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The Oil Drum: “A Plague o' Both Your Houses!”

In Shakespeare’s Romeo and Juliet, as Mercutio lays dying, he curses the two families whose rivalry led to his death: “A plague o' both your houses!”

The editors of The Oil Drum, an online forum that encourages an open, rational, and fact-based discussion of energy issues, have taken a similar—albeit less dramatic—position with respect to the political jockeying between Republicans and Democrats in the US over the issue of gasoline prices. The editors—who are “ideologically diverse”—took the unusual step of issuing a press release emphasizing their conclusion that the discourse around the politics of oil must change.

We strongly feel that the leaders of both political parties are not only headed in the wrong direction with respect to gas prices, but we also worry that they fundamentally misunderstand the factors behind the current situation at gasoline stations around the US.

Public statements by political figures over the past several days would seem to suggest that oil companies and their record profits are the sole factor determining the price of gasoline. Not only is this untrue, but it is dangerous to give the American people the impression that only oil companies are to blame.

The American people need to understand that the phenomenon of high gas prices cannot be attributed to a single source. They also need to understand that no one political party will be able to fix our current woes.

The following are among the factors affecting the price of oil, according to The Oil Drum:

  1. Oil companies do not single-handedly determine the price of oil. The price of oil is set on the crude oil futures market. Simply put, these prices are affected by supply and demand because, at present, oil trades in a global commodity market where increased demand or reduced supply in one place instantly translates into price shifts everywhere. A variety of publicly available information sources show that supply is relatively static at the moment, while world demand continues to grow as economies grow.

  2. We have provided evidence many times at The Oil Drum that the output of major oilfields is declining and that we may now have reached a peak or plateau in global oil supply. Oil companies have not been able to increase production for a number of years, and it is unclear that OPEC is accurately reporting their reserves. Even if there were significant sources of high quality oil remaining, it is getting increasingly difficult and expensive to drill. These factors, along with aging infrastructure for oil exploration and a retiring workforce are also contributing to high oil prices.

  3. The geopolitical situation is volatile, and an astute citizen may notice that every time there is news from Nigeria or Iran, the price of oil goes up because of the potential and real effects of these situations on world oil supply. Again, oil traders are fearful that the supply will not remain stable forever.

  4. Countries like China and India are industrializing at a great pace, and while we are accustomed to obtaining oil at a comfortable quantity and price, it will be impossible (and immoral) to deny similar resources to these countries. China is working furiously to secure new oil supplies, and they're content to negotiate with countries we're reluctant to deal with, like Iran and the Sudan.

These points demonstrate that disruptions in the supply of oil that affect the price of gasoline at the pump are not just a temporary glitch. For various reasons—decreased discoveries of new oilfields, geopolitical instability, international competition for oil supply—we can no longer assume that we will be able to consume as much oil as possible, or ever get it again for $1.50 a gallon.

Demagoguery and grandstanding are not strategies for addressing our energy problems.

The editors make three recommendations for beginning to address those problems:

  1. Maintain the gas tax. Eliminating the gas tax temporarily or permanently will only worsen our dependence on oil by disincentivizing the innovation of oil alternatives and oil conservation efforts.

  2. Both mainstream American political parties should stop accusing convenient scapegoats of price gouging or price fixing and instead educate the public about how the price of gas is actually set.

  3. Government should be focused on helping us cure our “addiction to oil.” The answer does not lie in lowering gas prices, which will only encourage people to drive more and further waste our valuable resources. As the Department of Energy funded Hirsch Report on Peak Oil laid out, the consequences of not taking steps to transition away from oil could be dramatic to our economic system. Appropriate solutions include large-scale research, development, and implementation programs to improve the scalability of alternative sources of energy, other projects geared towards improving mass transit and carpooling programs across the country, providing incentives to buy smaller and more fuel efficient vehicles, and promoting a campaign to increase awareness about conservation.

Full discussion of the release is ongoing at The Oil Drum.

