Skyrocketing oil prices: looking for solutions in all the wrong places

As gas prices reach record prices levels our politicians' “cure” is to clamor for windfall taxes to punish those greedy oil companies. Instead of recognizing looking at their own errors of past policies that have allowed us to increase our dependence on Saudi oil they would rather blame oil companies even though, as I have pointed out in a previous post, Exxon Mobil controls less than 1% of the world’s oil supply.

What could we have done? There is a laundry list but at a minimum here are two possible avenues.

• Use breeder reactors to produce nuclear power. http://en.wikipedia.org/wiki/Breeder_reactor

• Develop the tar sands in the Green River Formation which according to Wikipedia “contains the largest oil shale deposits in the world. The 213 billion tons of oil shale contain an estimated 2.38 x 10¹¹m³ (1.5 trillion US barrels) of shale oil.” http://en.wikipedia.org/wiki/Green_River_Formation#Oil_shale See this publications for more detailed information on oil shale. http://pubs.usgs.gov/sir/2005/5294/pdf/sir5294_508.pdf

The Why's of Rising Oil Prices: Part 2

As usual, Thomas Sowell gets to the core of an issue.

The Pitfalls of Windfall Taxes on Oil Profits

Investor's Business Daily has an editorial on the renewed campaign to punish oil companies like Exxon Mobil for their recently announced record profits. Here is are two key quotes.

Remember: Oil companies don't really pay "windfall profit" taxes, anyway. You do. Some 50 million Americans today own oil company stock, either directly or through 401(k)s and mutual funds. Don't be suckered: "Windfall profits" taxes come right out of your retirement account, not out of the oil industry's business.

[A]ccording to Ernst & Young, from 1992 to 2006 the U.S. oil industry spent $1.25 trillion on long-term investment vs. profits of $900 billion.

The other question our politicians don't ask is: What do the oil companies do with these profits? Hide them under a mattress? I don't think so! It is put somewhere, in supporting drilling (where it's allowed), in investments in other technologies, or in research. Even if Exxon puts the profits in money market funds it is still being used for some financial purpose that has ripple effects in the economy. On the other hand what happens to windfall profits taxes? Into whose hands does this money go? Our government and our politicians. I don't know about you but I'd rather have that money being put to some productive use somewhere in the market than feeding our legislators and their pet projects.

The Why’s of Rising Oil Prices

As prices at the gas pumps rise almost daily questions about the role of oil companies start to float on TV and radio. Each night I watch the local TV news where a reporter stands in front of a gas station with the price prominently displayed in the background. This is usually followed by an enlightening man-on-the-street interview where people who are filling their tanks and emptying their wallets are asked why they think prices are increasing (as if they’re experts on the subject). The usual reply is that the oil companies are colluding to drive up prices simply to build up their bottom line. (A clip just like this aired while I was writing this.)

To shed some light on the forces at work here are several links that address what is happening in the global oil market.

http://www.physorg.com/printnews.php?newsid=128264775

In summary, this article lists the following factors:

1. Rising demand, primarily from China
2. Stagnant oil production
3. Falling U.S. dollar
4. Insufficient U.S. Refinery Capacity

This link - http://www.globalenvision.org/library/3/1652 - has a nice explanation, some of which is provided below.

The Organization of Petroleum Exporting Countries (OPEC), a group of 11 countries,¹ produces close to 40 percent of total world oil production² and owns about 70 percent of proven oil reserves. Other major oil producers in decreasing order of production are the U.S., Russia, Mexico, China, Canada, and Norway.³ Overall, the Middle East, especially the Persian Gulf, remains the major oil-producing region, and holds around 60 percent of the proven global oil reserves.⁴

How Oil Prices Are Determined

Forces of supply and demand determine global oil prices. OPEC's primary goal is to manage market supply by limiting oil production among its members. The objective is to maintain prices that are high enough so that OPEC members make a healthy profit, but not so high that consumers significantly reduce their consumption of petroleum. Because of its production capacity and oil reserves, OPEC's decisions significantly influence world oil prices. However, the power of OPEC to manage world oil prices has diminished in recent years because of increased production from non-OPEC oil producers, such as Russia, Norway and Mexico.

¹ OPEC countries include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

² International Energy Agency, Oil Market Report, May 11, 2005. For the most recent issue of the Oil Market Report, available free of charge, please go to http://omrpublic.iea.org/.

³ Department of Energy, Energy Information Administration, "Non-OPEC Fact Sheet." Available online at http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.html.

⁴ For more information on oil and oil markets please see the Department of Energy, Office of Oil, Gas, Energy Information Administration's "Oil Market Basics"

This document by Global Oil Watch - http://www.globaloilwatch.com/reports/Oil%20Primer.pdf - lists the world’s largest oil companies based on oil reserves.

A couple of interesting things can be taken from this list. First, the top 11 companies are government owned. Exxon Mobil, the first privately owned company on this list, controls only 1.08% of oil reserves. The UK’s BP comes in at number 17 with 0.85% of reserves. Second, the Middle East countries of Saudi Arabia, Iran, Iraq, and Kuwait possess more than half of the oil reserves. From this we can conclude that private oil companies who are the favorite whipping boys of the media and posturing politicians control literally a drop in the oil bucket and have little ability to influence the global market price of oil.