Dealing with petroleum production

One of the most immediate and difficult predicaments facing the American people and their political and business leaders is the problem of energy. Where to get it, how to conserve it and how to use it effectively throughout our economy.

Please understand that I am not an expert on these matters. I'm simply a layman who looks at these things, is curious about the facts, and analyzes them with a basis in common sense. The latter part seems to be pretty scarce in American society, politics and the educational system.

Proceeding on the premise that the current energy troubles we face are at their root problems with supply and demand, both current and future, mitigated by geopolitics and certain economic realities as the decline of the dollar, there is no one simple solution to this problem.

Lets deal with the problem of supply first.

US proven reserves as of January 2007 totaled 21,757 million barrels or enough to fully replace foreign imports for just 10.8 years. So that alone isn’t the answer. But when you consider our largest trading partner for crude is Canada from which we import 15% of our need has reserves totaling 179,210 million barrels the situation doesn’t look quite so dire.

The problem with accessing the US reserves is one of political policy. The US Congress and the Administration, both past and present, Republican and Democrat, have gotten in bed with radical environmentalists who have convinced them that our crude oil reserves cannot be accessed without doing damage to the environment. That is patently wrong.

While it can be demonstrated that done improperly, oil production and transportation can cause harm, we have the technology and know how to do it right. ANWR and the continental shelf have huge untapped oil deposits that have been deemed politically inaccessible. That must change if America is to regain energy security.

Another huge source of petroleum for the US is found in shale oil. The US has reserves of 2 Trillion barrels of shale oil, nearly four times that of the rest of the world. Because of the difficulty in extracting and processing it, until now to do so hasn’t be profitable. But with crude prices in excess of $130 per barrel, it can now be a viable source of energy.

At current levels of consumption, that would provide crude oil for 280 years. Allowing plenty of breathing space for technology to develop and test alternative energy sources without rushing them out to unintended consequences.

The problem now is again, the environmental lobby who rail on about the potential damage that may be caused by extraction. Enter Raytheon Corp. which has developed a way to do this in a much more environmentally friendly way. Still, politicians and environmentalist will persist in blocking this resource that would provide a major foundation of US energy security.

Also, the US is an exporter of crude oil, 1,317,000 barrels every day. That amounts to fully a quarter, 25% or total US crude oil production. If we diverted that flow to domestic markets we could extend our total crude oil supply an additional 10%. To continue to export crude oil in the face to the energy security crisis we face is unthinkable.


If the US seriously committed to any of or preferably all the above the effect on the crude oil futures market and the petroleum producing nations would be immediate, even though it would take time to ramp up production.

Remember, it’s a futures market. The price is based on anticipated supply and demand. If the marketplace understands there is truly going to be substantially greater supply, traders will factor that in, producers will recognize the increased competition for their product and the price per barrel will shrink accordingly.

That will have a very quick impact at the pump. And it will be long lasting as opposed to quick fix fuel tax holidays and wrong-headed suspension of deposits into the SPR proposed by politicians who refuse to think out of the box.

House Republicans have already begun to answer the call with a proposal to increase production. But it needs to be more than merely a proposal and House Democrats need to join in.

OK, so is increased domestic production the answer. Not in and of itself. We need to actively pursue alternative energy sources. I’m not talking simply solar or wind technologies though they are a part of the matrix.

The next post will discuss some of the alternatives to petroleum.

Statistics taken from:
The Energy Information Administration-Dept. of Energy

Interested in holding your politicians "feet to the fire?" Follow the link below to American Solutions where you can join others petitioning Congress to act now to expand use of our domestic resources.


"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson

Support your candidate, pin him down, er, up, er whatever

A short aside from the current topical line. There’s a new campaign tool out for the Obama campaign. Acknowledging BO’s deep knowledge and understanding of the US political geography one company has created a lapel pin for his supporters.

This is a great way to show your unwavering support of Obama, regardless of his knowledge, or lack thereof, of the country he’s campaigning to run. He's really a great guy who we know little of, but he’s talks real good and looks nice. That’s enough, right?

On the other hand, if you are not a supporter, get one, or several as a way to telling others you are not blinded by his charisma. This tongue-in-cheek slap will raise questions and perhaps give opportunity to explain why he actually isn’t the best candidate.

