As a general rule, business exists where profit can be made. Pretty basic stuff. Nothing wrong with making a profit. Of course, to make a profit, I usually have to sell something. Usually goods or services. When the supply greatly exceeds demand, prices tend to asymptotically approach the "zero profit" line. This is not really good for business, and tends to dispose of the more inefficient companies, and discourage new entrants into this market. In the end, a fairly good
balance can take place with proper free market driving forces. Everyone benefits, both consumer and business.
But how does this translate to the oil industry?
For starters, you are not very likely today to see many new entries into this market. It takes too much money to get started, and small businesses just don't have the economies of scale necessary to be competitive. So very limited competition.
On the demand end - how much choice does the average person have to reduce gas consumption? There is a little wiggle room, but not much. So we have a fairly fixed demand on a per capita basis, at least here in the USA. (Side note - if we were talking the lobster business, and prices tripled, people would stop eating lobster. Problem solved. But since the world's industry is based largely on oil - price increases will become inflationary).
Everyone knows that oil reserve supplies are limited, yet I am not of the opinion that this is THE reason for the price hikes we have seen over the last 2-3 years. The key suppliers of crude have made sure to allocate production to "match" demand. In the oil industry, excess is difficult to maintain, as you can only store so much oil. So one might infer that this is just how this business needs to be run. But wait. Haven't global markets recently stretched supplies? Driven prices upward? Indeed. And there were few industry experts who were surprised. We have had no fewer than 5-10 years "notice". So why wasn't the industry prepared?
Because that would be bad business. A couple minor shortfalls in supply do wonders for prices. And everybody in the business celebrates. Crude oil suppliers, refiners, and oil/gas distributers. Executives get well deserved pats on that back and record shattering bonuses, stock options, retirement benefits, etc. Again, nothing new about this.
Just don't expect drilling to add much to global market supplies. And don't be so naive to think that if we drill in the USA, or off-shore, that we somehow have dibs on this supply. Unless this country abandons the free market realm and nationalizes the oil industry - oil drilled here will be sold on the world market. Of course, even this is short-sighted. What incentive do oil companies have in off-shore drilling? They have a winning combination right this moment, and they have no desire to invest many billions of dollars in additional off-shore drilling that will only serve to reduce their profit margin. There are allocated lands on-shore today they have not drilled. There may be many reasons, the largest is lack of incentive.
So why do you suppose there is such a "drill, and drill now" mantra being spoken by both sides of the aisle? Because the sheeple want to think that their government is looking out for them, and government is all too willing to strike any pose to garner their votes. End of story.
The prevailing belief is that we have an oil shortage. It is a myth. Oil production has never been higher. The world demand has just outstripped this and other nations' abilities to REFINE the oil. So drill all we want, if the refining capacity is not increased, then we have no more gas.
Will there be ANY winners in the "drill now" crowd? Minimal. Add a couple percentage points (at most) to global oil supplies starting in 10 years or so. Employ a few thousand people. Make people *feel* better, even if they pay the same price at the pump.
Who loses? The environment. Our trust that the government can address a problem with a real solution. Politician's honesty.
The longer we keep looking in the wrong places, with simple-minded solutions to complex problems, the harder the fall will be when we get caught with our pants further down than they already are. Government and big business make for a nefarious combination when allied against the people. And although we the people hold the trump card, we refuse to play it. When we do, we can only hope it won't be too late.
3 comments:
Tom,
This was an excellent piece of writing and analysis! However, I do have a few comments.
You stated that the average person does not have much of a choice in reducing gas consumption -- surprise, surprise, they do have a lot of leeway and have reduced consumption by a striking amount in the last few months! Also, moving forward, they are choosing autos that are way more efficient, and the market is busy trying to provide workable all-elecric cars. I believe that the free market does work and WILL deliver solutions as long as the government does not inerfere...
You also stated that the oil companies have no real incentive to drill off-shore. This is an incorrect and naive premise. The oil companies are the ones that are paying the exorbitant money to OPEC for oil -- this raises their profit in the short term because profit margins are based on a percentage of the cost of goods acquired or produced. If oil companies drilled off-shore, they would get the same price for their oil as OPEC does cause they would sell in the world market. This would bring badly needed dollars into our economy as opposed to sending it elsewhere. Yes, it would cost the companies billions in up-front costs, but this is "the cost of doing business".
So, look at Dubai and tell me that you think that we should just keep sending our money to them or should we perhaps try to keep some of it at home...
I sure hope to see more blogs from you cause you are quite provocative.
Nancy
The idea that ir would take 10 years for additional drilling to increase the supply, I disagree.
It might take 2 years for a noticable increase. We have to start somewhere.
Another partial solution to our energy problems would be nuclear power. It now takes ten years to get a new plant in operation but this is largely a
bureaucratic snafu caused by our liberal tree hugers.
These same tree hugers make it difficult to build new refineries which I think we will soon need.
In order to isolate our oil production from the world market we could ( but won't ) impose an export tax on our prodution.
Yes! I am vigorously nodding in agreement to this entire post.
One aside to Nancy--Dubai's economy is very loosely tied to the oil industry. It's complicated, but the real danger zone in the Middle East are the Wahabi Saudis who ARE on the oil take more than anyone.
Tom- you should really check out some of the incredible vehicular technology coming out of India, my favorite is a car whose pistons are fired with compressed air! We have limited choice now, but I believe the future holds great promise. Sadly, the technology will probably not be home-grown because we are so petro-centric that we can't think outside the barrel.
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