Political Review - realoutlook.com

Oil company executives are dragged before Congress time and again suffering indignities at the hands of elected officials who are more to blame for the current oil prices and pending shortages than the industry titans that have consistently delivered this complex product for more than a hundred years with the exception of 1973 when the Arab Oil Embargo sent a delicate delivery system into disarray. Exxon-Mobil, British Petroleum, Shell Oil and others are threatened by the legislators with excess profits taxes on profits that, while staggering by their numbers, are hardly excessive representing eleven percent or less on investment over the last five years. They are more than willing to invest these profits developing new domestic supplies and refineries to process petroleum products were it not for the restrictions imposed by the pompous interrogators who cast a shadow of wrong doing but never issue an indictment for their acts.

In years past most global crude oil reserves were in the hands of the major oil companies with a 75 percent share back in the 1970’s. Today that number is closer to 6 percent leaving control of supplies to the hosting nations. Where once the profit distribution was a 50/50 split producing nations are demanding closer to 90 percent after the investment of the developing company is paid back. After some forty hearings, nine of which took place in the last month, some in Congress fail to understand what little grasp the West and its petroleum enterprises have over this vital resource. More likely they are hopping to lay blame for their negligent policies at the foot of corporate America; if not oil executives then fund managers.

Blaming Big Oil

Among the staunch detractors is Senator Dick Durbin, D-Ill who hoped to shame the Majors during Senate hearings asking

“Where is the corporate conscience?”

While it was this administration that pushed for more domestic drilling he was still in denial of the solution thinking the president should just tell the Majors to give away shareholder profits when he stated

“It strikes me that this is the right situation for a president to step in, for a president of the United States to step in… I think the president should be calling you all before his little meeting place, the White House, and talking about what you are doing to the American economy.”

Senator Patrick Leahy, D-Vt. stated

“People we represent are hurting, the companies you represent are profiting.”

Arlen Specter, R-Pa. has been one of the very few Republicans who has joined the chorus of liberal Democrats catering to environmental lobbies lambasting the executives. After hours of testimony about the tenuous nature of their reasonable returns at on slim margins allowed by the host countries he asks as if he never heard a word of testimony

“…why profits have gone up so high when the consumer is suffering.”

Hearing the same facts about the tenuous conditions that affect world energy prices Senator Dianne Feinstein felt compelled to make her attempt to shame Big Oil stating

“To me it was just a litany of complaints that you are all just hapless victims of a system, you blame one thing or another, which most people would say is just simply the cost of doing business… Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline.”

Chevron vice chairman, Peter J. Robertson responded to Feinstein’s insults saying

“I don’t fell like a victim at all. I fell very proud of the fact that we are investing all of our earnings… We invest in the future supplies for the world, so I am very proud of that.”

It is common for liberals to scoff at the claim by these executives that they are acting in the best interest of their shareholders. While its true Exxon Mobile profits have been staggering, $10.89 billion in the first three months of this year, their profit margins are not excessive when compared to other industries. And these were short of record profits set last year as the price of oil has risen faster than the price gasoline. With their hold on reserves slipping away, both from attrition and nationalization by such countries as Venezuela, they now sell more gasoline than crude oil. How much of their revenues were distributed to shareholders? A staggering $9.9 billion!

The U.S. currently consumes over 21 million barrels of oil per day while only producing 8; at only $100 per barrel that’s $1.3 billion per day added to the trade deficit. And though some estimate the total reserves in Alaska, off the coast of California, the Gulf Coast and eastern Continental Shelf range upwards of 80 billion barrels, it has been rendered inaccessible since Congress initiated a drilling moratorium in 1981. A Republican Congress tried to remove the Alaskan Wildlife Refuge [ANWAR] form the restrictions but the legislation was vetoed by President Bill Clinton in 1995. When President George Bush tried to revive the issue at the beginning of his first term there was an outcry form environmentalists and liberals that sunk the proposal. Today they are fond of noting it would take eight years to bring these supplies to market crying “we can’t drill our way out” of this crisis as though their constituates were foolish enough to believe doing nothing would be better.

Ethanol Alternative - Even More Suffering

The effects of misguided U.S. energy policy go far beyond the pain of paying over $4 per gallon of gas at the pump. Both Democrats and Republicans can take responsibility for the “war on the poor” waged though the current alternate fuels program [ see "Ethanol - Cars At The Dinner Table" ]. About one quarter of the U.S. corn crop will go to ethanol plants this year. This will generate stellar profits for farmers but mean substantially higher costs for those needing feed for poultry and live stock. This will mean substantial increases for consumers for basic staples; the price of eggs at the wholesale level went up 40 percent in the first quarter. The effects are felt around the globe in a year where world grain production has suffered from a variety of disasters. Foot riots have broken out is Egypt, Indonesia and other areas where the poor cannot avoid the pain of higher costs for life’s basic necessities.

Blaming Fund Managers

Futures markets give industries the ability to lock in prices and manage costs. Hog farmers, cattle ranchers, poultry producers can buy feed contracts such as corn and sell contracts for hogs or cattle and lock in a profit if they think emerging market conditions could threaten their margins. It is these risk takers who provide the liquidity that makes it possible. Both Republicans and Democrats alike mulled the idea of raising margin requirements on these transaction and banning traders from using offshore futures markets to avoid regulations. But more often than not it is the speculator who comes out the loser in these trades even though we often hear of those rare instances where some have made fortunes in these transaction. Raising margins would also raise the capital requirements of transportation, agricultural, mortgage, energy and a wide range of other industries that use these markets to survive unstable markets.

Airlines have been hit particularly hard by the rapid increase in fuel prices. New baggage fees have been instituted, fares hiked, flights reduced and some cities dropped from service. In the midst of the chaos one carrier, Southwest Airlines, serves as a model of avoiding loss by locking in costs to hedge against volatile fuel costs. Knowing they could make a profit at a cost of $51 per barrel, they locked in 70 of their estimated fuel requirements for the year at that price and have so far avoided the scampering of their competitors to make ends meet and have been able to maintain routes and fares. They may be the only U.S. airline able to make a profit this year.

Ignoring the Perils of World Oil Supplies

Today’s Los Angles Times ran an article titles Nigerian attacks disrupt oil flow. It is common for rebels to sabotage pipelines and even off shore oil rigs. In the past oil workers, executives and family members from companies around the world including the U.S., Germany and Russia have been kidnapped or murdered. This is common in Nigeria as well as Columbia. Often the assets of companies are nationalized as we’ve recently seen in Venezuela. Mexico did so in the 1930s. The host countries with policies adverse to the interests of the West, including Iran, Venezuela, Russian, and those with tenuous regimes in Indonesia, Nigeria and even Mexico threaten our energy security as well as the lives of oil industry workers and their assets. With affordable alternatives decades away the integrity of a Congress that ignores the fact we have to drill our way out of this crisis in pretty much on empty.

This entry was posted on Sunday, June 29th, 2008 at 11:53 am and is filed under Economy, Energy, Middle East, Politics. You can follow any responses to this entry through the RSS 2.0 feed.