Chevron Profit Rises as Unrest Lifts Oil Prices

 

The Chevron Corporation said Friday that its first-quarter profit rose 36 percent as economic growth and supply disruptions drove crude prices above $100 a barrel.

Net income rose to $6.21 billion, or $3.09 a share, from $4.55 billion, or $2.27, a year earlier, Chevron said. Sales rose 25 percent, to $60.3 billion.

Global demand for petroleum-derived fuels rose 2.9 percent during the first quarter, led by growth in China, Brazil and India, according to the International Energy Agency. Oil futures traded in New York climbed 20 percent to average $94.60 a barrel, driven in part by the civil unrest in North Africa and the Middle East that has imperiled crude supplies.

Stock in Chevron, which is based in San Ramon, Calif., rose 63 cents, to $109.44 a share.

Profit from the company’s oil and natural gas business increased 27 percent to $5.98 billion as higher commodity prices offset an output decline of less than 1 percent. Chevron said it pumped the equivalent of 2.76 million barrels of crude during the period, down from 2.78 million a year earlier.

Chevron’s refineries earned $622 million, more than three times the profit of the first quarter of 2010.

 

Parties Seeking to Blame Each Other’s Policies for Gas Prices

President Obama touched off the latest flurry with a letter to Congressional leaders last week calling for the repeal of $4 billion a year in tax incentives for domestic oil and gas production, saying the industry was doing very well, thank you, and needed no help from the government. Republicans responded that the president’s proposal would only raise the cost of production and the price of gasoline, which now tops $4 a gallon in many parts of the country.

Both parties are planning legislative maneuvers this week to try to caricature their opponents as either in the pockets of the oil companies or hostile to domestic energy production.

The debate may generate a fair amount of noise that provides one side or the other with a temporary political advantage but is unlikely in the end to have an appreciable impact on gasoline prices.

“Every time Americans have to shell out $60 or $80 to fill their tanks, they mutter under their breaths about government and it puts pressure on Congress and the White House to do something,” said Byron L. Dorgan, the former Democratic senator from North Dakota who is now co-chairman of an energy project at the Bipartisan Policy Center in Washington. “But it’s just howling at the moon. The basic laws of supply and demand haven’t changed.”

House Speaker John Boehner unwittingly gave the Democrats a political opening to pile on the oil companies by saying in an interview with ABC News last week that oil companies should “pay their fair share in taxes” and that Congress ought to reconsider some of the tax incentives they enjoy. He has since walked away from those remarks and said that raising any taxes would choke off the economic recovery and lead to higher prices of gasoline and other goods.

His comments came as lawmakers from both parties were home on recess, hearing a torrent of constituent complaints about the high cost of gasoline at the same time major oil companies were reporting near-record quarterly profits. Exxon Mobil, the world’s largest oil company, said it earned $10.7 billion in the first three months of the year, and other companies reported similarly robust earnings.

Mr. Obama seized on the opportunity to try to deflect some of the heat he has been feeling as gas prices have steadily climbed. He noted wryly at a political fund-raiser last weekend that his poll numbers tend to go up and down with pump prices, even as he admitted he had no “silver bullet” to bring those prices down in the short term. But he found ammunition in the tax breaks the oil industry has enjoyed for decades, portraying the industry as undeserving of them at a time when government needs all the revenue it can get.

“As we work together to reduce our deficits,” Mr. Obama said in a letter to Congressional leaders last week, “we simply can’t afford these wasteful subsidies.” Mr. Obama says the money saved should be used to finance more research into clean energy alternatives — a proposal he has made in his last two budget requests that has largely been ignored.

“The odds are low that the tax repeal goes through as a stand-alone measure, but you might see it as part of a broader deal,” said Michael A. Levi, an energy and environment specialist at the Council on Foreign Relations. He said it was in Mr. Obama’s interest to keep the issue alive both to align Republicans with the unpopular oil companies and to use as leverage as new budget negotiations begin.

Harry Reid, the Senate Democratic leader, said he would press for a vote as early as next week on repealing the tax subsidies. Democrats hope to paint Republicans who vote against the plan as tools of the industry.

“Now is not the time to stand idly by while large oil and gas companies get billions of dollars in tax breaks,” said Senator Max Baucus, Democrat of Montana and chairman of the finance committee. “Now is the time to take concrete steps toward cleaner, more affordable, domestically produced energy.”

The measure could well pass in the Democratic Senate, although some Democrats from oil-producing states, like Mary Landrieu of Louisiana and Mark Begich of Alaska, are likely to oppose it.

But it has little chance of even coming to a vote in the Republican-run House, where Speaker Boehner is orchestrating a fresh chorus of “drill, baby, drill” with a series of votes on bills to allow new oil and gas exploration in the Gulf of Mexico and off the coast of Virginia.

