Cash is gushing into international oil companies after the recent jump in the price of oil and gas. According to our estimates, the five largest corporations generated more than $120 billion in cash flow before capital expenditure in 2005—equivalent to about twice their capital expenditure over each of the past few years and more than one and a half times the annual cash flow recorded during the industry's last boom, from 1979 to 1981.¹ Suppliers are also benefiting: oil field service companies are expected to report increases of more than 50 percent in full-year 2005 profits over the figures for 2004.

What should companies do with the extra cash? Although executives might be expected to relish such a problem, the decisions they make will have ramifications far beyond the oil industry. On the one hand, companies face pressure to invest more in exploration, production, and refining (where margins have also risen): consumers and governments are angry about high prices, the industry's large profits, and the channeling of those profits into share buybacks and dividends rather than into investments that might bring down prices. On the other hand, with the industry outperforming the S&P 500 by almost 30 percent since...