Some Simple Truths About Oil

Many people have misconceptions about how oil is found, produced, refined, and supplied to consumers, most noticeably in the form of gasoline. The oil industry has been so demonized over the years that few people fully understand where oil actually comes from, who really owns it, how costly it is to find and produce, and how much actual profit oil companies make. It is this ignorance, I believe, that leads to bad government laws, more taxes, higher costs, (like we're seeing now) and serious damage to our economy. Here are ten simple truths everyone should know.
Peter

Ten Simple Truths about Oil
Alan Caruba

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Having written about the energy industry and issues now for a long time, I hope I can be forgiven for being enraged by the comments by Sen. Charles Schumer (D-NY) in response to President Bush’s press conference Tuesday morning. There is simply no way to describe them other than false.

The Democrat Party has long made “Big Oil” their favorite punching bag, confident that the public has no idea what influences the price and supply of oil. Saying anything favorable to Big Oil is immediately deemed evidence that one is in their pay and whatever facts are offered are therefore invalid.

There are, however, some simple truths about Big Oil that cannot and should not be ignored. To do so leaves everyone at the mercy of energy policies that have created the situation in which the United States finds itself today.

Fact #1. The combined ownership of oil reserves by the independent, investor-owned oil companies such as ExxonMobil, Conoco-Phillips, BP, Chevron and others is barely 4% of the total known oil reserves in the world. By itself, ExxonMobil’s share is 1.08%.

Fact #2. Oil is a global commodity sold on mercantile exchanges for whatever price it can command. Speculation in oil prices is the primary reason they have been driven to utterly insane costs per barrel. It has nothing to do with actual supply and demand.

Fact #3. No nation on Earth is or can be “energy independent.” The geopolitics of oil is complex, but as nations such as China and India have seen their economies grow, their need for oil grows with it and thus they compete with long established industrialized nations for existing oil supplies. This competition has an impact on prices.

Fact #4. The OPEC nations, those in the Middle East and including Venezuela, control 77% of the world’s known oil reserves. Like Russia and Mexico, where the oil industry is controlled by the state, it is generally poorly managed. Several Big Oil companies that were induced to undertake exploration and development in Russia and Venezuela actually had their assets nationalized or stolen at prices well below their investment and value.

Fact #5. Energy is the master resource. All nations with any hope of growing their economies require it, mostly in the form of electricity, but also for oil’s role in transportation. The failure to have a national long-range energy policy that is based in reality can severely impact energy prices.

Fact #6. The United States has, for years, pursued an energy policy based on environmental myths such as “biofuels” in which corn is turned into ethanol to reduce the import of oil, but it costs as much to produce ethanol as to refine oil and it provides less mileage per gallon, thus negating any reason for this additive. Likewise, suggesting that wind or solar energy can generate anything more than its current 1% of the nation’s electricity needs ignores their unreliability and the fact they are heavily subsidized, a form of hidden consumer tax.

Fact #7. It costs billions to explore, discover, extract and transport oil. It takes lots of lead-time as well. The United States Congress has, for decades, refused to permit the extraction of vast oil reserves in ANWR despite the fact it would have little or no impact on the Alaskan wildlife reserve. In addition, Congress has declared 85% percent of the nation’s coastal, offshore areas off-limits to any exploration for oil or natural gas.

Fact #8. The U.S. Environmental Protection Agency, under the mandate of Congress, requires Big Oil to refine oil into some 17 different formulations in the name of clean air. With three grades of gasoline, that means that refiners must produce some 45 different blends. The quality of air in America is excellent, but the cost of gasoline at the pump continues to rise as the result of these mandates.

Fact #9. America imports two-thirds of the oil it uses. All of its transportation runs on oil. The population continues to grow. Failure to encourage the construction of a single new refinery since the 1970s puts a further strain on the ability of Big Oil to provide the nation’s oil and diesel fuel needs.

Fact #10. Democrats continue to demand that Big Oil’s profits be confiscated in some fashion and some of the inducements offered to explore for more oil be ended. Because the costs of exploration, extraction, refining, and transporting of oil represents billions, the actual profit margin of a company like ExxonMobil is about 10%, well below what industries such as pharmaceuticals and banking enjoy.