“Our goal is to expand the supply of American energy to lower gas prices and create jobs,” said Michael Steel, spokesman for Mr. Boehner. “Raising taxes would have the opposite effect.”

Neither the Senate tax measure nor the House drilling bills is likely to become law because of the fierce partisan calculus of the current Congress. But some Republicans, including Representative Paul Ryan of Wisconsin, the party’s leader on budget matters, have left open the door for rethinking a range of government tax breaks as part of an agreement on the federal budget and deficit ceiling.

Some conservatives oppose energy subsidies of all sorts — including those for ethanol, wind, nuclear and solar power — and would be willing to see them all repealed as part of a reform of the business tax code.

Oil industry tax breaks — some of them dating back a century — have been debated for years but have survived every elimination attempt. According to a breakdown by the nonpartisan Joint Committee on Taxation, oil companies receive about $4 billion a year in federal subsidies and can avail themselves of tax breaks at virtually every stage of the prospecting and drilling process.

One lingering provision from the Tariff Act of 1913 — enacted to encourage exploration at a time when drilling often led to dry holes — allows many small and midsize oil companies to claim deductions for tapped oil fields far beyond the amount the companies actually paid for them.

Another subsidy, devised by the State Department in the 1950s, allows U.S.-based oil companies to reclassify the royalties they are charged by foreign governments as taxes — which can be deducted dollar-for-dollar from their domestic tax bill. That provision alone will cost the federal government $8.2 billion over the next decade, according to the Treasury department.

David Kocieniewski contributed reporting from New York.

 

Bank Warns of Effects of Rising Food Prices on Asia

BANGKOK — Sharp rises in food prices are a threat to economic growth in Asia and could push millions of people into extreme poverty, the Asian Development Bank said in a report to be released on Tuesday.

Food prices in Asia have increased an average of about 10 percent so far this year, which the bank calculates could force 64 million people below the poverty income threshold of $1.25 per person a day if prices remain at current levels.

“Whenever we say that Asia’s growth rate is booming and Asia is a new global growth center, people misunderstand the point,” said Changyong Rhee, the chief economist of the bank, which is supported by governments and helps finance infrastructure projects around the region, among other activities. “Asia is home to two-thirds of the world’s poor. There is still a long way to go.”

Asia is a major contributor to global inflation and is vulnerable to its effects. Growth in China and India is blamed for pushing up prices of many commodities. The region’s population density and uneven income distribution make people there especially susceptible to spikes in food prices, Mr. Rhee said. The poor in Asia typically spend about two-thirds of their income on food.

A continued rise in prices for food and fuel could leave Asia’s consumers with less disposable income to spend on electronics, clothing and other products. Inflation could also spur central banks to further raise interest rates. Taken together, this could slow down economic growth by as much as 1.5 percentage points this year, the development bank has calculated.

Much depends on whether prices continue to climb. On Monday, Barclays Capital, a securities firm, reported that food prices in Vietnam, one of the countries worst hit by inflation, rose 24 percent over the last 12 months, the fastest pace in more than two years.

But Prakriti Sofat, the analyst at Barclays who wrote the firm’s report, predicted that prices in Vietnam, especially for rice, would fall in the coming months as farmers who were hoping for even higher prices sold off their stocks with the arrival of a new harvest.

“We believe rice prices should taper off as the spring harvest begins in May,” Ms. Sofat said.

Mr. Rhee of the Asian Development Bank also expects a moderation in food prices later this year, but he fears it could lull governments into inaction.

“It’s time for us to talk about long-term investments in food to make sure this problem is not recurring,” he said.

Poor countries that are net food importers are the most vulnerable to the increases, Mr. Rhee said, citing Bangladesh, the Philippines, India and Sri Lanka.

In theory, the winners from higher food prices in Asia are countries like Thailand, a major food exporter. Indeed, the countryside in Thailand has shown some signs of vitality.

Car dealerships in regions heavy with plantations have reported sharp increases in sales as a result of rising prices of palm oil and rubber. Sales of pickup trucks nationwide were up 25 percent in March from a year earlier.

But farmers were also being hit by the rising price of oil, both for fertilizers made from petroleum products and fuel for their machinery.

 

Small-Business Guide: Real-Life Lessons in the Delicate Art of Setting Prices

The fear, of course, is that raising prices will send customers fleeing. While that can happen, many small businesses have raised prices and lived to tell about it.

They echo a common sentiment: setting prices strategically is not just about the numbers. Buyers are not necessarily looking for the best price, said Mark Kronenberg, founder of Math 1-2-3, a New York-based tutoring and test preparation company.

“I learned it’s a misconception that if you raise prices too much, you’ll have no business,” Mr. Kronenberg said. “There are many customers who shop based on quality, not lowest price.”

