Saturday, August 9, 2008

The problem with energy...

A month or so ago, Lyric Mezzo sent me an email pointing out a rant against "Big Oil" that Bill O'Reilly had done. It wasn't the first time he'd accused oil companies of "gouging" consumers. While I generally enjoy watching O'Reilly and think he often make intelligent points on the various issues he covers, I believe he gets a bit hysterical...

First, let me say I am by no means an expert on the oil industry. While I have one uncle who has worked for oil companies for decades (I believe his degree is in chemical engineering) and one cousin who works for an oil company with operations on the North Slope of Alaska, I've never talked to them about their work. However, I have some insight into the industry that the average person likely does not have. My undergraduate degree is in Accounting. One of the electives within my major was oil & gas accounting. Let's just say that class ensured I would never want to work within that particular field of accounting. Accounting for oil and gas enterprises is much more complicated and involved than most any other business, IMO. Now, on to the topic at hand:

Oil companies aren't gouging. Their actual margins are less than many other industries. The fact that they have "obscene profits" right now is directly related to the volume of their sales, not that they have been charging consumers an outrageously high retail price relative to the oil companies' costs. Oil is a commodity, and the oil commodities market sets the price, not "Big Oil". The United States isn't only nation with a large demand for this commodity. India and China have booming economies, so they are now demanding more oil than in years past: this energy source is lifting their large populations out of poverty.

Also, there is much speculation in the oil futures market - this has been driving up the price. Also, the US dollar has been very weak when compared to other currencies: this makes oil more expensive for us, and cheaper for those using those other currencies.

Lucky for us, the price of oil has been dropping. So, what is likely responsible for the recent drop in the price of oil, which has dropped about $30/barrel from the high of about $145/barrel? It would appear that $4 a gallon gasoline is the tipping point at which American consumers change habits: we, as a nation, have cut back on our usage of gasoline in response to the high price of gasoline.. I know I have - the past two summers, I hardly missed going to an Express baseball game. This season, I have only been to a handful of games that weren't on a Saturday or Sunday; it's about a 70-mile round trip for me, and I can't afford that for an 8-game homestand... Americans are driving less: consequently needing to buy less gasoline; American airlines are parking lots of airplanes, reducing their need for jet fuel. The law of supply & demand is at work here, folks...

Also, since President Bush lifted the executive ban on off-shore drilling, the price of crude oil has dropped dramatically. This ties back to those "evil" oil speculators. There is now one less obstacle to the United States drilling for its own oil, so the speculators have been betting on lower oil prices in the future. Now, Congress needs to get their sh*t together and remove those remaining obstacles to the United States accessing its own energy resources so we won't be beholden to countries like Iran or Venezuela, both OPEC members with no great love for the United States. Drilling in the US would help reduce the speculatory rise in crude oil prices.

One thing I am sick and tired of hearing from those in the anti-drilling crowd, who just happen to be Democrats as far as I can tell, is the "we won't get any oil for 10 years from new drilling". Well, you know what? If we'd started drilling in ANWAR when it came up under the Clinton Administration, we'd now be getting our first barrels out oil out of it... They seem to have absolutely no forward thinking when it comes to proven sources of energy. If the worst should happen in the Middle East, say an open, direct confrontation with Iran (not this proxy war they've been fighting with Israel through Hezbollah and with the US in Iraq) that disrupts the flow of oil coming out of the Persian Gulf, we need to have another reliable source of oil. Our need for crude oil isn't going anywhere, no matter what the environmentalist say. We use petroleum for far more than powering our automobiles...

We need to drill in ANWAR (the people of Alaska want to...), we need to drill in the Gulf (and not just off the Texas/LA coastline). We currently can't drill off the coast of Florida, but China is, with Cuba's help. With the price of gas being so high, it is now becoming cost-effective to drill for harder-to-get-to oil. We need to build nuclear power plants, too. Biofuels aren't the answer, but I'll get to that later. I have no problem with reasonable conservation measures - I know that fuel economy has always - even before gas prices got so high - been a huge factor in my choice of car. I won't even consider something that doesn't get an EPA estimated 30 mpg. And I keep my tires properly inflated. And I make sure to get my car in for regularly scheduled maintenance. That's just not smart fuel economy, it's smart economics - I plan to drive my car for as long as I can - as long as the upkeep is more cost effective than buying a new vehicle.

