Soccer Dad

Drill

Like high food prices, high oil prices result from a number of poor policy decisions coming together at the same time as Robert Samuelson argues in Start Drilling.

The truth is that we're almost powerless to influence today's prices. We are because we didn't take sensible actions 10 or 20 years ago. If we persist, we will be even worse off in a decade or two. The first thing to do: Start drilling.

It may surprise Americans to discover that the United States is the third-largest oil producer, behind Saudi Arabia and Russia. We could be producing more, but Congress has put large areas of potential supply off-limits. These include the Atlantic and Pacific coasts and parts of Alaska and the Gulf of Mexico. By government estimates, these areas may contain 25 billion to 30 billion barrels of oil (against about 30 billion barrels of proven U.S. reserves today) and 80 trillion cubic feet or more of natural gas (compared with about 200 tcf of proven reserves).

What keeps these areas closed are exaggerated environmental fears, strong prejudice against oil companies and sheer stupidity. Americans favor both "energy independence" and cheap fuel. They deplore imports -- who wants to pay foreigners? -- but oppose more production in the United States. Got it? The result is a "no-pain energy agenda that sounds appealing but has no basis in reality," writes Robert Bryce in "Gusher of Lies: The Dangerous Delusions of 'Energy Independence.' "

It's easy to blame the oil companies when they boast record profits, but those profits are the result of consumption. Per sale, oil company profits aren't that great. Jeff Jacoby wrote a few years ago:

But profits can't be judged by dollar amounts alone. What counts is the percentage of revenues those profits represent. ''Our numbers are huge because the scale of our industry is huge," Exxon CEO Lee Raymond tried, probably in vain, to explain during last week's big Senate hearing on oil company profits. Exxon's profits last quarter amounted to 9.8 cents for every dollar of sales. Is that obscene? Well, it was more profitable than Shell (which netted 7.8 cents of each dollar of revenue) or Chevron (6.6 cents) or BP (4.6 cents). But compared to Coca-Cola (21.2 cents), Bank of America (28.3 cents), or Microsoft (33.2 cents), it was nothing to write home about.

While I don't know what the current returns are, I suspect things haven't changed that much.

But there is one sector that benefits a lot more from the investment of the oil companies: government. Jacoby again:

In fact, the real gas and oil profiteers weren't represented by the CEOs getting grilled on Capitol Hill last week, but by the demagogues doing the grilling. Over the past 25 years, according to the Tax Foundation, oil companies paid state and federal taxes of more than $2.2 trillion (in inflation-adjusted dollars). During the same period, the companies' profits totaled $630 billion -- less than a third of the government's take. Government revenue from gasoline taxes alone has exceeded oil industry profits in 22 of the past 25 years.

Again these are old figures, but I suspect that not much has changed.

Now I realize that it's a lot easier of Rep. Markey to condemn oil executives citing several of a billion dollars than it is for the same executive to argue that he only makes cents on the gallon, large numbers are worth thousands of words in politics. However that doesn't make the oil company executives wrong.

Samuelson continues:

The best we can do is to try to exert long-term influence on the global balance of supply and demand. Increase our supply. Restrain our demand. With luck, this might widen the worldwide surplus of production capacity. Producers would have less power to exact ever-higher prices, because there would be more competition among them to sell. OPEC loses some leverage; its members cheat. Congress took a small step last year by increasing fuel economy standards for new cars and light trucks from 25 to 35 miles per gallon by 2020. (And yes, we need a gradually rising fuel tax to create a strong market for more-efficient vehicles.)

Increasing production also is important. Output from older fields, including Alaska's North Slope, is declining. Although production from restricted areas won't make the United States self-sufficient, it might stabilize output or even reduce imports. No one knows exactly what's in these areas, because the exploratory work is old. Estimates indicate that production from the Arctic National Wildlife Refuge might equal almost 5 percent of present U.S. oil use.

Sens. McCain and Clinton are recommending a tax holiday from gas taxes this summer. As a consumer such relief would be extremely welcome. However, given that supply and demand is fueling the rise in oil prices, such an effort would likely increase demand and thus exacerbate the problem.

I'm not thrilled with Samuelson's recommendation to raise oil taxes, however to the degree that it suppresses demand it might be worth considering. (The problem other than the burden to the consumer is that tax windfalls encourage politicians to spend more.)

If you're a politician it's easy to demagogue the oil companies and pretend that you're protecting your constituents. But wouldn't we all benefit if Congress would let the industry do what it does best rather than casting it as a villain?

Posted by SoccerDad at April 30, 2008 6:25 AM