Over the years, some prospective clients have balked at Mr. Kronenberg’s rates — his highest hourly rate is now $200 — but he said the company has more than made up for the losses by attracting and retaining higher-end clients who are more inclined to keep a tutor for a long time.

“I think it’s best to avoid a race to the bottom,” he said. “It’s an easy race to win, but you won’t have a lot of profit to show for it.”

This guide offers examples of small-business owners who decided to raise prices and the lessons they learned.

DON’T ASSUME PRICE IS ALL About three years ago a computer error caused all of the prices on Headsets.com to be displayed at cost rather than retail. With the lower prices on display for a weekend, Mike Faith, the chief executive, expected sales to soar. Instead, the increase was marginal. “It was a big lesson for us,” Mr. Faith said.

He realized that sales for his company, which is based in San Francisco, were far less dependent on price than on what he now says differentiates his business: customer service. “Every call we get is answered by a human being within four rings,” he said, “and our reps are well trained and know a lot about the headsets.”

Since the incident, Mr. Faith has raised prices once, by 8 percent and without much fanfare, although regular customers were told in advance. The result? Revenue rose about 8 percent as well.

“Over all, we didn’t notice any change in sales revenues, but all our sales were of the higher margin,” he said. “Did some customers not like the price? Yes, I’m sure. But that’s the case with any price you charge — there’s always somebody cheaper. The truth about pricing is it’s an art with a little bit of science, rather than a science with a little bit of art.”

Melanie Downey, the owner of Wilava, which manufactures and sells natural skin care products, also assumed that her customers were motivated primarily by price. Over time, she realized she had set prices too low to sustain the business. Yet she hesitated to raise them because she wanted her products to be affordable for those who needed them, and many of her customers have cancer or severe skin problems, including children with eczema. Concerned about maintaining trust, she decided not to act until after the company’s spring busy season.

The increase will range from 4 percent to 20 percent across Wilava’s line. Ms. Downey has been alerting customers in person and has gotten positive, even encouraging, feedback. In the next few weeks she will begin telling online customers. “I’m nervous about that,” she said, “since I won’t get immediate feedback.”

Still, looking back at the last year, she said, “I wish I had done this months ago.”

RIVALS’ PRICES MAY NOT MATTER A lot of small-business owners set prices just by looking at what their competitors charge. Naomi Poe, founder of Better Batter Gluten Free Flour near Altoona, Pa., learned that it is important to try to understand how your customers value your product.

In the food industry, Ms. Poe said, customers generally look for the cheapest price, but because her flour and baking mixes contain no gluten, they cost more to manufacture. She initially tried to compete with products that contain gluten on price but lost money on every sale.

 

Prices Surge as Investors Rush to Safety of Gold

The prices of other precious metals, like silver and platinum, have also surged recently on what analysts call a flight to quality, when uncertainty about the economic and political outlook sends investors into assets that are perceived to be safest.

“We’re seeing a perfect storm for gold and silver prices,” said Robin Bhar, a senior metals analyst in London for the French bank Crédit Agricole.

The list of factors that have supported the price of precious metals in recent weeks is long. It includes worries about the sustainability of European debt levels and whether countries like Greece will soon default; the weaker dollar; rising inflation in many parts of the world; continued unrest in North Africa and the Middle East, which has also pushed up oil prices; and concern over the United States budget, which also stirred fear in world stock markets earlier in the week.

Stocks recovered somewhat Wednesday after strong earnings reports restored investor confidence, analysts said.

Other factors that are helping precious metals include the buildup to the early autumn wedding season in India, during which families lavish gifts of gold on brides; the longstanding shortage of skilled labor and equipment at certain mines; and the increase in the number of mutual funds investing in gold.

The recent popularity of gold-based exchange-traded funds has also propelled prices of the underlying metal by making it easier for more investors to trade in gold.

Each share in a gold exchange-traded fund represents part of an ounce of bullion, but it comes without the inconvenience of holding the metal or the risk of buying futures and options. Before such funds became popular in the middle of the last decade, individuals who wanted to invest in gold had to buy gold jewelry, coins or bullion — and pay the high security and transaction costs. They could also invest in the shares of gold mining companies — more of an arm’s-length exercise — although the cost of investing in those companies has also risen recently.

In addition to benefiting from increased demand for the underlying metal, gold and silver futures contracts are seen as attractive substitutes for paper investments, given that they can be redeemed for a physical commodity.

“Gold is sometimes a currency, sometimes a commodity and sometimes a store of value,” analysts at Merrill Lynch wrote recently.

Gold for June delivery rose as high as $1,506.50 a troy ounce during trading in New York on Wednesday before settling at $1,498.90, a gain of $3.80 on the day. It was the first time that gold had breached the $1,500 level.

While that represented the highest level in nominal terms, the inflation-adjusted price was higher during the early 1980s, when it was well above $2,000 in current dollars.

Silver prices also climbed on Wednesday. Silver for May delivery climbed 1.2 percent, to $44.46 a troy ounce in New York, after rising as high as $45.40, the highest price since 1980. A troy ounce is 31.1 grams, or 1.1 ounces.

Although gold prices are likely to remain volatile and are vulnerable to retreat as investors take profits on their gains, few analysts are willing to bet on a sharp reversal in the near term. “As the purchasing power of workers in emerging markets increases, we see demand for gold as a commodity increasing over the next few years,” the Merrill Lynch report said.

In a research note published Friday, Goldman Sachs forecast a gold futures price of $1,690 an ounce in 12 months’ time, driven primarily by the assumption that the Federal Reserve’s continued stimulus policy, known as quantitative easing, would keep interest rates low in the United States, bolstering demand for the metal as an investment.

The market for silver, which Mr. Bhar of Crédit Agricole described as a “poor man’s gold,” is far more illiquid than gold. Mr. Bhar said several hedge funds appeared to have been “bullying” the price higher in recent sessions. Prices of palladium and platinum have also climbed.

Less valuable base metals like copper, tin, aluminum and zinc, which are used in large quantities in construction and heavy industries, have also climbed since last year, after plummeting during the financial crisis.

But among these commodities, there have been more divergences, according to Jim Lennon, head of commodity research in London for Macquarie Securities.

Markets for commodities like coking coal, used to make steel, iron ore and copper have been tight, he said, driven by inventory accumulation from producers and concerns about output bottlenecks at mines in Africa, Australia, Brazil, Chile and China.

For other base metals like aluminum, zinc and nickel, supply and demand appear better matched, he added.

Overhanging many of these markets remained the question of China, and whether its roaring economy might soon cool down. Many metals’ traders and analysts have had to become China watchers, poring over the economic data issued by that country and studying accumulations of stocks in Chinese warehouses. During the first quarter, China’s economy expanded 9.7 percent from a year earlier.

Investment and consumer spending in China have remained robust despite the government’s effort to temper growth through interest rate increases and curbs on bank lending.

 

World Bank Discusses High Food Prices

Steve Baragona | Washington, D.C. ?April 16, 2011

A giant electronic display outside the World Bank's headquarters in Washington, D.C., is tallying the number of chronically hungry people in the world today, April 2011

Global food prices have risen by 36 percent in the past year, according to figures released this week by the World Bank. The Bank hosted its spring meetings in Washington this week, where it called on policymakers to focus on food security. Experts say that for many developing countries, that means supporting the interests of small farmers.

Outside the World Bank's headquarters in Washington, D.C., a giant electronic display is tallying the number of chronically hungry people in the world today. As the digits tick up toward one billion, the World Bank is calling on policymakers to put food first.

A panel of experts discussed today's high food prices. World Bank sustainable development expert Inger Anderson said small farmers are at the center of the hunger problem.

"The majority of the poor farmers are small farmers. And the voice of the small farmers is not heard sufficiently. And they are actually the ones that are feeding by far the largest proportion of the world's poor."

Lindiwe Majele Sibanda with the African policy analysis group FANRPAN says small farmers face a range of challenges, especially in Africa.

"We are using seeds that are not best-placed to produce the best. The soil management practices are not applied. The water - 95 percent of our agriculture is rain-fed - which means in bad years you can harvest nothing."

Rwanda's minister of agriculture, Agnes Kalibata, was on the panel representing a country that experts praise for its commitment to agriculture. She said Rwanda has benefited from organizing small farmers into cooperatives.

"They access inputs - that's seeds, improved seeds, fertilizers. Extension, which would be extremely difficult to deliver without this consolidation. And then, technologies on planting and production. In that forum, also, farmers are able to look at opportunities of markets. To open up their minds to think about markets, which they would never have done as individual farmers," said Kalibata.

Rwanda was the first country to agree to an African Union program to commit 10 percent of its national budget to agriculture. Kalibata said that kind of political leadership is essential if governments are to succeed in reducing hunger.

"The worst form of abuse to mankind is hunger. Once we agree on that, we do the right thing by the farmer," she said.

Beyond exercising leadership, says the World Bank's Anderson, there are other things governments can do.

"Ensuring that there are the kinds of roads that can move the produce from point A to point B to market. And ensuring that there are no policies that obstruct farmers from selling their goods at the appropriate price," said Anderson.

Many factors are involved in improving small farmers' productivity, from seeds and water to transportation and access to markets. FANRPAN's Sibanda said policymakers must tackle them all.

"We cannot prioritize one over the other. There's got to be a holistic approach with the ultimate aim that food is more available," said Sibanda.

With food prices high and demand increasing, experts say the way to avert worsening hunger in the world is to put food first.

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