Of course, then you have to decide who is. Hmm, tough choice.

Get yours here:

View a larger image

"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson

Crude, profits and big government

At the end of my last post I said I’d give my personal take on the solutions to the energy crisis. But as I thought about it, I realized most people swallow the line put forth by the media and the left as to the cause of the rising price of crude oil and subsequently the price of gas at the pump.

They (the media and the left) would have you believe that “big oil” and its billion dollar profits along with inept policy on the part of the Bush administration is the reason you are paying nearly $4.00 per gallon for gas.

I’m gonna have to disagree with them, and I’ll tell you why in this post.

The price of crude oil is not determined by the oil companies. While they may affect it to some degree, the price of crude is subject to the same laws of supply and demand that govern the rest of the US and free world economy.

The prices seen on a daily basis that has the media whipping up a froth of alarm is actually the bidding in the oil futures market. Those prices quoted are for crude oil to be delivered the next month. It’s actually a little more complicated than that, but for our purposes that’ll work.

There’s also a spot market that is even more volatile for crude available for immediate delivery. What determines the pricing in these markets is not “big oil” or even market demand. What drives it is what the traders think demand will be compared to what they think availability will be at that time.

Geo-politics plays a huge role in this. The current major unknown (traders hate unknowns) is the condition of the Nigerian oil fields. In recent years these production facilities have been under constant siege by militants, action that may result in the closing down of Nigeria’s 2.16 million-barrels-per-day production. That’s about 7.2% of OPEC’s production and nearly 3% of total world output.

Normally that wouldn’t seem to be a problem, but with producing nations shipping near capacity, demand from developing countries increasing and some analysts predicting a peak in production in a few years with ongoing declines thereafter, the current pressure on prices doesn’t look to be temporary. Many analysts predict an upward march to near $200 per barrel of crude within 2 years or sooner. At the current rate, it may well be sooner.

China, India, Russia and other rapidly developing nations are competing with the US for the finite supply, exploring and drilling in areas either geographically inaccessible to us or off limits due to the environmental lobby. China, Cuba and Mexico are planning to drill in the Gulf of Mexico while China bids on pipeline services in Alaska.

Bit by bit our resources are sold off or abandoned to foreign competitors while we complain and do little else.

But what about “big oil” and their “billion dollar profits?” Aren’t they making a killing off the consumer? As it turns out the answer to that is…No! The table below compares the 2005 profits of several major companies including oil and you can easily see that while amounts are large, “big oil” exacts a margin much lower than other large US companies in other sectors.

Oil company profits: A perspective Earnings, Revenues, Profits (Billions) for selected companies, recent quarter, 2005 Source: Bloomberg News, reported in AAPG Explorer Dec. 2005
Company	Net Profit	Revenue	Profit Margin
Citigroup (banking)	$7.1	$21.5	33%
Microsoft	$3.1	$9.7	32%
Coca-Cola	$1.3	$6.0	21%
Procter & Gamble	$2.0	$14.8	14%
General Electric	$4.7	$41.6	11%
ExxonMobil	$9.9	$92.6	11%
ConocoPhillips	$3.8	$48.7	8%
IBM	$1.5	$21.5	7%
Chevron	$3.6	$51.1	7%
Wal-Mart	$2.8	$76.8	4%
Oil industry average profit margin is about 8.2%; (3rd Q. '05) for all US industry, the average is about 6.8%. Profits in the oil industry were easily outpaced by those of the Pharmaceuticals, Banks, Household Products, Software, Telecommunications, Semiconductors, Consumer Services, and Food, Beverage and Tobacco sectors.

Should you think that is an anomaly, early figures for the first quarter of 2008 have Exxon, Conoco and Chevron earning .0857% on their total revenues of $235.5 billion dollars. That’s a net profit of $20.2 billion. But don’t worry; at the same time they paid $47.86 billion in taxes.

Let’s put that in perspective. You have a, say, widget you sell for $100. It costs you $71.08 to design, produce and sell that widget. After you collect your $100 from the sale you cheerfully give $20.32 to the government to spend any way they please and they let you keep $8.58 to do with what you wish.