Comments

Joseph Willemssen

It's all about consumption. Surpisingly a parked SUV 4x4 uses the same amount of fuel as a parked Prius. So we can reduce fuel demand just by driving less even with gas guzzlers.

I agree that we have the power to make a difference, but the problem is that if people conserve a huge amount, then the prices will go down, which then will increase consumption. It's the same dynamic that occurs when people try to "solve" congestion. Take roads off cars = makes driving easier = makes people more likely to drive = more congestion.

The government plays a role in setting limits and boundaries. Without that, the stasis point remains the same.

Cosmo

Harvey D,

I agree with your basic assertions in your commentary, but I do not believe that in 1906 vehicles were getting 40 mpg. Please give evidence of your claim. The internal combustion engine is amazingly more sophisticated and efficient then it was 100 years ago. The problem is, most of those efficiency gains have been translated into increasing POWER rather then fuel economy. Look at the new Camry. The V6 gets something on the order of 60 HP more then the 2005 model and slightly better fuel economy. Imagine if Toyota would have designed the engine to get 10 extra ponies and a significant increase in MPG. Even toyota is more cooncened with power then efficieny. One high tech vehicle like the Prius does not make up for the rest of the fleet.

Peace,
Cosmo

Lucas


The best way we could improve "our" world would to limit EVERY politician to ONE term in office!

JJ

Cosmo -- I think you got it backwards -- it's not that Toyota is interested in more HP -- it's the consumer who keeps wnating and buying more and more HP -- afterall, there are plenty cars with less HP and better effeciency then the Toyota yet the Camary is A BEST SELLER !!

Max Reid

"from 2/10/06 to 4/7/06, total net petroleum imports into the US dropped 13.2%, "

Guess how ?.

Many people bought portable electric heaters and wood stoves for home heating which should have cut fuel oil usage. Similarly Big SUV sales also fell.

1 good example is Dodge-Durango sales fell 57 % in Mar-2006.

Oil consumption will decline in USA this year and will be flat Worldwide.

An Engineer

In the end the iraq war prolly saved a million us lives overe the next 50 years by getting our combat act together before it was too late. Its all just one big ass training exercise because we are fat and sloppy and out of shape.
Nice try, wintermane!

Next: How Santa Claus and the Tooth Fairy will save us from high oil prices!

Nobody plans that far ahead, least of all our so-called leaders. These guys are just greedy politicians, whose only priority is to save their own butts in the next election.

Proof: Look at all the nonsense they have been emitting about the high oil prices and how to fix the situation - the point of this article.

Joseph Willemssen

Guess how ?.

Many people bought portable electric heaters and wood stoves for home heating which should have cut fuel oil usage. Similarly Big SUV sales also fell.

1 good example is Dodge-Durango sales fell 57 % in Mar-2006.

Oil consumption will decline in USA this year and will be flat Worldwide.

Transportation energy consumption is flat, not declining 13.2%. Same for residential petroleum consumption, despite it being a warm winter this past season.

http://www.eia.doe.gov/emeu/mer/pdf/pages/sec2_11.pdf
http://www.eia.doe.gov/emeu/mer/pdf/pages/sec2_5.pdf

JMartin

I said the market will work if you let it, not that we were letting it work -- and when it does work, it is not all that efficient.

odograph, the government should be working to ensure free markets, rather than screwing them up like they have done with oil. Why are we paying $20 a barrel to subsidize our imported oil through the war in Iraq? Because the politicians don't believe in free markets.

Joseph W, You make my point exactly. The Government is inept at best. So why do we keep expecting it to put incentives in the right place. Talk about believing in the Tooth Fairy!

Rafael, I disagree with one of your points. I think the oil companies have conceded that they have run out of places to drill. They just have not admitted that publicly, becuase if they do, how will they get Washington to subsidize their profits and fight their wars? If you take a look at their actions -- drilling activity and new refineries -- it is clear they know there isn't much more oil out there.

Harvy D is absolutely correct -- we have a choice. I ride my bike to work when weather permits and will do so more when gas goes up to $4. I hope that is soon, so other poeple will make choices, too.

