Wednesday, November 28, 2007

How Big Oil and Governments Bend you over the Barrel

As I'm writing this post, oil is trading at $92.84 a barrel on the New York Mercantile Exchange. Gasoline is near $3 a gallon in the U.S and $1.03 per litre in Canada. Meanwhile Exxon Mobil reported a $9.4 Billion (thats with a B folks) dollar profit for the last 3 months.

Here's why it's always your turn to be in the barrel;

  • The world's cheapest oil to extract comes from Saudi Arabia and costs $2 a barrel to pump out of the ground. The Saudi's, through their national oil company, produce over 8 million barrels per day which for the most part is off-limits to Western oil companies ... hmmm.
  • For Western oil companies it will cost between $5 to $7 a barrel for easily accessible oil. So let's say the cost is $7 per barrel.
  • Factor in capital costs, like building the pumping facility at several billion dollars a pop and that will typically add another $5 to $7 dollars per barrel. So for easily accessible fields it costs Big Oil $14 to get that liquid gold out of the ground.
  • For expensive fields like the Gulf of Mexico, Texas or the tar sands in Canada, the average production and capital cost is somewhere between $13 and $25 per barrel.

Now look out - here come the governments of the world. They have bequethed upon themselves the mantle of unrestricted taxation. Depending upon where you live on this planet, taxes and royalty payments can range from 40% of profits in the United States to over 90% in places like Russia or Libya.

Add to the mix the fact that there hasn't been one single new refinery built in the U.S. since 1976. As a matter of fact 50 have closed since the 1990's rather than making the necessary investments to comply with pollution laws. The net result are low gasoline supplies caused by a lack of refining capacity.

The domestic refining industry has continued to consolidate, allowing operators to avoid building new refineries, run existing ones at full throttle and thus causing many of the outages which have been experienced over the last few months.

Last but not least big oil companies refine more oil than they pump themselves. For example, Exxon refined 5.6 million barrels a day in the third quarter of 2007 .... but only pumped 2.5 million barrels a day. Chevron sold 3.5 million barrels a day of refined products ..... but only pumped 1.7 million barrels per day.

Mark Cooper, who is the research director for the Consumer Federation of America, said prior to a hearing by a House Judiciary Committee antitrust panel in Washington last May that Big Oil "have no interest in building spare capacity because that would undermine their pricing power." He went on to say at the hearing that "this is a picture of fundamental market failure," and that "Congress and the administration have stood by and done nothing to help consumers." "This is just mismanagement but they get away with it because their is no competitive discipline."

Connecticut Attorney General Richard Blumenthal is quoted as saying "There is near unanimity among economists that there is a concentration of power." The oil companies "have clearly demonstrated that they will abuse it."

To bring gasoline prices down in the short term, Cooper urged Congress to use its antitrust authority and investigate whether the refining industry has become too monopolistic. He also called for creating a strategic reserve to help ease price spikes when a refinery is taken offline.

I would urge Stephen Harper, the Prime Minister of Canada, to also address this extremely serious situation ... because at the end of the day ... the citizens of this great country, like the proverbial golden goose, can only lay so many golden eggs.

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