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High prices for crude oil in 2004 and into 2005 have reduced
consumers' purchasing power and raised costs for businesses while
providing billions of dollars to the oil industry and oil exporting
countries. The industry's increased revenues have led to record
profit levels. As the 109th Congress engages in oversight of recent
broad energy legislation which aims to increase the domestic supply
of crude oil to mitigate oil price increases in the longer term,
another key factor in determining increased supply is how oil
companies decide to allocate their profits between shareholder
returns and investment in oil production. This report is written in
response to a number of requests from Congress concerning profits
in the oil industry. This report provides background information
concerning the level of oil industry profits, the sources of those
profits, and a discussion of the potential uses of profits.
Risk management is important in the energy industries because of
the volatility of oil and natural gas prices. Price volatility can
reduce the profit of business strategies and hurt consumers. The
use of financial derivatives, both traded and overthe-counter, has
developed as a low cost method of hedging price risk. However, the
use of derivatives has also been linked to major financial scandals
and bankruptcies. Risk management strategies can be undertaken
without the use of derivatives.
Due to the growth in natural gas production, primarily from shale
gas, the United States is benefitting from some of the lowest
prices for natural gas in the world and faces the question of how
to best use this resource. Different segments of the U.S. economy
have different perspectives on the role natural gas can play.
Suppliers, which have become the victims of their own production
success, are facing low prices that are forecast to remain low.
Some companies that have traditionally produced only natural gas
have even turned their attention to oil in order to improve their
financial situation. Smaller companies are having a difficult time
continuing operations and larger companies, including international
companies, have bought into many shale gas assets. Prices have
remained low even as consumption has increased, in part, because
producers have raised production to meet the demand and because
companies have improved efficiency and extraction techniques. Some
companies, many with large production operations, have applied for
permits to export natural gas. This has raised concerns from
consumers of natural gas that domestic prices will rise. The debate
regarding exports is ongoing. Industries that consume natural gas
have seen input costs drop, and some have heralded low natural gas
prices as the impetus for a manufacturing revolution in the United
States. Some companies have begun to make major investments to take
advantage of the low natural gas prices, particularly in
petrochemicals. Other companies are waiting to see if prices will
remain low long enough to warrant major investments in new
facilities. Meanwhile, the electric power sector has already seen a
transition from coal-fired generation to natural gas. Low natural
gas prices are also putting pressure on renewable sources of power
generation. However, increases in demand will put upward pressure
on natural gas prices. The transportation sector, the one part of
the economy vulnerable to foreign energy supplies, is beginning to
explore ways to use more natural gas. Transportation makes up less
than 1% of U.S. natural gas consumption and would require billions
of dollars in investment to increase that share significantly. All
of the change that has taken place so far has occurred despite
environmental concerns and regulatory developments at the state and
federal level that might curtail production. Natural gas is a
fossil fuel that produces various pollutants, some more than other
fossil fuels and some less. Methane, the major component of natural
gas, is also a potent greenhouse gas when released without burning.
Other environmental concerns focus on water use and disposal in
hydraulic fracturing to extract natural gas from shale formations.
Over the next five years, many of the issues being debated now may
be decided. The industry and market are adapting to the newly found
supplies and the concerns associated with them, as well as
integrating more natural gas into the economy. There are many
evolving issues some of which Congress can influence directly
because of statutes and some indirectly. On the demand side,
legislation has been introduced regarding exports of liquefied
natural gas and alternative fuels for vehicles. There has been
other legislation related to environmental regulations of natural
gas.
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