Joseph Willemssen

Joseph W, You make my point exactly. The Government is inept at best. So why do we keep expecting it to put incentives in the right place. Talk about believing in the Tooth Fairy!

I didn't say I expected it to. I want it to. Government plays a unique and critical role which won't be played by other actors. More than most people I believe in doing what one can with what one is capable of doing. But as I pointed out about energy consumption and congestion, the perverse effect of reducing demand is that it just ends up increasing it elsewhere. Until people start being compensated for doing what's best for us all, instead of subsidizing those who do worse, then you're not going to get a good outcome.

It took me a long time to accept that difficult truth, but it's real.

Joseph Willemssen

And I'd like to add that "government" isn't inept by definition -- we make it that way. And we can choose to make it better.

But no matter what we wish, we aren't going to change the behavior of people who do awful things for their own benefit. That requires some degree of power parity, and only the government is capable of being that actor.

allen zheng

LOOK AT THESE DOCS, ITS ONE OF THE PROJECTS/TECHNOLOGIES THAT THOSE OIL COMPANIES ARE LOOKING AT. All of a sudden, oil could be plentiful (or at least $35-$60 range) again as more known, but unreachable reserves are tapped.

http://www.energy.gov/news/3291.htm
http://www.fossil.energy.gov/programs/oilgas/publications/eor_co2/C_-_10_Basin_Studies_Fact_Sheet.pdf

allen zheng

Rafael, Iraq has problems with its oil fields. The massive Kirkuk field in northern Iraq may have been overexploited and pernamently damaged. The practice of reinjecting heavy fuel oil back into oil fields around Iraq to increase yields (during Hussein's reign) may have gummed up some of the oil in the ground. Such problems might hinder the ability to recover some of the supposed 100+Bbl of oil in reserves.

gerald earl

Big oil is made up of shareholders.The majority of shares are owned by investment funds made up of peoples retirement funds.Windfall profits taxes or any such interference could do great damage to the average working stiffs 401k.The oil companies make nine cents per gallon and the government makes eighteen cents per gallon in taxes{plus state taxes}.Thats where they get the money for bridges to nowhere{earmarks}.When exxonmobil merged, the government regulators insisted that they divest themselves of refining assets.These assets are now held by smaller corperations that dont have the deep pockets to finance expansion that the biggies do.As for the internet,it started out as a military research project{darpanet}it was then applied to connect university research labs.It was when it was released to the business community that it exploded into the world wide web.The Iraq war has its roots in the first Iraq war.We liberated Kuwait but our true goal was to assure the free flow of oil{not to steal it but to make sure it is availlable to buy}The Sauds invited us onto their soil because they feared Saddam would come after them next.We have flexed our muscle over there for decades because oil is the lifeblood of our existence economicaly,militarily etc.If an antagonistic power were able to monopolize it we would be at their mercy.Our muscle flexing and our support of Israel has made us hated by the mideast and Islamist fanatics.We need a new energy system to survive without the oil nations.withdrawing support for Israel would be to feed them to the ovens of Islamist hatred{they will when able kill every jewish man woman and child}.If you look into the demographics of African nations torn by war you will invariabl find a population divided into muslim,christian,and indigenous africans.The wahab brand of Islam believes in its conquest of all others because they are superior due to allahs commisioning{sound like the nazi party and the superior aryan race?}.Read Future Jihad by walid Phares for a clear view on this by someone who grew up in the muslim world.Iran is run by a messianic figure who believes he can bring about the arrival of the twelfth Imam.They are pursuing full bore nuclear weapons which brings about the same problem of an atagonistic power in control of our lifeblood{oil}and dedicated to nuking every jew.We can in no way be dependent on this part of the world and do have to be on alert for their oil wealth looking to reach out and touch us through terror.

Joseph Willemssen

The oil companies make nine cents per gallon and the government makes eighteen cents per gallon in taxes{plus state taxes}.