Now, for the insight I gained from the O&G accounting class all those years ago... These "windfall profits" the Democrats keep talking about make up for the times when oil companies were barely getting by (anyone remember the "Oil Bust"? It had a huge impact on the Texas economy back in the day...), and also help fund new exploration.

There are many expenses related to finding and extracting crude oil. I know, in general terms, that methods of exploration have gotten more sophisticated since I was in college, but I'm sure the basics still hold true. An oil and gas company will have a general idea, based on geology, where they think an oil or gas deposit is. If they want to do more than just speculate on what is there, they will have to obtain the rights from the property owner to come in and do surveys of what is underground. I think today, they can do a lot of this without having to sink exploratory holes into the ground.

Now, if they find a deposit they think is worth extracting, they will have to pay for the mineral rights to that property. Now, one thing I never thought about prior to taking that class is this: the owner of the mineral rights isn't necessarily the same as the owner of the ground level property. So, there may be two entities that have to be compensated for the privilege of drilling. Once the appropriate leases and mineral rights and what-not have been secured, there is the work of actually getting to the deposit. They'll have to drill. Drilling is a very dangerous bit of work. The people who do this work must be fairly compensated for the dangerous and skilled work that they do.

Once the drilling is successfully completed, it will have to be converted into an actual well, pumping the oil or gas to the surface. After that, it needs to be transported for refining. I', am not really up on what all needs to be done to natural gas to make it "market ready", beyond adding that inert gas to give it that smell so you'll know if you have a gas leak. For oil, though, what happens will depend on what the end product is supposed to be, and the quality of the crude pumped out of the ground (or from beneath the ocean floor).

I never had to pay more than $3.999 when filling up my car, but the $40 it took to completely fill my tank from "E" is more than double what it cost me when I bought that car four years ago. I filled up the other day for $3.699, but when I drove by the same gas station on the way home from work Friday, it was down to $3.619. I have a friend out in California who pays a much higher price, and I have a friend in Arkansas who has actually been paying a little less (but I think she and her husband sometimes even fill up just over the state line in Missouri for a little less than they would pay "at home" - the difference likely being taxes). Why the big differences in the price of gasoline? The gasoline that can be sold in Texas - or Arkansas and Missouri - likely isn't the proper blend to be allowed to be sold in California. All these blends are in existence because of environmental regulations. If I recall correctly, there are at least a dozen different blends of gasoline required to meet the regulations of various states and municipalities around the country. Oil refineries can't make all the different blends at one time. They'll make one kind, then they have to switch over to be able to make another kind. All these blends make the cost of turning crude oil into gasoline go up. That's one reason the price of gas went up so much after Katrina and Rita in 2005, also. Refineries along the Gulf Coast were offline, so other refineries had to make up for the decrease in refining capacity: fewer refineries still having to put out the same number of blends that are required around the country.

Once the gasoline has been refined, it now has to be transported to gas stations around the country so it can be sold to American drivers. All that costs money, too. Oh, and let's not forget all the taxes we pay to various governmental entities - in some cases, a set amount per gallon (I think that's how all the taxes work here in Texas, thank goodness!), in others, a percentage of the sale price (so when the price of a gallon of gas goes up, so does the tax you have to pay). Often, the various taxing entities make more money off of a gallon of gasoline that the oil companies do...

With regard to refineries, no one wants them in their own backyard. I've been near the refineries around the Houston area. They stink something awful. But, we need new refineries. As far as I know, we haven't built a new refinery in the United States in over 30 years (though I may have heard recently about one new project somewhere...). Environmental groups - and some in the NIMBY crowd - do their damnedest to prevent construction of new refineries. Never mind a new refinery would likely be much more efficient than the existing ones.