For these and many other reasons, Americans are being impoverished at the gas pump because Congress has dithered and failed in one of its most important responsibilities.

A Lot Of Money Being Spent On Arctic Oil Exploration

Oil companies just spent a record $2.7 BILLION dollars for the "right" to drill exploratory wells in the Chuckchi Sea off the northwest coast of Alaska. This is a huge amount of money, in fact, the most ever spent in Alaska, onshore or offshore. This tells me, as a geologist who is familiar with the area and its history of oil exploration and development, that the oil companies are very confident there is a lot of recoverable oil in rocks beneath the Chuckchi Sea. It also means they think they can find it, produce it, and move it to market. This is by no means a simple task, in what certainly must be the world's harshest environment.

Another aspect of this lease sale by the United States Federal Government, and one that is often overlooked, or ignored, is that all of the money from the winning bids goes into the governments coffers. Look at the amount of money the government has collected from lease sales in Alaska in the past (see the list below). The amount is mind-boggling. So much for the idea that "big oil" is bad. The government must love the oil and gas industry for all of the revenue it provides.

There is yet another aspect to this sale that I'm sure a lot of people overlook. Where does the oil industry get all the money to spend on these lease sales? Well, they get it from you and I, and anyone and everyone who uses petroleum products. The cost gets passed on to the consumer, of course. When you think about it, this is another form of taxation; in this case the money goes from your pocket to the oil companies, who then pay a large portion to the government. This does not even include the royalties companies pay when they actually produce oil and gas.

To make things even more depressing, think of the taxes you pay when you buy the gasoline made from this oil. We're being taxed, and taxed, and taxed again. Think about this the next time you fill your car with gas and complain that you're being "ripped off" by "big oil".
Peter


source:


Record bids for oil, gas leases in Chukchi Sea
$2.7 BILLION: Alaska won't get a penny from federal sale of remote Chukchi Sea tracts.
By WESLEY LOY

wloy@adn.com wloy@adn.com
Published: February 7th, 2008 12:11 AMLast Modified: February 7th, 2008 03:23 PM

Oil companies flush with cash and hungry for new discoveries bid nearly $2.7 billion Wednesday in a blockbuster competition for drilling rights in the forbidding Chukchi Sea.
The sum of winning bids is the most ever generated in an Alaska oil and gas lease sale, whether on land or offshore. The tally tops the $2.1 billion raised in a 1982 sale in the neighboring Beaufort Sea, and the $900 million in a 1969 land sale at Prudhoe Bay that launched giddy Alaskans into a new era of fabulous oil wealth.
All proceeds from Wednesday's sale go to the U.S. government, and none to the state, as the offshore acreage is under federal jurisdiction.

Oil men, journalists and others packed a Loussac Library auditorium in Anchorage and listened with anxiety and awe as officials announced hundreds of often jaw-dropping bids on tracts totaling 2.8 million acres in the Chukchi, a shallow and icy polar sea between Alaska and Russia.
The competition was pitched as two global powers -- Shell and Conoco Phillips -- offered fortunes on some of the same tracts. Onlookers sometimes sounded like a football crowd, going "ohh!" or "aww!" when one company barely beat out the other.

The day's highest bid for a single tract came from the Dutch company Shell at $105,304,581.
"It's fabulous," Jason Brune, head of the Resource Development Council for Alaska, said during a break in the three-hour bid reading. "The big boys came -- flexed their muscles."
Not everyone was happy.

A handful of environmental activists and Native leaders from the coastal villages of Point Hope and Barrow stood in subzero cold outside the library to protest the sale. They fear industrial activity and spills could drive away or kill whales villagers hunt for food.
"Our ocean is our garden," said a shivering Earl Kingik, a Point Hope whaler.
He and other protesters said they don't believe oil companies can clean up offshore spills, and they said the companies demonstrated with their huge bids they have the power to steamroll village concerns.
Point Hope and a coalition of environmental groups have filed suit challenging Wednesday's lease sale.

