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Energy Insights:65: Why Big Oil is not the problem

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65: Why Big Oil is not the problem


Many Americans are now busy playing the blame game. They are blaming the big oil companies for the high prices of gasoline at the pump.  But this logic is wrong for a number of reasons.

1. Big Oil has little oil.

Big oil companies like ExxonMobil, Shell, BP, Chevron, etc, only control around 10% of the world's daily production. One can't really have much influence over the price of oil with such a small amount. Ninety percent of the world's oil is administered by the governmental oil companies.  Governments have no interest in efficiency. They are interested in politics.   Mexico uses Pemex as a public bank, taking almost all the profits leaving them with little money to reinvest in new production.  And indeed, Mexico has internal studies showing that their 3.5 million barrel per day production is on the verge of collapsing. These studies say that there is a chance that Mexico's largest field could collapse to only 520,000 bbl/day in 2008. That would mean a drop of 63% in Mexican exports--and possibly a collapse of Mexico's economy. 

        "Mexico has been bracing for a decline in Cantarell for years, and previous predictions of immminent decline have turned out to be wrong. But the internal study is the most complete look at the field to date. It says the distance between the layer of gas that sits atop the oil and the water that is creeping into the rocks below is now 250 meters and is diminishing at a rate of between 75 and 110 meters a year. The report recommends that Pemex scrap 26 of 30 new wells planned for the northern part of the field because of gas encroachment.
"'In my mind, this report suggests a collapse scenario is the most likely,' says David Shields, an energy consultant in Mexico who first published the study's findings. Other analysts agree with Pemex's official assessment, however, Matthew Shaw, head of Latin America research for Scotland-based oil consultancy Wood MacKenzie, says he has never heard of a major field declining as fast as the worst-case outcomes outlined in the study." David Luhnow, "Mexico Adds to Oil Woes," Wall Street Journal Asia, Friday-Sunday, Feb, 10-12, 2006, p. 10

Consider also Venezuela.  During the tenure of Hugo Chavez the output of Petroleos de Venezuela has dropped by nearly half and the missing barrels there, are not available to sell here. The only reason Venezuela's production has remained relatively flat is because the big bad western oil companies have been managing other parts of the Venezuelan oil industry and have been increasing production (see below for the bad news) Here is a picture.

2. There is no evidence that the big oil companies are withholding production.

Here is a picture of the production of the top ten publically traded oil companies.  Note that the biggest of the big have had basically flat production, meaning that they are not withholding oil from the market place. Exxon has remained flat, BP has been bringing more oil to market. Total has been flat in production, ConocoPhillips and ENI have both been producing more oil. Only Chevron and Shell have had trouble replacing their production, but their loss has more than been made up by the other companies.

3.Environmentalism,  Oil Nationalism, Taxes and Confiscations are Lowering Investment in new Energy Sources.

The United States decided long ago that they would no longer look for oil offshore Florida, California, and on the Alaska Wildlife refuge for environmental reasons.  Taking areas which are potentially oil productive out of play, meaning that lots of new production was not found is fine and dandy. That is a choice a society can most assuredly make. But then to turn around and grip at the oil companies as if the short supply is their fault is simply irrational--but then no one said politics was rational.

One other thing that society's environmentalism does is restrict the people going into the oil and gas business because they are portrayed as being full of evil people--one can see this on cartoon shows and in the things that teachers say to students about oil.  When my son graduated from Texas A&M the ceremony was with the geosciences department.  Only 3 people graduated from there in 1991. In the early 1980s, this program was a huge, with hundreds graduating each year. Today oil companies can't find young-people to replace the people who are about to retire.  Unlike other countries, which treat oil and gas as a strategic resource, the US treats it as something we would rather not have. Businessweek says:

"Companies also say it’s not easy finding the personnel needed to man these projects, especially in the West. In Russia, China, and elsewhere, its a different story. Russia’s Gubkin Institute of Oil & Gas has an enrollment of 8,000 students and adds 1,500 each year—more than the total native British and U. S. students studying petroleum science, says Joseph A. Stanislaw, senior advisor to Deloitte & Touche’s energy practice.” Stanley Reed, “Why you should worry about Big Oil,” BusinessWeek, May 15, 2006, p. 70

Americans should remember something very, very important:

“The First World War was over, and oil was a key strategic commodity that had helped the allies become victorious. Simply put, the Germans had run out of oil and it cost them the war. So, not only were secure supplies of oil needed to power Britains growing economy after the war, but finding more oil was also a strategic military requirement. Competing against U.S. and other European interests, Anglo-Persian was the British government's key player in securing valuable oil concessions around the globe, in particular the Middle East. Back then, the rush of countries laying claim to the worlds valuable oil resources was termed the "Great Scramble.” Peter Tertzakian, “Canadian Oil Sands—Myth and Reality,” Journal of Petroleum Technology, May 2006, p. 28

Oil nationalism is also taking root. The UK and Russia, has raised taxes on oil (which which will result in less investment). Venezuela is unilaterally changing the contracts on oil fields in which the western companies invested $12 billion (meaning the Venezuelan government didn't have to invest this)  and in which the western companies increased Venezuela's production by 400,000 bbl per day.  Now, their investments will be lost. Bolivia just sent the army in to confiscate fields from Brazil's Petrobras, and Spain's YPF--it seems that it isn't only yanqis companies which are at risk of confiscation. One can't lose investments of this magnitude and still use the money to find new oil sources.

4. Natural production declines in oil producing regions.

Places which used to be highly productive of oil are now in steep decline. The UK production is as low as it has been since the early 1980s. The UK began decreasing in production in 2000. Oman began decreasing in 2001. The oil that is no longer producible in the UK and Oman are not available for sale on the world markets and this results in increasing prices. Here are the pictures:

Notice what has happened to Venezuelan production since 1998.  If these countries produce less oil, there is less supply and thus the price will increase.  I would like to note that the part of Venezuelan production which was managed by the big oil companies increased. The government portion (PDVSA) declined dramatically. If big oil was the problem, why didn't their portion of the production decline?

Kuwait may just have peaked production. From

It was an incredible revelation last week that the second largest oil field in the world is exhausted and past its peak output. Yet that is what the Kuwait Oil Company revealed about its Burgan field.

Kuwait: Saturday, November 12 - 2005 at 08:46

The peak output of the Burgan oil field will now be around 1.7 million barrels per day, and not the two million barrels per day forecast for the rest of the field's 30 to 40 years of life, Chairman Farouk Al Zanki told Bloomberg.

He said that engineers had tried to maintain 1.9 million barrels per day but that 1.7 million is the optimum rate. Kuwait will now spend some $3 million a year for the next year to boost output and exports from other fields.

These are not good signs for the future fueling of the world.

5. Americans drive gas guzzlers.  

The environmentalists (who also drive gas guzzlers), have been warning us about this for a long time. It is irrational to drive a gas guzzler and then blame others for the lack of supply. If your car gets less than 20 mph, you are part of the problem, not the solution.  But then, you might try gripping at the Big oil companies and calling your politicians to raise their taxes so that you can enforce your God-given rights to drive a gas-guzzler.

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