Thursday, July 03, 2008

Obscene Oil Profits and How to Put an End to Them

Barack Obama is an idiot. And because John McCain can’t come up with this idea on his own he’s likely not much better. Now I know that the biggest criticizer of “big oil” (By the way, I looked it up, there is no single entity called “big oil” just a group of publicly held companies operating in the oil industry) and coiner of the phrase “obscene profits” is Hillary Clinton, but aside from a potential VP nod and subsequent plot to take the Oval Office from within the administration, she’s a non-factor right now.

That leaves us with Barack and John. I pay their salaries; I think its okay for me to address them on a first-name-basis.

Obama’s position on $4 gasoline is summed up in his statement “We can’t drill our way out of this,” meaning that he would rather see more hybrid cars, mass transit and people turning off their Air Conditioning and Heat. His statement “we can’t” doesn’t refer to a physical inability; it is actually an ideological roadblock: “we shouldn’t.”

McCain’s solution to high gas prices has been to have a gas-tax holiday from Memorial Day to Labor Day. Essentially, during the summer the government gets none of what you pay at the pump. If anything this just keeps the gas companies from having to collect taxes on behalf of the IRS and isn’t much of a long-term solution at all.

Others have proposed further taxing the oil companies “obscene” profits. This just exacerbates the high price at the pump because in everything you buy from t-shirts to stereo equipment to mayonnaise has a tax built into the price. Taxes on corporations are just the IRS’s way of outsourcing their collections department.

But what if we did drill our way out if this? Keep in mind I believe we can and we should. The reason for high gas prices is primarily the industrial revolution currently happening in India and China. More industry needs more fuel and outside of smashing atoms, oil provides the best bang-for-your-buck ratio. We know from the first law of Economics that when demand rises, and supply stays stagnant so the price goes up.

Drilling domestically, and all signs point to there being at least as much Oil in North America as there is in the Middle East, would provide a significant boost to the world’s oil supply. This would increase supply at some point to approach the increased demand. Continuing with the economics lesson when supply rises to meet demand the price comes down.

So in response to Barack, Yes, we can drill our way out of it, in fact, the best, easiest solution in the world is to drill our way out of it.

Now what would be the long-term ramifications of this? With oil trading currently at approximate $140 a barrel, based on future speculation of supply and demand the speculation would then shift toward rising supply and thus lower price per barrel. Since we are dealing with long-term speculation and not physical supplies the price for a barrel of crude would likely drop rapidly and significantly.

How significant? Well let’s assume that ANWR provides ten years of US supply. Oil would become more readily available concequently the price per barrel would drop; the profit margin from extracting the oil from the ground would become razor thin.

Oil companies now get $140 per barrel. Let’s assume that their overhead costs, including facilities, transport and labor costs are $50 per barrel. Droping the price per barrel to $80 significantly cuts into the profit margin per barrel. Dropping the price again under $50 creates a loss for the oil company.

And that’s how you cut Oil profits without hurting the consumer!

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