Oil company executives and officials with the U.S. Minerals Management Service, which regulates offshore industry, said whales, polar bears and other wildlife will enjoy many protections from explorers. For example, all the leased acreage is at least 50 miles out to sea. And companies would be encouraged to use pipelines, not tankers, to carry oil to market.
Randall Luthi, director of the Minerals Management Service, said world energy demand is rising and the Chukchi Sea offers a chance to reduce U.S. dependence on oil and gas imports.
The government estimates the Chukchi could hold 15 billion barrels of recoverable oil and 77 trillion cubic feet of natural gas. Those numbers compare to reserves in the Prudhoe Bay area.
"It's a great sale, a great commitment," Luthi said. He noted the $2.7 billion in winning bids far surpassed his agency's prediction a couple of years ago that the Chukchi sale would generate $67 million.

The last Chukchi sale, in 1991, generated $7.1 million.
Much has changed since then. The price of oil has rocketed to nearly $100 a barrel, and Shell and Conoco ran seismic surveys to test the geology beneath the Chukchi in the last couple of years, sometimes sharing the cost and the data, said Erec Isaacson, Conoco Alaska's exploration and land vice president.

Of the seven companies bidding, Shell was tops with $2.1 billion in winning bids, followed by Conoco with more than $506 million. Other bidders included the Spanish firm Repsol, the Italian firm Eni, Statoil Hydro of Norway, and two others.

The biggest bids centered on abandoned well sites in the Chukchi. Between 1989 and 1991, Shell drilled four exploratory wells with names like Popcorn and Burger, finding signs of oil and gas, and Chevron drilled one.

Because the Chukchi is so remote and devoid of roads, pipelines and ports, it'll take a major strike to justify the enormous cost of commercial development, oil company executives said.
But with other oil provinces around the globe either closed or played out, and with oil prices soaring, the Chukchi looks like a good gamble, they said.

"The time's right to come back to Alaska," said Annell Bay, a Shell exploration vice president.
Shell, which re-entered the Alaska picture in 2005, plans to drill in the Beaufort Sea this summer assuming it can overcome a court challenge.

Biggest Alaska oil lease sales
Year Sponsor Location High bids
2008 Federal Chukchi Sea$ 2.66 billion
1982 Federal Beaufort Sea $2.06 billion
1969 State North Slope $900 million
1984 Federal Beaufort Sea$ 867 million
1979 State Beaufort Sea $567 million
1976 Federal Gulf of Alaska $560 million
1984 Federal Navarin Basin $516 million
1979 Federal Beaufort Sea $489 million
1988 Federal Chukchi Sea $478 million
1983 Federal St. George $426 million
Sources: U.S. Minerals Management Service; Alaska Division of Oil & Gas

No More Oil? No More Civilization As We Know It?

This article is now 2 1/2 years old, but the basic premise put forth, that the world will run out of oil and gas, remains as true today as when this it was written. What has changed is there is now a "consensus" that the world must wean itself off of oil, gas, and coal, (fossil fuels), but not because we are going to run out of those sources of energy, but because they produce carbon dioxide emissions and cause global warming. I find this stance being taken by governments and industry to be a bit odd. I intend to explore the issue farther.
Peter

from: http://www.livescience.com/environment/end_oil_041214.html

End of Oil Could Fuel 'End of Civilization as We Know It'
By Robert Roy Britt, LiveScience Senior Writer
posted: 14 December 2004 03:28 pm ET

SAN FRANCISCO -- Opponents in a long-running debate over when the world will run out of oil squared off Tuesday in a crowded room of scientists, reaching only one conclusion: The supply of fossil fuels is fixed and the world economy will eventually have to wean itself from oil.
The most dire and perhaps speculative forecast calls for global oil production to peak next year -- specifically on Thanksgiving.
Others say the end can't be accurately predicted, but that it is likely decades rather then centuries away, and that the consequences will be grave: huge inflation, global resource wars -- China vs. the United States was emphasized as a possibility -- and the end of civilization as we know it.

Other experts at the face-off, held here during a meeting of the American Geophysical Union, said there is nothing to worry about in the short term.
U.S. peaked already
The argument stretches back to a 1956 prediction by M. King Hubbert that oil production in the lower 48 U.S. states would peak in the early 1970s. He was right. The United States now imports nearly 60 percent of the oil it uses.
Kenneth Deffeyes, a Professor Emeritus at Princeton University, has taken Hubbert's logic a step further and predicts the world's oil production will top out late in 2005.
"It's Thanksgiving plus or minus three weeks," said Deffeyes, who grew up in the oil fields and was a researcher at Shell Oil for several years.

Deffeyes second book on the topic, "Beyond Oil: The View from Hubbert's Peak" (Hill and Wang) is due out in March. His crystal ball is full of complex formulas and, most scientists agree, numbers that are impossible to accurately pin down, such as the amount of oil in known fields and how much more will be found.
"This is not science," said Michael Lynch, a political scientist and energy consultant. "This is forecasting."

Lynch agrees there are problems with relying so heavily on oil, and he sees more price volatility ahead. But he argues that many smaller deposits will be found and they will add up to "a lot of oil" over time. He also faults the running-dry-soon predictions as being based not on geology, but on politics and economics: Oil production in various countries has flattened or fell at certain times for reasons having nothing to do with how much they could produce, Lynch says.
Further, Lynch contends, it is not possible to predict the discovery of new oil fields or the true size of existing in-ground reserves. He likens current oil forecasts to stock market prediction. Charts fit history well, he says, "but they're not predictive."

Alternatives?
Likewise, analyst Bill Fisher of the University of Texas at Austin sees plenty of oil over the next few decades. Fisher sees no reason to panic. He expects the world to gradually transition to an economy based on natural gas during the first half of this century, then to a hydrogen economy before 2100. He pointed out that estimates of oil reserves tend to grow over time, no matter who does the guessing.

The debate got more complex at this point.
Caltech physicist David Goodstein sees little hope for hydrogen, which he said requires fossil fuels in order to extract. And natural gas, like oil and coal and shale (another proposed alternative) are all finite, Goodstein argues.
"The oil will run out," he said. "The only question is when."

Goodstein puts little stock in nuclear fusion, which for decades has been proposed as the cousin of fission with unlimited potential. "Fusion and shale oil are the energy sources of the future, and they always will be," he quipped. Solar energy shows promise, he said, but "we haven't figured out how to use it."
So Goodstein takes a pragmatic approach. It doesn't matter so much when we run out, he argues, but what we do about it.

Global trap
Goodstein, author of the book "Out of Gas: The End of the Age of Oil" (W.W. Norton & Company) sees a looming world crisis that could fuel war and bring society to its knees.
"We have created a trap for ourselves," Goodstein said.
The United States has so far avoided serious consequences from the trap by relying on imports. The country uses about 7 billion of the 30 billion barrels of oil produced annually around the globe. And it makes us rich. Oil consumption equals standard of living, experts agree.
Meanwhile, other countries are beginning to clamor for oil at unprecedented rates, and therein lies the recipe for potential disaster.

China uses a comparatively modest 1.5 billion barrels a year (perhaps 2.4 billion this year) according to some estimates. India consumes less. Both countries' economies are becoming increasingly dependent on oil, however. China's consumption is expected to grow 7.5 percent per year, and India's 5.5 percent, according to the Institute for the Analysis of Global Security.
By 2060, oil production will have to triple just to meet global population growth and maintain current standards of living, said Stanford University geophysicist Amos Nur.
Yet China's own production has been flat since the 1980s and it now imports 40 percent of what it needs.

'When do we panic?'
"What matters in the short term is, when do we panic?" Nur said. "In my opinion, the point of panic has already taken place."

It's a behind-the-scenes sort of panic. The two largest economies on Earth -- China and the United States -- have already incorporated the finite nature of oil into their national security policies, Nur argues, citing policy statements from both governments reflecting the need to secure stability in oil-producing countries and a free flow of the resource. The war in Iraq, a country second only to politically unstable Saudi Arabia in oil reserves, is another clue, he said.
"There is a huge conflict that might be emerging," Nur said.

Some of the fine points of the various presentations were argued, even resulting in one shouting match over how much oil is in Saudi Arabia. But none of the roughly 500 scientists in the room voiced disagreement with Nur's view of the potential for war.
If the world is sliding toward global conflict over oil, the skids may be pretty well greased, politically speaking.

Governments do not have the political will to prepare for the end of oil, says Goodstein, the Caltech physicist.
"Civilization as we know it will come to an end sometime this century, when the fuel runs out," Goodstein said, adding that "I certainly hope my prediction is wrong."

Payback Time: Democrats Plan To Tax Oil and Gas, While Subsidizing Alterntive Energy

This a rather long article and hints at the changes coming in US Energy Policy. The one thing people can be sure of is our energy will cost us more. Does anyone think that new taxes on oil and gas companies will not be passed on to the consumer in the form of higher prices?

Is it smart for the government to tax the public (which is the ultimate effect of subsidies) to pay for unprofitable alternative energy sources? Will these taxes really significantly reduce our "dependence on foreign oil"? Will this shift in government spending really control "global warming"?

The bills essentially transfer billions of dollars from oil and gas companies to producers of "renewable fuels". This is like "robbing Peter to Pay Paul". Is it any wonder why the large oil and gas companies are investing in solar, wind, ethanol, and coal-to diesel technology. They'll be taxed in one area and rewarded in another, maintaining their profits, while the consumer continues paying more.

Or is all of this political gamesmanship, and as some Democrats are saying, "it's payback time", (no doubt with big grins on their faces)? Does any of this make sense to you? Is there a better way?
Peter

from: http://www.nytimes.com/2007/06/18/washington/18oil.html?pagewanted=1&th&emc=th

Democrats Press Plan to Channel Billions in Oil Subsidies to Renewable Fuels
By EDMUND L. ANDREWS
Published: June 18, 2007
WASHINGTON, June 16 — Senate Democrats are seeking a major reversal of energy tax policies that would take billions of dollars in tax breaks and other benefits from the oil industry to underwrite renewable fuels.

The tax increases would reverse incentives passed as recently as three years ago to increase domestic exploration and production of oil and gas. The change reflects a shift from the Republican focus on expanding oil production to the Democratic concern about reducing global warming.

On Tuesday, the Senate Finance Committee will take up a bill that would raise about $14 billion from oil companies over 10 years and would give about the same amount of money on new incentives for solar power, wind power, cellulosic ethanol and numerous other renewable energy sources. The bill is one of the signature issues this year for Democrats, along with immigration and the war in Iraq, and one in which they hope to clearly distinguish themselves from the Republicans.

But Senate Democrats are expected to go beyond the $14 billion in tax changes in the draft bill. Democratic officials said the committee is all but certain to adopt a proposal by Senator Jeff Bingaman of New Mexico that would raise $10 billion from companies that drill for oil and gas in federal waters but do not currently pay royalties to the government.

“We are cutting back subsidies for the oil and gas industry and using that money to finance the development of new and cleaner sources of energy,” said Mr. Bingaman, who plans to attach the entire tax package to the energy bill on the Senate floor next week.
It is unclear how much President Bush or Republicans in Congress will fight the proposed tax shift. The ranking Republican on the Senate Finance Committee, Senator Charles Grassley of Iowa, has already endorsed the $14 billion package.

But the plan could easily founder because of opposition to any one of many hotly disputed provisions in the broader energy bill. Just last week, a threatened filibuster by Republicans forced Democrats to postpone a floor vote on requiring electric utilities to produce 15 percent of their power from renewable fuels. The White House, meanwhile, has threatened to veto the bill if lawmakers do not drop a provision intended to prosecute what Democrats call “unconscionably excessive” gasoline prices.

Senator Charles E. Schumer of New York has proposed that oil companies be prohibited from using an accounting method called “last in, first out” for inventories that saves them as much as $5 billion in taxes a year.
Because Senate Democrats want to offset the cost of any new tax breaks with tax increases elsewhere, many lawmakers are pushing for even more tax raises from oil companies.
Oil executives are protesting loudly, saying that the proposed changes would take money away from exploring and drilling in the United States and increase the nation’s dependence on imported foreign oil.

“They talk about our companies as if they’re owned by space aliens,” said John Felmy, chief economist at the American Petroleum Institute, a trade association. “They talk about energy security, but these provisions could have the opposite effect in terms of reducing our production here and increasing our imports.”
The oil industry has ample reason to worry. With consumers seething about gasoline prices increasing to more than $3 a gallon and oil profits reaching record highs, oil companies would be short of friends in Congress regardless of the party in power.