Now, back to biofuels. At this point in time, biofuels are not a viable alternative to gasoline. Ethanol is contributing to an increase in food prices, as acreage is going from growing food plants to growing fuel plants - and I heard on the news recently that in whatever South American country that makes biofuel from sugar beets is destroying rainforest to get more land to grow food plants because they've used so much of existing farmland to grow those sugar beets... While it is my understanding that sugar beets are a fairly effective biofuel, in regard to the amount of energy you can generate from a given amount of acreage, corn isn't so effective. But, we have corn farmers here in the US successfully lobbying Congress to push this less-effective alternative biofuel. Maybe that's why so many politicians pander to Iowa when they want to run for president - that corn lobby is pretty influential, it would seem. Biofuels might become a viable alternative, but not any time soon - certainly not any sooner than it will take to get crude oil out of the ground if all the unnecessarily obstacles were removed. And Congress needs to butt the he|| out and let the market take care of what - if any - biofuel is most effective.

What else would help solve the energy problem? Nuclear power. We have a NIMBY problem here, too. Listening to the radio this past week, one of the "local" news reports was about a proposed nuclear power plant near Victoria, Texas. The news report had a gentleman who didn't want that power plant near his town. Democrats seem to want to emulate Europe so much when it comes to failed socialist ideas, but they don't seem so keen on emulating their intelligent use of nuclear power. I'd like to see it much easier to build nuclear power plants. And, hey, they don't produce those evil "greenhouse gases" the environmentalist say are contributing to anthropogenic global warming (which I think is a bunch of hogwash, but that's a separate discussion...). Ability to get to the oil shale that is now cost-effective to recover with the current price of a barrel of crude. Clean coal technology. But the first thing that would have the most immediate impact on energy prices would be for Congress to eliminate all the road blocks to the United States accessing its own energy resources. Recent reports say that, when you combine all the resources that are currently off-limits, the United States has more oil than Saudi Arabia. If you don't think that would have a dramatic effect on crude prices, you haven't been paying attention, or you are being willfully obtuse.

Drill Here. Drill Now. Pay Less. And support the "rebel Republicans" who haven't taken a vacation and are keeping up the good fight to get Nancy Pelosi and Congress to do the right thing when it comes to America's energy. But even don't get me started on the "Gang of 10"...

6 comments:

Lyric Mezzo said...

Awesome post as usual Miss L! Now you DO need to post on the Gang of 10.

Miss Ladybug said...

Would that there were enough hours in the day...

Donna B. said...

The China Syndrome was on late night TV last night (coming on right after Hunt for Red October) and I stupidly sat through the crapola again.

It's that kind of knee-jerk reasoning about nuclear power that keeps a lot of people in a NIMBY state of mind.

Though I never took accounting of any kind in college, I worked for several years as bookkeeper/janitor/bartender for a couple of geophysicists who had working interests in several wells.

It was the best job I ever had, but oil & gas bookkeeping is a buggerbear. Way back in 2001, the bosses explained to me the new "China Syndrome" we'd be facing.

Miss Ladybug said...

I don't think I've ever seen The China Syndrome... I wouldn't have a problem living close to a nuclear power plant. It's clean energy and doesn't require fossil fuels, and it can last a really long time - that's why the Navy went to nuclear powered vessels - carriers and submarines, at least...

Stephen said...

Excellent post. First time I've checked out your blog (via Tigerhawk). Any time I hear someone rail against the price-gouging oil companies--and no, I don't believe they're run by saints---I ask why the angry person doesn't do himself a favor and buy their stock. With all those ill-gotten profits, CVX and XOM should be a better investment than Apple or Google. But of course the ranter doesn't make the connection. Big is bad, unless it's the government.

Miss Ladybug said...

Thanks, Stephen. I took a quick scroll through your blog, as well. In my previous life doing software training, I found myself out in the Bay Area a few times, San Mateo/Redwood City/San Bruno on the SF side, Hayward over on the other. I prefer the green of Northern California to the brown of Southern California ;-)