In the case of “big oil” that $8.58 goes to the share holders who risked their money to invest in their future via the stock market while the government, which risked nothing took away nearly 2 and a half times what the investors received. And now Hillary Clinton, Barack Obama, Nancy Pelosi, Harry Reid and other Democrats want even more. (Psst..companies don't really pay taxes guys, it get's passed on to the consumer via cost of goods. Always has, always will. It's under the table taxation of the public.)

If the oil companies were to cut their profits to zero the most that would be saved at the pump would be .91.5¢/gallon. But in reality only .46% of a barrel of oil goes into gasoline so you might in reality see only a .424¢/gallon reduction. But how long do you think that would last? No company is in the business to break even. And no investor will willingly put his hard earned money into an investment when he knows his return is zero.

So the company goes out of business or is sold to an off shore investor, either way people are out of work and either the new owner or other international oil companies pick up the business and they earn the profits. And the government, they lose their cash cow.

"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson

Gas prices, taxes and politics

I just returned from a 13-day trip to Ocracoke Island and Myrtle Beach. While the destinations and itinerary of that trip will be the subject of future posts, my current interest is my observations on the ongoing debate over the soaring price of fuel.

In January of this year unleaded regular gasoline cost an average of $3.085/gallon and we all were crying the blues. Now, four and a half months later, the average price of a gallon of unleaded regular in Florida is $3.814, an increase of 23.6%. Annualized that’s an increase of 62.9%.

That hurts everyone and affects every part of our economy from food to transportation, from stock prices to entertainment; everything we do is connected in some way to the cost of fuel and crude oil.

The burning question on most people’s minds is, “who is to blame?” The media and the Democrat party will tell you its “big oil” and the Bush administration who are at fault. Most people go along with that assessment because it makes a neat little package and easy to understand.

I find it interesting that when asked a hard question, liberals (i.e. Democrats) will counter that the answer is not so simple, nuanced with many variables that must be addressed for one to understand their answer. But when it comes to the price of fuel, they simply pin the blame on “big oil” and the current administration.

But is it really so simple, and is the fix so simple as well?

They want to divert the deposits into the Strategic Petroleum Reserve to the marketplace for the rest of the year and eliminate the federal gas tax for 15 weeks during the upcoming summer driving months. Sounds good, but will it really make a serious impact?

The Strategic Petroleum Reserve (SPR) amounts to 70,000 barrels per day, about one tenth of one percent of world consumption and 0.0056% (that’s just over one half of one percent) of daily US imports.

If the SPR were full and we were to be cut off from the world oil supply, there would be only about 58 days of reserve before we would need to drastically cut back on consumption. In practice though, we would need to make those drastic cutbacks immediately.

The US is dependent on foreign crude oil for 60% of its consumption, the largest portion of which is refined into gasoline (9.253 million bpd). However, if the 12,000,000 barrels per day we import was interrupted not only would fuel supply be scarce, but manufacturing of most goods would grind to a halt.

Not only is crude used to make plastics, which permeate every part of our economy, but the machines which produce them and make every item we produce more affordable would stop for lack of lubrication and maintenance parts.

But returning to the immediate issue of the price of gasoline and the effect of the congressional and administrations band-aid approach. It’s estimated that diverting the SPR to domestic production will result in a reduction of about .03 - .05¢ gallon. That works out to about $53 in savings over 6 months of the diversion. Excited?

The moratorium on the 18.4¢ federal gas tax will save motorists an estimated $28 - $30 on average over its limited lifespan and in the process reduce available revenue for highway maintenance by $6.4 billion, affecting 10’s of 1000’s of highway related jobs.

So for the sake of saying they did something, our congressmen/women and the administration are going to save you about 83 bucks, expose a weakness in our national security, expose motorists to unsafe roads as they go unmaintained and throw thousands of highway workers into the unemployment lines.

In the end, who's gonna notice anyway? In 38 days at the current rate of increase the pump price of gasoline will be right back where it was before the "cuts" took place. At the end of the summer when the "tax holiday" ends and the price suddenly rises 18.4¢, do you really think the American people will remember they've been enjoying the largess of the US Congress for 3 months?

Sounds like a great plan to me.

My next post will include some of my ideas on what we should do to deal with this problem and the wider issue of the US energy supply.

"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson