THE CURMUDGEON CHRONICLE ©
AN IRREVERENT VIEW
Time Line: July 15, 2008
Date Line: Flemington New Jersey
Shortages come in all shapes and sizes: they arise for reasons like “there isn’t any” and “lets hold back on deliveries”. Shortages are felt at once and people ask how to correct the supply and the price. Asking Big Oil why gas is $4.00 at the pump is like asking a lion why it eats meat. The difference between them is that the lion won’t kill if it is not hungry; Big Oil never stops demanding more.
From a look at the Department of Energy’s 2007 report it seems that:
There is no shortage of oil in the US
We do not apply resources properly
From which it follows that fair pricing of the commodity means:
The energy industry has public utility functions and should be regulated
Speculation in commodities affected with a public interest should be banned or strictly regulated
Research and development in energy is a corporate (not a Government) function that should be rewarded.
Eliminating purchases of foreign oil will help prices attain realistic levels.
According to the DOE the US has 1.124 trillion barrels of recoverable oil reserves. That does not include Baaken sands; hydrocarbon-bearing shale, and new tar sands, all once deemed too costly to exploit. Those reserves (as yet not fully quantified) could add at least another two trillion recoverable barrels. In 2007 the US used about 20 million barrels of refined petroleum product per day (7.3 billion barrels a year). Of that amount, 15.12 million barrels are crude oil. US production accounted for 5.1 million barrels and the balance (10.02 million barrels) was imported. The rest of what we use consists of liquids generated in the production of natural gas, including liquefied natural gas, and all of that is domestic production.
We provide 50% of the components used for refined products in the US. We import 10 million barrels of crude oil a day from four suppliers: Canada, Mexico, Venezuela and Saudi Arabia. Canada is the largest supply source (40%) and Canadian suppliers own significant reserves and pipeline facilities in the US. Purchases of Canadian/US oil and gas are classified as imported oil. Mexico supplies us with another 20%; we are dependant on Non-North American resources for only 22% of daily consumption and we use refined products as follows:
Allocation Millions of barrels
Industrial Uses 5.06
Residential 0.76
Commercial 0.32
Transportation 14.25
Electric Power 0.25
If you divide 1.124 trillion barrels of crude oil reserves by the 2.2 billion barrels used annually for non-transportation applications it is clear that we can be petroleum self sufficient for a very long time. By the way, 7.4 billion barrels of total usage divided into the minimum recoverable reserve pool of 1,124 trillion barrels makes it clear that we are not in dire straits for about 130 years or more.
The technology of alternative energy has not been applied as yet. We know the technologies and concepts; we have only to put them to use. Brazil is an example of what can be done by government to make and sustain national energy self-sufficiency.
Does that mean there is no shortage? The answer is yes, (or no, if you are talking to an Oil producer or refiner).
Substantially all the major oil producing acreage in the United States is held by Big Oil under lease from Federal, State, and Tribal entities. The Federal government leases oil properties subject to a 12.5% royalty. That is the best deal on the planet as far as Oil producers are concerned. They want to postpone using those reserves for as long as they can; hence the industry position that oil is in short supply, or too costly to produce, etc.
No US producer has increased domestic production resources either at the well head or the refinery door in the past two decades. Consider that a $140 barrel of oil costs about $14 to produce (including all costs and expenses, depletion, amortization and overheads). The US gets royalties of $35 and the Lessee oil operator nets $91 per barrel. In addition a refiner gets a “cracking fee” (refinery profit) of another $30. Total to Big Oil $121; total to the US $35, cost to the public at the pump = $4.20 per gallon.
That may or may not be fair in the world of petro-arithmetic. When the Saudis and others analyzed the numbers they nationalized their petroleum deposits. Big Oil said, “Thank you very much. May we continue to refine your production?” Big Oil didn’t care too much because oil was selling at under $20 per barrel and the cracking fee was more than the net profit on sale of a barrel of crude.
Our government was neither asked (nor ever considered) to try to recover the nationalized assets. OPEC was born; and we became a customer of a Cartel whose avowed purpose is getting the highest possible price for the product. As the customer of a sole source of supply for a necessary product, you are given no choice beyond paying the price or doing without the product. Today’s world cannot do without petroleum products.
OPEC and our domestic producers are assuring us there is a terrible shortage of the commodity. If the US does not challenge that position, there is little hope for the consumer.
We are in a unique position: we have sufficient reserves to meet our needs; we have a government with the legislative power to act in the current circumstances. Through legislative power we can regulate the commodity, reward those who help bring costs down, punish profiteering, and see that industry and the consumer get a fair deal.
The industry serves a public utility function and should be regulated under US laws. Regulation would assure product distribution and availability, fair pricing and profits to the Oil companies. Regulation would promote research and development of all forms of energy.
We had an excellent regulatory model; its effectiveness was proved by such public utilities as AT&T. Our telephone and public utility companies were models for the world but we allowed business to buy legislative cover that destroyed AT&T and created the Enron abuses in the name of “competition”. If it took a stroke of the pen to wipe out the controls, let’s stroke the pen once more and bring them back where they are needed.
There are things to do that will alleviate costs and bring prices down for today’s consumer. Consider transportation’s role in oil consumption. It takes one gallon of fuel for the average truck to move a ton of freight 25 miles. The same gallon of fuel moves a ton of freight 435 miles by rail!
It takes a Chevrolet a gallon of gas to move you 13.5 miles in city traffic.
It takes a Mini-Cooper a gallon of gas to move you 45 miles in the same traffic environment.
The combined petroleum use for residential and electric power purposes is 5% of total usage. The obvious culprit is transportation and the unrealistic and unnecessary demands it is permitted to make on our resources.
The airline industry/has a fuel cost per mile approximately 600% of the cost per rail mile. There is virtually no reason for airlines to provide service between cities 250 mile apart or less, The train time to Washington DC from NYC is approximately 3 hours and compares very favorably with the flight time of 1 hour and 15 minutes to which one must add at least an additional hour and a half for check in procedures and other delays, without considering the time and energy used to get to an airport vs. getting to a city rail station. A switch to rail stead of trucks can reduce crude used for transportation by between 25% and 50%.
We know how to reduce the use of crude oil. The question is, whether that will permit the reduction of gasoline and refined products. Today the price of oil futures dropped sharply despite the fact that nothing has changed in the usage patterns or anticipated need for product.
Nevertheless, the price of gasoline rose during the day to a new record.
You cannot expect speculation or the profit motive to go away because of the nation’s needs: For that, you need control and regulation.
Is there a leadership in government that is ready to try?
Howard Stamer
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