Friday, 11 July 2008
Politics of Gas: A Follow Up
I received a scathing rebuke in the comments from andy42302 for my commentary on the politics of gas. Since I like reasoned debate, I wanted to go through his thoughts and provide a response to his arguments in hopes of continuing the discussion.
The price of gas is a gift to Big Oil. From your own admission, drilling will do nothing to help the current crises. Oil companies have enjoyed record profits throughout the Bush/Cheney Regime but they have not drilled in the 68 million acres that they have available in the USA.
First off, the price of gas is not a "gift" to big oil. Oil companies enjoy record profits because there has been an increase in demand for the product. If you sell 1,000,000 gallons of gas at 5 cents a gallon you make $5,000 dollars. If it cost $3,000 to create a million gallons then a profit of $2,000 is made. Now if you sell 2,000,000 barrels at 5 cents a gallon you make $10,000. If the cost remains the same then the profit is going to be $4,000.
If you keep selling more product you are going to continue making record profits. Because oil companies sell more product they make more profit. The high gas prices will actually hurt the oil companies because the demand will fall and they will sell less product. In addition it spurs research into alternate energy sources which could make their product obsolete.
I also did say drilling now would do nothing about current high prices of oil. Mainly because today's high prices have been caused by a bubble in the commodities market. The collapse of the sub-prime mortgage caused people to pull their money out of the lending markets. The money had to go some where. The weakness of the dollar caused much of it to end up in commodities like oil. The influx of cash has caused a bubble to form. The market has been distorted and it is not driven by demand.
Since the current bubble is not demand driven increasing the supply won't effect the current price. Having thought about it some more, I am beginning to think that a dramatic effort by the U.S. to increase production of oil may hasten the burst the oil bubble.
The argument that oil companies haven't drilled on the 68 million acres is bit of a canard. I imagine they would drill there if they had actually found oil on those properties. Drilling for oil is expensive and would be stupid to drill without spending time to make sure oil is there.
Regulations haven't prevented them from updating and/or building new refineries. It has been their decision not to invest. Now they want the heart of the watermelon and they want it now. Voters are scared, angry, and broke. When people get this way, they're easily tricked into buying in to such nonsense, grasping for hope and wanting to believe that this sugar pill will ease their pain. Even John McCain has admitted it would only create a psychological effect at best, just like his gas holiday nonsense.
It is true that oil companies have not built new refineries, but they have expanded the capacities of existing refineries. Otherwise they wouldn't have been able to keep up with growing demand. But do you blame them for not building additional refineries? According to Democrats and the environmental groups we shouldn't be using any oil. Would you build additional facilities with so many political groups hostile to your business? I would hedge my bets as well and just stick to expanding current facilities.
I do agree with you on one point. McCain's gas holiday is a bit of a scam. Why only help tax payers for a short period of time? If he had been for a permanent repeal the plan would actually have merit.
If you look at ANWR for example, the concept of opening it up to ease prices simply doesn't compute. The figures vary but it's reasonable to say that oil can be extracted in about 10 years and will pump about 1 million barrels a day for about 15 yrs. Assuming that oil comes to the USA and isn't sold to China, that would ease out imports from about 67% to about 65%. This could bring the price of gas at the pumps down about a nickel at best IN TEN YEARS. After that oil is depleted, we're right back where we are today.
But it will ease prices. That is the point of increasing supply. If we add the oil capacity off the shores of our country into the mix we can begin to increase the supply in this country. That is what is important for meeting future energy demands. If we do nothing now, the situation will only get worse down the road. Part of our current problem has been the Democrats refusal to expand our capacities over the last 10-20 years. If we had started drilling in ANWR 10 years ago and off our shore 10 years ago the current world supply would be much higher now and would have been less vulnerable to market distortions. We wouldn't have the current bubble. That is why I want to drill now. To keep this from happening in the future.
There's an argument that this extra oil would ease the burden of world demand and that would lower prices. Why would EXXON et al want to deliver less profits to their stock holders than they did last year? That doesn't make sense.
Probably because they don't make profits off of crude oil. They make their profits off the stuff that is made from the crude. They would rather not have to spend excessive amounts of money on the raw materials. If they keep their costs down they can keep the prices of their products low. The lower the cost of their products the more they will sell. The more they sell the more profits they make. And that is why they want the extra oil. Because it will make their stock holders richer.
