitless, or almost limitless, supplies worldwide. It's only becoming more and more expensive to find and drill for. But the smelly stuff IS there.

  • Posted By: fjb11 @ 11/19/2007 6:45:13 PM

    wonder when it will be that the big five oil companys all move to dubia with their newly liquid cash and are in a position to be putting economic santions on the u.s. in order to have continuing growth.

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