‘Gold mines usually don’t run out of gold, and tin mines usually don’t run out of tin, but they are often shut down. They close their doors and go out of business. That is because the quality of the ore remaining fell too low for them to be worked economically.
The 2000 WEO (World Energy Outlook) placed liquid hydrocarbon resources at as much as 4,300 Gb (billion barrels). The world in the last 158 years has extracted less than 1,700 Gb. ‘Running ‘Out is an oxymoron. Going out of business isn’t!
Gold mines, tin mines and oil wells are operated to make a profit. Investor put up money, and expect a return on their investment. If they don’t get it the business is sold, or scrapped out. It is that return that determines if an operation is continued, or shut in. It has absolutely nothing to do with the quantity of resource that remains in the ground?
The Bell Weather of the petroleum industry, EXXON, has seen its ROA (return on assets) decline by 65% in the last four years. It has fallen from 13.45% to 4.8%. The decline for the return on its assets went down right along with the price of oil; which fell from $94.05 in 2012 to $48.67 in 2015. If it follows that trend its ROA will hit zero at about $30. During the first 10 months of 2016 the price of WTI (West Texas Crude oil) averaged $39.40. At an ROA of zero its investors will see no benefit from their investment; except perhaps for the company’s scrap value.
This post was published at SRSrocco Report on November 29, 2016.
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