Friday, May 16, 2008

Since I'm already going to hell for that last post...

...I figured I'd change the subject to something less ethereal - OIL PRICES.

For those who wonder why the price of oil has skyrocketed and better yet, who to blame, I came across this article today in, of all places, USA Today - it's a preety fair piece and very accurate;

Oil prices

USA Today
Fri May 16, 2008

So who's to blame for record high oil prices?

In public opinion polls, oil companies get fingered as Public Enemy No. 1 by one-third to one-half of respondents. The other leading culprits include the OPEC cartel, President Bush, environmentalists and speculators.

Not one of them is as culpable as their critics claim. More important, none is capable of solving the problem, making the finger-pointing a destructive distraction. Before we get to some of the things the nation could have done, and should do now, to ease the crisis, let's assess the usual suspects:

Oil companies

Blaming Big Oil for higher prices is kind of like blaming bankruptcy lawyers for home foreclosures. Without doubt, oil companies benefit when shortages drive up prices, but they don't cause the problem, nor do they gain much leverage to increase profit margins when prices rise.

Take ExxonMobil, for instance. Last year, the world's largest petroleum company made an eye-popping $41 billion in profits. That's serious money, but it's a profit margin of about 10% on sales, a middle-of-the road level for major corporations. It's also the same margin ExxonMobil had when oil was cheap. In 2003, it made $21.5 billion on $213 billion in sales. Repeated federal investigations have shown no evidence of oil company conspiracies to drive up prices.

Oil producing nations

Producing nations can affect prices by limiting production. But that's a fact the United States can't do much about, other than trying to exert diplomatic pressure, as Bush will attempt to do on his visit today to Saudi Arabia. The United States can't really blame foreign countries for deciding how much of their oil to sell.

What's more, the fact that the Saudis and others aren't pumping more oil already — to prevent their customers from falling into recession or deter them from developing alternative energy sources — suggests they might not have a lot of excess capacity, a theory put forth years ago by people who predicted the current price run-up to near-universal skepticism. Further, the Organization of Petroleum Exporting Countries (OPEC), the demon behind the first oil crisis three decades ago, no longer has such control. It now pumps only about 40% of the world's petroleum.


Oil traders are without doubt adding some cost to the price of oil. Some analysts say it's $10 a barrel. Some say more. Speculation, however, is a normal byproduct of tight supplies and actual or potential turmoil in oil-producing nations.


Drilling in the Arctic National Wildlife Refuge could produce about 600,000 barrels of oil per day. Although it's worth doing as a way to increase domestic supply, it's no panacea. It would still increase world oil production by only a fraction of 1%. Opposition to drilling there, as well as in offshore sites currently under moratorium, affects prices only at the margins.

Filling the Strategic Petroleum Reserve.

To judge by the debate in Congress, you'd think that the diversion of 70,000 barrels of oil a day into the Louisiana salt domes is a major reason behind the price surge. This week, in a laughable piece of political sleight of hand, the House voted 385-25 and the Senate voted 97-1 to suspend deposits into the reserve. Considering that daily world demand is about 84 million barrels, suspending SPR purchases increases the world's oil supply by less than one-tenth of 1%.

As gratifying as it is to point fingers elsewhere, the mirror is the main place to look for the reasons that oil prices are hovering around $125 a barrel. The nation decided to let the laws of supply and demand work. It was rewarded with two decades of low prices that led to larger cars, bigger homes and longer commutes. Meanwhile, with the Cold War's end, Third World countries suddenly saw the benefits of capitalism, fueling robust growth in places such as China and India. As in the West, oil fuels that growth, first for industry, then for consumers who, naturally enough, use rising incomes to buy cars. That trend more than anything else is behind rising prices. And it has just begun.

A keep-energy-cheap approach would have worked if supplies were unlimited and prices didn't tend to lurch forward, as in the 1970s and now, rather than to rise gradually.

An alternative would have been energy policies that discouraged consumption with gas taxes and subsidized alternative sources. But doing this would have required voters to be willing to accept short-term pain for long-term gain. It would have required leadership, vision and political courage — the very same qualities needed now to stave off menacing crises in health care and Social Security.

Ominously for the nation, those characteristics seem in even shorter supply than oil.

OK, the article blames all of us, and that's largely true, although ALL of the aforementioned players play some role. Still, it's us, as consumers, who produce the demand.


WomanHonorThyself said...

excellent JMK!..Producing nations can affect prices by limiting production. But that's a fact the United States can't do much about, other than trying to exert diplomatic pressure,..and as we the saw..and knew..The Saudis wont budge and have us right where they want us!

JMK said...

True enough Angle, and OPEC only accounts for about 40% of the oil production worldwide.

We COULD increase our own production, but we've refused to do that, for a variety of reasons.

What's worse is that our recent foray into corn-based ethanol as an alternative fuel shows that even when we get a good idea (looking into alternative fuels) we seem to get it wrong!

Ethanol can also be made from saw grass (a weed), why we chose corn, a major food staple in America is disconcerting to say the least!

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