Beyond the immediate jockeying, however, lies a bigger question: Is Congress putting taxpayers at risk by funneling billions of dollars in subsidies into alternative fuels that are still a long way from being profitable?
Indeed, industry experts said the Senate bill greatly understated the true cost of incentives for renewable fuels. Most of the incentives are set to expire at the end of 2009 or 2010, but Democrats in both the House and Senate have called for an increase in the production of such fuels by 2022. As a practical matter, the vast majority of “temporary” tax breaks are routinely extended once they are passed for the first time.

In addition to higher taxes for oil companies, House and Senate Democrats are hitting at the oil industry in other ways. The Senate bill would give the federal government more power to prosecute companies that engage in “price gouging” on gasoline prices, which is broadly defined in the bill as charging “unconscionably excessive” prices that reflect “unfair leverage.” A similar measure is moving through the House.

Separately, the House Natural Resources Committee passed a bill last week that would, among other things, crack down on companies that cheat on royalties they pay for oil and gas pumped on publicly owned land.
In effect, the various bills would transfer billions of dollars from oil companies to producers of renewable fuels.

The Senate bill would offer $5.6 billion in tax credits over the next three years for companies that produce electricity from renewable fuels like wind and geothermal power. It would offer tax-free bonds for new power plants with renewable or clean energy. It would offer tax credits totaling about a dollar a gallon to producers of cellulosic ethanol, and even bigger tax credits for “biodiesel” fuel. It would extend and expand tax breaks for plug-in electric cars and other vehicles that use alternative energy sources, and it would provide tax breaks for gas stations that offer renewable fuels.

(Page 2 of 2)
In a nod to the politically powerful coal industry, the bill would also provide $1.5 billion in tax-free “clean coal bonds” for advanced coal-fired electricity plants and $332 million in tax credits for plants that make diesel fuel from coal.
Times Topics: Energy and Power
Democrats in the House are moving with similar legislation. The House passed a bill earlier this year that would raise about $14 billion over 10 years from oil companies, and the House Ways and Means Committee is expected to mark up a new tax bill that would offer rich incentives for alternative fuels and increased efficiency.

The Democratic bill contrasts sharply with the energy bill that the Republican-led Congress passed in 2005. The Senate bill offers less than $1 billion in incentives for coal, no tax breaks for nuclear power and tax hikes for oil. But two years ago, Congress approved $11 billion in additional tax breaks, of which $7 billion went to oil, coal and nuclear power.

“It is a dramatic change in policy, targeted at the big oil companies,” said Senator Ron Wyden, Democrat of Oregon. “It will show the country the kind of things we can do by taking away subsidies for fossil fuels and putting the money into new sources of energy.”
Privately, some Democrats say it is payback time: the oil industry’s political contributions have overwhelmingly gone to Republican lawmakers and President Bush, and many Democrats say they have little sympathy for the industry now.

It is unclear whether Republicans or Mr. Bush plan to protect the industry.
In stinging criticism earlier this month, the White House Office of Management and Budget said the proposed price-gouging measure amounted to price regulation that would jeopardize investment in oil production and ultimately hurt consumers.
In 2005, Mr. Bush threatened to veto a one-year measure that blocked oil companies from using the “last in, first out” accounting method for inventories. The Bush administration, echoing charges by the oil industry, said the measure amounted to a one-year windfall profits tax that would frighten investors by raising the prospect of further tax raises whenever oil prices jumped sharply.
Mr. Schumer’s proposal is similar to the 2005 proposal, except that his measure would be permanent.

The oil industry still has persuasive clout in Washington. Exxon, Shell and trade groups like the American Petroleum Institute have hired former Democratic lawmakers and Democratic lobbyists to help press their case.
They have carefully positioned themselves, picking their fights on selected issues that attract fairly little popular interest but affect potentially large amounts of money.
The effort is mostly defensive — fending off tax increases — but also has offensive elements. Royal Dutch Shell and other big companies hope to be big players in coal-based liquid fuels. And the industry in general is still pushing for Congress to open up more areas on the outer continental shelf for deepwater drilling.

But industry executives hold out little hope for emerging unscathed.