Hate Big Oil's Profits? Hate Homebuilders' Too

Most homebuilders are taking their enormous profits of late and plowing them right back into their businesses by buying more land and bulldozers. They might buy smaller homebuilders that have rights to good land, or just buy more land themselves. By the same token, energy companies are taking their sizable profits and purchasing new oil and gas blocks from governments around the world, as well as new equipment to do the drilling.

The End of 'Easy Oil'

As petroleum becomes both harder to find and costlier to extract and transport, energy companies absolutely need the income that higher pump prices bring so that they have the incentive and the funds to explore.

There's a real scarcity of prime oil and gas properties left in the world as the best OPEC, North Sea and U.S. fields reach their capacity peaks -- and the most promising new places to drill are in remote undersea, jungle or desert locations, where discovery costs are high and shipping is problematic. A Royal Dutch Shell executive is credited with the observation that "oil is seldom found where it is most needed, and seldom most needed where it is found."

Jason Kenney, an energy analyst at the Dutch investment bank ING, said in a note to clients last week that the rewards in historically safe regions of the world are dissipating. "The era of easy oil is clearly over," he said, and the energy industry is now faced with growing its reserves from unconventional resources, such as Venezuelan and Canadian tar sands, and in places with less stable fiscal and political regimes, such as Angola, Nigeria and Libya.

All of this exploration is just the sort of investment that actually causes the boom-and-bust cycle. As prices rise, new players arrive, and current players are encouraged to expand. (Last week, the government of Kuwait and maverick British billionaire Richard Branson separately proposed to build new U.S. oil refineries.) Yet at some point, a process that economists call "demand destruction" occurs, as higher prices also cause consumers to pare back their purchases by driving less or buying more fuel-efficient vehicles.