Just imagine how we could do if there were more oil exploration opened up!
Every so often I get little nuggets from my friend Jane Vane Ryan at the American Petroleum Institute, and today was one of those days. She actually sent me two items, and I can distill both into one high-octane post. (I thought about adding a couple more oil-related metaphors and terms to that sentence, but I’d be fuelish to do so. You have my permission to groan.)
What’s quite serious of late is the precipitous drop in the price of crude oil, which begat the unprecedented slide in gasoline prices since July. Today the API put out a Pump Price Update based on information obtained from the federal Energy Information Administration. We are now back to the pump prices in non-inflation adjusted terms we paid back in 2005, but there were two charts in the API document which truly piqued my interest.
If you look at the chart on the first page of the API report, it graphically shows the average inflation-adjusted price of gasoline from 1918-2007. At the moment, our average price is near the bottom of the charts, although there was a long and recent period where we were doing even better compared to the overall term. The spike over the last half-decade seems to coincide with the Long War, and probably began shortly after 9/11 with the uncertainty created by Islamofascist terrorism originating in an oil-rich area. Obviously the API-member oil companies made a lot of profit over that timespan as well, but for all the maligning they’ve received in the press over these supposedly ill-gotten gains, the item I’ll get to toward the end of the post will be instructive.
The other chart that I found intriging was the bar chart below the gasoline price graph, which sorted the price of a gallon of gasoline by each component. As you can see, the one constant is the tax bite, which now consists of about 26.7% of the pump price. (Yet the federal and state governments want more because they have potholes to fill, not to mention budgetary holes.) Since I can be almost certain Jane is a monoblogue fan, she may be able to answer a question I have in seeing that chart: how do you or your friends at API explain the huge share of cost for manufacturing and marketing just two years ago ($1.30 per gallon) declining to just 20 cents per gallon now? Is that a component of hurricane damage being repaired, more efficiency at the refinery level, less profit on the books, or some combination of those and other factors?
We know that crude oil is now running south of $50 a barrel when it was nearly triple that just this past summer. Yet those oil companies haven’t exactly been placing their profits in the bank and collecting the interest (which may be a good thing seeing the condition of many of our major financial institutions); instead they do things like drill a really long way down, as this AP story by John Porretto relates.
Folks, we’re talking nearly two miles deep just to get to the bottom of the water, let alone through what’s under it.
Royal Dutch Shell isn’t talking specific numbers on this exploration bid, but Porretto notes that these efforts can run into the billions of dollars. Certainly that’s not just investment in the actual oil rig and drilling down through thousands of feet of water depth, but in all the planning and permitting that’s needed to occur since they (along with partners Chevron and BP) secured the lease twelve years ago. Half that time had elapsed before they determined hydrocarbons were there – imagine if they’d started the work and found a dry hole.
This is the point those who whine about the 68 million acres or whatever is leased by oil companies but not in production don’t seem to understand; much of that area has been explored on at least a cursory basis and found to be most likely lacking enough product to make the area worth further exploration. And if you return to the API data I cited above and refer to the 1918-2007 gasoline price graph, you’ll notice that back in 1996 we were in the midst of that pricing valley. Still, Shell and its partners were interesting in seeking more domestic oil because the infrastructure was available – even with a less-than-friendly President in office at the time. (However, we had a much business-friendly Congress at the time, which provided some balance.)
The other argument drilling opponents make is that getting new oil would take years, and surely they could point to this as an example. However, it’s obvious that the technology has advanced enough to continue exploring in deeper and deeper water if that’s where the oil can be found; on the other hand the technology for many other areas of “alternative” energy and associated products would need government subsidies for a decade or more before they could reach an affordable price point for the market. Witness the Chevy Volt – a mid-size car that could well run $40,000 but qualify for a $7,500 subsidy from the federal government when (or maybe if, given GM’s current state) it comes out in 2010.
Oil companies play a high-stakes game. If the Perdido field can come through on the potential 130,000 barrels a day of “oil equivalent”, daily revenue at even just $40 a barrel would run over $5 million. Shell and its partners would surely make up a $1 billion investment fairly quickly (now THAT would be an acceptable payback period to me.)
Not only that, the federal government also collects its share in taxes and lease payments – and do you notice the oil companies aren’t in the bailout line? If anything I say makes the argument that we should drill here, drill now, and pay less, it’s my prior questioning sentence.