Huh? Where in the world did you get those numbers? It costs Exxon about $5 to get a barrel of oil and they're selling it for $75. The oil itself makes up about 60% of the cost of a gallon of gas at this point. Maybe a gas station owner gets nine cents, but the oil company as a whole is making getting about $1.80, not 9 cents.

When exxonmobil merged, the government regulators insisted that they divest themselves of refining assets.These assets are now held by smaller corperations that dont have the deep pockets to finance expansion that the biggies do.

That's not true, either.

http://exxonmobil.com/Corporate/About/OurActivities/NEW_Corp_OA_Downstream.asp

wintermane

Actauly the huge ass payments to big oil leaders is a clear sign oil itself for those companies went from a long term future to a short term one.

Once they no longer needed to care about the long term they start to grab as much of the pie as they can so they can jump ship with money or jump to a new fuel source with money or run out the last days of oil with money.

As for the war it was just one of the factors that made the war a good idea at the time. But yes they did in fact think that far ahead and farther the plans and reasons for a war in iraq were around since before the first war. Saddam was always a useful target.

gerald earl

A dollar eighty per gallon?Gross,net?Their published profit margin{full page ads in ny times}are under ten percent.Your figure implies a margin closer to fifty to seventy percent.I believe the uproar is over net profits.They were divested of some refining capacity,that doesnt mean all.This is generally true in large mergers to avoid domination of a market.Regardless it is still true that the corp is made up of its shareholders and polital grandstanding will do more harm than good.Higher prices will lead to a drop in suv sales and an increase in sales of fuel efficient vehicles.So I say let the current market forces play out.

Joseph Willemssen

Their published profit margin{full page ads in ny times}are under ten percent.

So you're basing your numbers on full-page advertisements taken out by the companies themselves? Probably not the most unbiased source of information out there.

They were divested of some refining capacity,that doesnt mean all.

Well, you said "they were divested of refining assets [by the government] which are now held by smaller corporations". I see no evidence of that claim, nor what that statement implies.

Regardless it is still true that the corp is made up of its shareholders and polital grandstanding will do more harm than good.

That's pretty illogical. Most large firms are publicly held, and people and institutions who invest in them know that every business investment entails risk. There's no guarantees with an equity investment, nor should the government be in the business of guaranteeing exorbitant returns on specific equities. When a company is giving a guy a $400 million retirement package after 12 years at the company, while normal Americans are being pinched further every day while our government goes deeper into debt and war, something is seriously wrong.

Forgive me if I don't have too much concern that shareholders of XOM might take a small hit to their 76% increase in value during the time Bush has been in office compared to the -2% the S&P has done during the same time period.

Higher prices will lead to a drop in suv sales and an increase in sales of fuel efficient vehicles.So I say let the current market forces play out.

Wouldn't you agree that it would be better for $3/gallon gas to be composed of higher taxes and lower wholesale gas prices than lower taxes and higher wholesale gas prices? Either way, the price signal to the consumer is the same, but the economic effects of lower deficits, better funding for alternative transportation and fuels, and better air quality are superior to enriching a select number of actors, many of whom are not from this country?

I think it's a pretty obvious choice. The question is how to get to that point, and I think the best option is a cap-and-trade mechanism interacting with a dynamic fuel tax.

Paul

Free market theorist might say let the market work with no intervention. The President stated that oil companies "should" invest more of their profits. However, Exxon is buying back their stock, giving out dividends and paying their retiring Chairman a $400,000,000 going away package.

wintermane

Actauly its simple math. The companies make about 9.5% profit and the cost of gas went way up so thier profits went way up because it stayed 9.5%.

But here is the kicker.. for every 20 bucks of fuel you buy... they get $1.90. And the gov gets about $4-5.

In case your wondering where the rest goes...

Someone has to pay the guy at the gas statio and the guy who owns the gas station gets something and the company that owns the line of stations get something and the guy that trucks the fuel in gets something and the state gets a fee from the transport of the fuel and rcently they replaced all thier storage tanks with new ones for enviro reasons.. thats about 2 mil per station WE are paying.. oh and your paying for the mtfb and the alchohol the company buys to mix into the gas and the transport of the oil and people who work on that transport and dso on and so on and so on.

