Posted on 11/27/2007 6:47:21 AM PST by .cnI redruM
Before Giving Leonardo Maugeri a read, I never would have believed that anyone would praise the existence of high oil prices. While I’d rather not pay over $30 to gas up a sub-compact, the author makes an interesting point. The US, and the rest of the world are not overpaying for oil based on crude reserves. We pay for our lack of refining capacity.
Maugeri points out that we are nowhere close to tapping out our current supply.
An additional 2 trillion barrels of "recoverable" reserves are not classified as proven but will probably meet that standard in a few years as technological improvements, increased knowledge of the subsoil, and the economic incentive created by higher oil prices (or lower extraction costs) come into play. Consider, for example, that only 35 percent of the oil contained in known oil fields worldwide can be recovered today with existing technologies and based on current economic fundamentals (up from 22 percent in 1980). - Foreign Affairs (March 2006)
Maugeri states a naively optimistic belief that refinery capacity will expand as a result of higher crude oil prices. In an economically rational world, he would be right. People expedite what they want done, and therefore, oil companies should feel encouraged to underwrite more refineries. However, they most definitely have not.
The US has not built any new refineries after 1979. Government environmental policy has had the unintended consequence of taxing companies into not bringing more capacity online due to regulatory compliance costs. Ben Lieberman of the Heritage Institute describes these regulatory barriers to entry.
Since the Clean Air Act’s massive 1990 rewrite, the refining sector has had to spend a much as $4 billion each year on regulatory compliance at existing refineries.[2] These investments, which by now total nearly $50 billion, maintain existing capacity but do nothing to increase it. This regulatory burden has siphoned away substantial resources that could have otherwise gone into expansion. When expansions do occur, the regulations make them much more expensive. In addition to costs, the many procedural requirements—and in some cases litigation—can delay new capacity by months or even years. - Heritage Foundation 25 July 2006
Refining has thus become highly unprofitable. Major oil companies make a lot more money finding and drilling crude than they do producing usable products from their resources extracted. Forbes Magazine reveals the extent to which the profits from acquiring and selling raw materials differ from the profits made on the finished products.
Between 1999 and 2003, the major integrated oil companies earned roughly 20% on average capital employed in the upstream, but refining and marketing companies earned less than 10%. Therefore, it is hardly surprising that investment in refining has been lacking. - Forbes magazine, 30 May, 2005
Thus, the US has overregulated the refining of oil to the part where domestic corporations won’t willing volunteer to do more than the minimum amount of work required to provide a market for their wares. This, combined with a strongly inelastic demand for gasoline amongst American drivers, means that gasoline can get very, very expensive before refineries become a profitable enough alternative to new exploration to attract major investment.
So it isn’t necessarily OPEC that has our backs up against the wall on gasoline prices. The Federal Reserve could strengthen the dollar. The US government should review its regulations that make refinery construction a last resort for industrial investments in oil production. Finally, we could drill our own reserves, assuming we have the industrial base to refine them upon extraction.
Hugo Chavez made the point that, compared to wine, crude oil is pretty cheap.
when Al Gore advocates addigint $5.00/gallon to reduce usage, wnybody who whines about payign $3.60/gallon ought to pause - if he had been in the white house we’ed be paying $8.
that includes heating oil too.
never forget just how close he was in 2000....
Though normally against gov't intervention, this time it would serve Americans which speculators are driving up oil futures, and deal with them in court.
If my car ran on wine instead of gasoline, that comparison might make sense.
thanx fer reminding me - where is Joe Kennedy Jr. and his “good friends of venezuela” this year? I miss them commercials!
we really dodged a major bullet back then.
whenever anybody whines about payign $3, I ask them how they’d like to pay $8. the whiners are preedominantly dems, btw.
Problem has never been supply, the peak oil nonsense is just that.
IF we never find another oil field EVER, we know today about enough oil to last over 250 years. Yes its not all light sweet crude, and yes some of it will be tougher to extract, but there is no fundamental lack of oil.
This author while making good points also misses the mark. Yes, refining capacity could increase, but that will not drop the cost of gasoline significantly, when the raw crude is costing $100 bbl.
The fundamental driver in raw crude run up, is the same thing that drove up tech stocks in the 90s and housing prices until recently... speculative investing, pure and simple.
Nothing new here, just now they are playing their games with an inelastic good. That’s the single biggest driver behind the reason Oil is not what its fundamentals say it should cost (about $45 bbl) and the price currently being paid, nearly $100 bbl.
Let’s end the Greenhouse Effect, but make “industry” pay for it, instead of real human beings. Brilliant! (after about 5 or 6 Guinness Stouts)
I tend to think the Fed drives a lot of people into speculation. The Prime Rate was held too low for too long. An oversupply of cash makes dollar-denominated assets a bad play. People have to put their money somewhere, so first real estate and now oil have become the new gold.
biggest driver in the rising price of crude is the entrance into the market in a big way of Chine and India. more competition for available supplies.
Exactly. If anything, lack of refining capability would tend to act as a moderating influence, as it limits demand.
There is a $50-70 speculation bubble priced in right now.
—The US has not built any new refineries after 1979. —
Although a true statement, it ignores the amount of upgrading and expansions in our existing refineries. It hasn’t quite kept up with our consumption, but it is close.
Since 1985 our gasoline production has increased 30%. Our gasoline consumption has increased 35%.
U.S. Net Production of Finished Gasoline
http://tonto.eia.doe.gov/dnav/pet/hist/mgfrpus2a.htm
U.S. Finished Motor Gasoline Product Supplied (demand)
http://tonto.eia.doe.gov/dnav/pet/hist/mgfupus2a.htm
We are importing refined oil products because we simply don't have the capacity to refine all the oil we need.
Sorry,
I disagree wholey with that statement. That’s the storyline the press regurgitates, but its not true. Yes, India and China have come online in the industrial age so there is some more demand, but not nearly the amount that justifies the price run up we have seen.
China however is a COAL driven economy, yes they use oil, but COAL is their main energy source.
Remember, that 1/6 of our manufacturing job base has been offshored from just the US in just the last decade or so, let alone EU etc so its not like suddenly China and India are adding to the global manufacturing output or demand for oil in the levels the press portrays. We are demanding less oil domestically for every manufacturing job that’s been exported.
Oil demand has not trippled or even doubled in 10 years, but the price of crude has... this is not a function of raw demand or lack of supply, its the result of the amount of money funneled into oil speculation going through the ROOF in the past 5-7 years.
Look at the cost of non gasoline oil based goods... while they have risen, they have not risen remotely 2-3 times in the last 10 years. Because those goods are not inelastic, the speculators cannot affect those markets as easily.
There is nothing going on in oil that wasn’t going on in tech stocks or housing speculators are driving the market
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