Developing Energy Independence

There has been much talk in Congress and from the White House lately about our overdependence on foreign oil.  The President himself has said that we are addicted to it.  Well, in the upcoming general elections, I hope that my readers, and all American voters, will consider candidates of both parties as well as Independents who plan to do more than just talk about it.  Thus, the topic of this posting — recognizing the problem for what it really is, greed, and resolving to do something about it.

Sometimes people choose to respond to my blog postings off-line, and that’s alright. I understand how some might not want to go world-wide with their views.  I had several contrary responses to my recent article on Big Oil, how I believe that they are an oligopoly in the U.S.  Great!  That’s what The World According to Opa is for — the free excange of ideas, call it part of the great market place of ideas.  But all of the contrarian comments I’ve receive have been private.  Interesting — I must be doing something wrong.

What follows, fully protecting the confidence of a fellow thinker, is based on my private response to his off-line comments.

In a private email, my fellow thinker said that he thought the Federal Government is the true monopoly, not Big Oil… hmmm. This probably means that he’s a Republican.  Not that there’s anything wrong with that, most of my friends here in Texas are — Republicans that is — used to be one myself.

Texas, you know, actually collects more than the Federal government does in gasoline taxes:  20 cents per gallon, whereas the federal government takes 18.4 cents.  Notice that these are a flat rates, not percentages.  They are rates that haven’t changed for years (1997 for the federal tax) despite the recent increase in prices.  Further, the oil companies don’t pay these taxes, consumers do.  Since the demand of gasoline and other fuels is very inelastic, the effect of  taxes on these products minimally effect how much we buy of them.

Sort term supply in response to a new or increased tax will shift leftward, but it usually doesn’t take long for supply to recover so as to meet demand at a new equalibrium price.  Also, governments don’t profit from the taxes, which we more liberal thinkers consider to be user fees rather than true taxes.  This is because much of this money is hypothecated (dedicated) to transportation.  All but one cent per gallon of federal gas tax is dedicated to highways and mass transit, infrastructure without which there would be little market for oil companies’ products.  Neither are gas taxes a factor in figuring corporate profits, as my fellow thinker suggested in his comment.  This is because they really aren’t part of their costs of doing business.

My fellow thinker said that he didn’t begrudge Exxon Mobil from making a profit, and I responded that I don’t either.  I don’t begrudge any business from making a profit; that’s what we do in a free market economy.  And Exxon Mobil’s reported profit of 10.6 percent for 2006 is low compared to other large corportations like Microsoft, WalMart and Starbucks.  But, I said, remember that profit is the difference between accounting cost and total revenue, so it’s whatever a company says it is.  Lots of things can be counted as accounting costs.  Factor-in how much Exxon Mobil paid out to shareholders last year, to foreign governments for exploration and drilling rights, to corporate executives and to political action groups, and I would have to conclude that their accountants do a better job than most in “cooking the books.”  Less civic-minded corporations, I learned obtaining my MBA, sometimes do this so as to minimize corporate taxes.

My fellow thinker pointed out that there have been no new refineries built in years, and he was quite right.  But, as I pointed out, if they are to be built, oil companies will have to have an economic incentive to do so.  I agreed with my fellow thinker that there is plenty of oil, but only in the near term “pipeline”.  I’m not comfortable with projections made by some that there’s not a problem with future supplies.  True, we have not yet found all of Mother Nature’s oil, but no new discoveries are easy-to-get-at oil.  Which means that the cost of future discovery and recovery can only go up, and all these costs will be passed on to consumers. 

Petroleum reserves are limited. Petroleum is not a renewable resource and production cannot continue to increase indefinitely. A day of reckoning will come sometime in the future. When?  Ah, that’s the question.  But the point at which production can no longer keep up with an increasing demand will mean a radical and painful readjustment globally.

According to a U.S. Geological Survey Report, as of 1996, OPEC’s proven and undiscovered reserves amounted to about 853 billion barrels, while similar non-OPEC reserves were 769 billion barrels. I doubt that this ratio has changed much since then. So, based on actual production patterns in many non-OPEC oil producing countries, output can increase until there remains between 10 and 20 years of proven plus undiscovered reserves.  At this point, depending on the reserve growth that is actually available, a production plateau or decline will set in.  Now, given that non-OPEC production rates are nearly twice as great as OPEC rates, and assuming stable prices and a modest 2 percent per year market growth, non-OPEC production has been projected to reach a maximum sometime between 2010 and 2018 based on resource limitations alone (assuming complete cooperation of producers and that all undiscovered oil is actually found and produced as rapidly as needed). Once this happens, OPEC will control the market completely, and it is unlikely that production will increase much after that to meet the growing demand which, as my fellow thinker pointed out, includes the counties of India, China, and Russia.

My fellow thinker suggested the following Free Market remedies:

  • Buiding new refinineries in the US and refining permian sweet crude rather than Saudia sour crude.
  • Going to one formulation. 
  • Expanding exploration off shore and in Alaska. 
  • Keeping on the offensive in the war on terror so as to prevent others’ control of the world market.
  • Expanding alternative fuel research.

I agree with all of these ideas.  However, only the last, expanding alternative fuel research, has great potential in the long term.  But this is something Exxon Mobil and the other majors have declined to get invloved in.  So, who do we suppose is going to do it, three or four smart guys in a backyard garage workshop?  Maybe so.  But if and when they do, lets hope that Big Oil doesn’t “make ’em an offer they can’t refuse” before they get their ideas to market — as in the mythical 150-mile-per-gallon carbeurator.

mf_cartoon.jpg 

CLICK THE CARTOON ABOVE TO SEE SOME GREAT ENERGY INNOVATION IDEAS, then please hit your browser’s return arrow to finish reading this article.

Since industry is disinclined to develop any serious alternatives for their products, which are currently very profitable, I modestly suggest that government is going to have to play a much bigger role, and pretty darned quick.  Alhough my fellow thinker will vehemently disagree, as well as my Libertarian son who thinks I’m nuts, perhaps raising taxes should be considered as a way to reduce consumption and help pay for the needed research on alternatives. 

Actually, I consider myself to more moderate politically than this idea suggests.  But these are critical and dangerours times for America — indeed, for mankind.  We must not be limited in our response by ideology, not if we are to survive.

I’ll be interested in reading your comments on this.

To post a comment, click on the tiny COMMENTS word below.

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Published in: on July 6, 2007 at 10:47 am  Comments (2)  

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2 CommentsLeave a comment

  1. BRAVO to you Kent for your article. Yes, I agree. Our Federal Gov’t should and must play a bigger role in our energy crisis. That is what they are elected to do. If not the Fed. Gov’t, then who? There must be oversight on these run-away oil companies who are posting huge profits. In case anyone is listening or watching, we are in a big mess in our country and I shudder to think of the next admin. who will try and sort it all out.

  2. The comment you made that unnerves me the most is the one about the four guys in the garage that invent the 150 mpg carbuerator. I belive it has probably already been created, as well as possibly the cure for cancer, diabetes, etc. There is too much money to be made by these things not being out there in the world. I pretty much feel the greed of a few overcomes their conscious and their ability to consider the greater good.


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