On top of all that the company simply tacks on a 9.5 or so percent profit margin. Rather modest concidering the cost of the things an oil cpmpany needs to build these days... oh wait they charge that too...

Joseph Willemssen

But here is the kicker.. for every 20 bucks of fuel you buy... they get $1.90. And the gov gets about $4-5.

At last month's average price of $2.425, out of $20 of gasoline:

* $10.96 was for crude oil
* $4.34 was for refining
* $3.78 was for taxes
* $0.90 was for distribution and marketing

For January 2001's average price of $1.447, out of $20 of gasoline:

* $8.54 was for crude oil
* $5.84 was for taxes
* $3.56 was for refining
* $2.08 was for distribution and marketing

Of that roughly 98 cents of price increase from January 2001 to March 2006:

* 71 cents was for crude oil
* 27 cents was for refining
* 4 cents was for taxes
* -4 cents was for distribution and marketing

Naturally, with this month's price almost 50 cents higher than March's, the proportion of crude oil as a component of price is even higher.

So this belief that somehow fuel taxes are burdensome or large is laughable, as they remain relatively constant over time in currnet dollar terms, with the federal portion steadily decreasing in real dollar value since it hasn't been adjusted in nearly a decade.

To give you a sense of how well a company like Exxon did last year, they achieved 34% return on equity and 19% return on assets. Compare that to Microsoft, which achieved 29% return on equity and 16% return on assets.

And keep in mind that's at average crude oil prices of around $50/barrel, not $70-75/barrel we're seeing now.

Cut through the b.s. the oil companies like to feed you. They have a pretty large stake in keeping people misinformed.

http://tonto.eia.doe.gov/oog/info/gdu/gaspump.html
http://www.artba.org/economics_research/reports/gas_tax_history.htm
http://exxonmobil.com/corporate/files/corporate/sar_2005.pdf

wintermane

You still gfailed to get the fact that the taxes are far greater then what the company is making profit wise. So if you complain about the profit and not about the taxes you are ignored by many.

Joseph Willemssen

You still gfailed to get the fact that the taxes are far greater then what the company is making profit wise. So if you complain about the profit and not about the taxes you are ignored by many.

Why would I complain about a profit-making enterprise paying taxes? I have to pay taxes. Why shouldn't they?

What you're falling for is what my profs called "accounting magic". Just because what they report under accounting standards seems "reasonable", you need to dig deeper to see the kind of cash they're making.

You're dealing with a commodity with an essentially fixed cost of production, so every extra dollar of price on that commodity is pure profit.

Exxon was making a profit with $10-15 oil -- a healthy profit. Their net income per share has increased 240% from 2002 to 2005. Their share price is up over 70% compared to a flat S&P over the past 5 1/2 years.

What exactly is your motivation for defending the likes of Exxon when your country is now spending $300-400 billion more per year for petroleum than it was just a few years ago, when the $22-28 price band was seen as optimal by the Saudis and exorbitant by a certain person running for higher office in 2000?

Joseph Willemssen

Oh, and jus so you can correct another one of your misperceptions, their income taxes last year were $23.3 billion (and this is globally, not just the US) on net income of $59.4 billion. So both their pre- and after-tax net income exceeds their income tax.

http://www.exxonmobil.com/Corporate/Files/Corporate/fo_2005.pdf

Why do you accept Exxon propaganda so readily?

An Engineer

Seems like somebody has been "gfailed" (sic) by their logic and fact checking-ability.

Let's not forget that the more money that goes to the Middle East, the more money goes to Osama et al. You would have thought that even the president would have understood that soon after 9/11.

Instead, there he was at his ranch in Crawford, kissing up to the then Crown Prince Abdullah. "Please, sir, can we have more oil?"

"Let me see, W, you want me to spend a bunch of money now, so that oil can be cheap and we make less money? I'll get back to you on that." (Winks to aid.)

Looking at the statements emitting from DC, few of our brave leaders get it.

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