Tuesday, April 29, 2008

Ten Simple Truths About Oil

By Alan Caruba

Having written about the energy industry and issues now for a long time, I hope I can be forgiven for being enraged by the comments by Sen. Charles Schumer (D-NY) in response to President Bush’s press conference Tuesday morning. There is simply no way to describe them other than false.

The Democrat Party has long made “Big Oil” their favorite punching bag, confident that the public has no idea what influences the price and supply of oil. Saying anything favorable to Big Oil is immediately deemed evidence that one is in their pay and whatever facts are offered are therefore invalid.

There are, however, some simple truths about Big Oil that cannot and should not be ignored. To do so leaves everyone at the mercy of energy policies that have created the situation in which the United States finds itself today.

Fact #1. The combined ownership of oil reserves by the independent, investor-owned oil companies such as ExxonMobil, Conoco-Phillips, BP, Chevron and others is barely 4% of the total known oil reserves in the world. By itself, ExxonMobil’s share is 1.08%.

Fact #2. Oil is a global commodity sold on mercantile exchanges for whatever price it can command. Speculation in oil prices is the primary reason they have been driven to utterly insane costs per barrel. It has nothing to do with actually supply and demand.

Fact #3. No nation on Earth is or can be “energy independent.” The geopolitics of oil is complex, but as nations such as China and India have seen their economies grow, their need for oil grows with it and thus they compete with long established industrialized nations for existing oil supplies. This competition has an impact on prices.

Fact #4. The OPEC nations, those in the Middle East and including Venezuela, control 77% of the world’s known oil reserves. Like Russia and Mexico, where the oil industry is controlled by the state, it is generally poorly managed. Several Big Oil companies that were induced to undertake exploration and development in Russia and Venezuela actually had their assets nationalized or stolen at prices well below their investment and value.

Fact #5. Energy is the master resource. All nations with any hope of growing their economies require it, mostly in the form of electricity, but also for oil’s role in transportation. The failure to have a national long-range energy policy that is based in reality can severely impact energy prices.

Fact #6. The United States has, for years, pursued an energy policy based on environmental myths such as “biofuels” in which corn is turned into ethanol to reduce the import of oil, but it costs as much to produce ethanol as to refine oil and it provides less mileage per gallon, thus negating any reason for this additive. Likewise, suggesting that wind or solar energy can generate anything more than its current 1% of the nation’s electricity needs ignores their unreliability and the fact they are heavily subsidized, a form of hidden consumer tax.

Fact #7. It costs billions to explore, discover, extract and transport oil. It takes lots of lead-time as well. The United States Congress has, for decades, refused to permit the extraction of vast oil reserves in ANWR despite the fact it would have little or no impact on the Alaskan wildlife reserve. In addition, Congress has declared 85% percent of the nation’s coastal, offshore areas off-limits to any exploration for oil or natural gas.

Fact #8. The U.S. Environmental Protection Agency, under the mandate of Congress, requires Big Oil to refine oil into some seventeen different formulations in the name of clean air. With three grades of gasoline, that means that refiners must produce some 45 different blends. The quality of air in America is excellent, but the cost of gasoline at the pump continues to rise as the result of these mandates.

Fact #9. America imports two-thirds of the oil it uses. All of its transportation runs on oil. The population continues to grow. Failure to encourage the construction of a single new refinery since the 1970s puts a further strain on the ability of Big Oil to provide the nation’s oil and diesel fuel needs.

Fact #10. Democrats continue to demand that Big Oil’s profits be confiscated in some fashion and some of the inducements offered to explore for more oil be ended. Because the costs of exploration, extraction, refining, and transporting of oil represents billions, the actual profit margin of a company like ExxonMobil is about 10%, well below what industries such as pharmaceuticals and banking enjoy.

For these and many other reasons, Americans are being impoverished at the gas pump because Congress has dithered and failed in one of its most important responsibilities.


Aidan said...

Alan, very interesting as usual. Greated as I was this morning by news headlines of yet another sly UK government theft, namely an increase of around £250 a year in road tax for the worst "CO2" cars, oil is at the forefront of my mind right now. It seems more and more as if ordinary people are viewed primarily as a revenue source for bloated governments around the world. If I were to ask our Chancellor of The Exchequer just what I would be getting for being around £250 poorer, he would no doubt say something akin to a cleaner planet. Yes, CO2 is the smoking gun indeed, and we are all the victims of governments who repeatedly pull the trigger of taxation! But I must say I find the whole Biofuel fiasco shameful. To think that there are food riots partly caused by green policies which artificially decrease food supply and increase its price is inhumane to put it diplomatically. Granted, poor growing seasons in parts of the world are probably more responsible for shortages, but I'm convinced that biofuels are not helping. How any policy can be implemented which forces people to burn food for fuel is simply unthinkable... or used to be unthinkable until green guilt took hold of the western world. One point of contention with your blog though, is that fact #2 seems to contradict fact #1. If I read them correctly, in summation #1 says that supply and demand has nothing to do with the price of oil but that it is rather speculation that has driven up prices, while #2 says China and India's increase in oil demand has an impact on oil prices? Seems a bit of a contradiction. Perhaps you could clarify? Otherwise do keep up the good blogs Alan, it's refreshing to read a rational point of view. I did not hear of your radio interview on the BBC unfortunately but I hope to hear you if you are interviewed again. Perhaps you could post a notice in advance about when you'll be on again? Regards, Aidan

Alan Caruba said...

I wrote Ten Simple Truths About Oil in a white heat of rage over comments by a US Senator, but as to the seeming conflict between #1 and #2 I probably should have phrased it better. Bottom line, there is plenty of oil available, even with increasing demand from China and India, and elsewhere.

There will be supply problems at some point only because of a lack of sufficient refineries in the US and presumably elsewhere, but they will get built at some point.

Not being adequately prepared is probably more a question of human nature than anything else. Certainly, the oil companies do not lack for the means to build them at this point.

Andy said...

Our gas is still pretty cheap compared to the rest of the world. Japan's average is around 1.7 yen / mL (about $6usd/gal), Denmark pays about $9usd/gal.

It's too bad our leaders and future leaders are still looking for that magic pill or quick fix for everything on their plate. No one has the ability to look 5-10yrs into our future? Where has science gone? Has my education been a sham? Should I have studied economics of the bible instead? Maybe I could have been a politician.

Digging up ANWR should be a nobrainer. It would be beneficial to the next generation of Americans. Beit they may not speak English or pay taxes... That's a different topic though. Why does government want to plant its carbon foot on wildlife anyways? Is it just for good media relations? I'd rather save ca$h on gas and put a few dollars in my savings account towards a house in my future than save 100 moose in Alaska.

It's time for change America. Fire every one of our "leaders" and hire new ones that haven't been influenced by old money grubbers from the 30's. I'm not here to vote for someone to fill another man's dirty shoes, I'm here to vote for a man to make some new footprints.

thanks for reading.