Jun
8
Iraqi conspiracy theories and oil economics
June 8, 2008 | Tagged chavez, economics, gas prices, Iraq, oil, Politics, Venezuela | Leave a Comment
A friend of mine sent me the usual big men in a back room monopoly theory of high oil prices, this time tied to Iraq since 1922, so instead of ignoring it, I thought I would give a shot at rebutting it.
Hi and thank you for emailing me. What you sent sounds somewhat plausible on the face, but here is something you need to consider, actually a few things. First is that Venezuela sells more oil to the U.S. than Iraq, because although Iraq has larger proven reserves, its output right now is lower. Iraq is actually producing more oil now than it was 2 years ago when oil was trading for $45 a barrel. Funny how more oil being produced in Iraq made the price go up isn’t it? Facts are persnickety things to theories like the one you sent me. Venezuela also hates the U.S. a lot more than Iraq does (or at least Hugo Chavez, the dictator, does) and could cause a much greater shock to our gas prices (and national security) than Iraqi production, and as a matter of fact, Mr. Chavez has been trying to nationalize the oil production facilities in his country, which is a fancy way of saying he is trying to steal the investments of foreign oil companies helping to develop Venezuelan oil reserves. Venezuela does not have the technical expertise to exploit some of its oil reserves, so it had outside companies invest billions of dollars in exploration and infrastructure, and when it was close to going online, tried to steal it from them. Mr. Chavez is currently before the World Court for his troubles, with large judgments being entered against him in favor of the companies he tried to shaft. According to all the conspiracy folks, maybe we should invade him instead:-) Secondly is that the oil companies do not make a certain level of profit per barrel of oil, i.e. if oil goes from $80 to $100 a barrel the oil companies do not get an extra $20 a barrel profits. What actually happens is that the producing countries such as Saudi Arabia, Iraq, etc., get a $20 a barrel increase in profits as it costs them the same to pump oil at $40 a barrel or $140 a barrel. The multinational oil companies pass this added cost onto the consumer, and keep about the same margin of profits. So they make 4 percent profits, to pull a number out of the air, on every barrel of oil, which means at $40 a barrel they make $1.60 per barrel, and at $100 a barrel they make $4 a barrel profit. Yes they are making higher revenues, but the higher price also justifies more R&D, and new exploration. The global oil companies have spent over 200 billion dollars in exploration, infrastructure and R&D in the last year alone. Do you know that a oil rig in the Gulf of Mexico can cost more than a billion dollars before the first barrel of oil is pumped from it? That cost is paid through revenues. Higher market prices give a lot of incentive to find more oil to sell, and finding more oil supplies drives the prices back down, as well as helping our national security. Oil producing countries have a greater incentive to sell oil when the price is high, as a free market would lead you to expect. Demand and supply drive prices, and China is becoming one of the main importers of oil after the United States (actually one of the main importers of everything from food to steel, China shut down 1/3 of its old steel mills last winter and diverted the coal to heating uses because of the extremely cold winter (no global warming there!) and because of the shutdown steel prices in the U.S. almost doubled.) and the projected increase in China’s need for petroleum products is for it to double by the year 2025 as more Chinese discover the joys of driving instead of riding a donkey. Conspiracy theories always want to show the big men in the back room, but the world oil market is too big for a monopoly to work. Even OPEC cannot control prices that well (or don’t you think they would keep prices above $100 a barrel oil all the time since 1973?)and besides, in the news this week OPEC nations are increasing the supply of oil they are pumping by over 800,000 barrels a day! What is really driving the prices up in the USA is the Democrat’s refusal to build new oil refineries (last new refinery was built in the 70’s and the price spike every spring is due to refinery bottlenecks due to govt. regulations concerning what type of gas can be sold where, and the resulting refinery bottlenecks, not oil supply issues), and Democrat’s refusal to expand domestic oil production. Dems just shot down a proposal to tap the oil shale in the Rockies this week, where there is a proven oil reserve in the billions of barrels, as well as refusing to allow oil drilling off our coasts and in ANWR(Alaskan wildlife refuge. Our domestic energy woes are directly traceable to a political party, it is true, but that party is the Democrats. One last thought: how is taxing oil companies going to bring down the price of gas? Every company sells a product at a price the market sets, and if the company incurs higher production costs in the form of taxes, etc, it passes them on to the consumer, or if unable to do that, will shut down rather than sell at a loss. Businesses are not like the government, they cannot continually run deficits and increase taxes or inflate the money supply by printing more to pay for their irresponsibility. They turn a profit or they go broke and out of business. Soooo…., how will raising taxes lower our gasoline bills? It won’t, it will raise our costs, just like the ethanol subsidies jacked up the price of corn and foodstuffs globally. Anybody can have a theory and some charts, but the truth of a global economy is much more complex, and I have just scratched the surface here. Government is a very inefficient parasite on the national economy, and should always be viewed through this one simple truism: Governments produce nothing, every dollar they spend comes out of a taxpayers pocket, and that dollar could have been used much more efficiently in the private sector.