Tuesday, May 2, 2006

The war against 'Big' Oil

Let the market work and ignore politicians and eco-fascists

by StFerdIII

Imagine the following. You start a company, you build it up, you invest, you take risks, you pour your own capital into the concept, and eventually through good management and smart capital allocation you generate profits and along with some other firms come to dominate an industrial segment. Then imagine a consort of politicians going to the media and crying about the ‘public good’ referencing your supposedly obscene profits and high prices with wild demands that you pay a sur-tax for the good of your country and the ‘people’ or return profits immediately to the government who will then wisely distribute it to all the vote casting citizens that need to be bought off. Communist? Decidedly. But that is now the hue and cry from the chattering elite, media, assorted eco-fascists, and neo-Marxists jokers regarding ‘big’ oil. Destroying oil companies which compete fairly in the open market is unnecessary, immoral and would lead to an energy disaster and a dislocation of our modern economy. Leave them alone and keep the busy bodies and the ignorant political class out of the economy.

Consider the following. Oil companies have on average a low 6 % margin on retail gasoline sales. This margin level is below that of most industries. Yet due to the cartel called OPEC, hedge fund speculations, and increased demand, especially from China and Asia, coupled with a lack of refining capacity in North America, and the entire North American Continent off limits to oil drilling, oil and gas prices have increased. Wow big surprise. Cartelized supply by mostly Arab nations, which gouge the wholesale price, plus increased demand, plus bottlenecks in refining and distribution, plus escalating economic demand from large growing economies and prices have escalated. But wait – these can’t be the reasons! No no no. Oil companies are colluding, raising prices, gouging consumers and destroying our economy……35 years of anti-trade investigations in both the US and Canada can find no proof for this but heck in the post-modern world, who needs reality and facts. Big oil is evil! That sells news time and newspapers.

If you want to solve high oil prices do the following: build more refineries, allow drilling and distribution networks to be set up and let oil prices work in the open supply and demand market. These are short and medium term steps that can be enacted by Parliament and Congress. In the longer term destroy OPEC. One reason amongst many why I support the current Iraq war is that at some point to safeguard our modern civilization, we will need to break OPEC and control oil. Such an idea offends the sensitive, gay-loving, Arab kissing elite, but it is better to deal in reality and facts than dialectical theories and arcane psycho-semantic nonsense. Control oil and control our destiny would be my motto. Another way to decrease oil prices is to reduce government taxes on gasoline. Government taxation accounts for 40 % of retail gas prices. But don’t expect the vote buying snake-oil salesmen to recommend a decrease in their own revenue anytime soon. Easier to beat up ‘big’ oil, demand more taxes to be paid, and buy those votes.

So what about the extra costs involved in our gas prices that no one talks about? Inane costs include reformulated gas mandates, prohibitions on offshore and Alaska oil drilling, and environmental regulations and price controls. These additional costs go a long way to explaining why not a single new oil refinery has been built in the U.S. or Canada since 1976. So even as world oil supply exceeds world oil demand by 2 million barrels per day – a rather slim but still healthy margin – we are unable to increase our distribution capability and thereby lower prices, since we are prevented from finding and then refining new supplies thanks to eco-regulatory costs.

Remember the oil spike of the 1970s? The worst US President in history – the ably moronic Jimmy Peanut Carter – implemented a $50 rebate in 1977 to spur the economy. It did exactly nothing to spur the economy or solve the underlying systemic problems associated with high oil prices mentioned above which were as true in 1977 as they are today. Now the US Congress is musing about following Carter’s highly intelligent policy by giving US citizens a $100 each. All in the name to buy votes, spend money they don’t have and smile and cry before the media cameras about their concern for their fellow citizens and the environment. They will certainly shout that the oil firms are colluding and that government ‘must’ do something to repair this incontrovertible fact and they hope that the $100 rebate, should it happen, will save their jobs come the November elections.

But do oil firms collude? The idea that oil companies are colluding to raise prices has been contradicted by countless Federal Trade Commission studies. Oil exploration is a capital-intensive business that requires huge economies of scale and long time horizons. From the time a potential drilling site is spotted to the day any oil gets to the pump can take a decade. Bigger companies can afford to take bigger risks. So busting up oil companies would almost certainly lead to less oil exploration and production, and thus higher oil and gas prices. It would lead as well to job losses, and less inventive methods of exploration and technology exploitation to turn different varieties of oil [think shale and tar-sands] into refineable and usable product.

In short high gas prices are necessary and are a response to supply-demand and cost pressures. Government, as usual, helped create these higher prices. By reducing taxation, increasing the incentives to build refineries and repealing eco-nonsense regulations, we would enjoy cheaper and more abundant oil supply and retail prices would be lower. If we don’t enact these changes, then we should stop crying and live with higher prices.