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America's Energy Policy: Coming to Terms with Reality

by: James Picerno May 23, 2008 | about stocks: BP / CVX / IXC / IYE / PBR / RDS.A / TOT / XOM    
James Picerno

James Picerno

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There are no easy answers to America's energy challenges, but if there's any hope of finding anything resembling a solution, it surely begins with an honest assessment and discussion of the facts. And therein lies the problem: coming to terms with reality.

It's a simple task, really, although in a business as politically charged as energy nothing is as easy as it seems. Wednesday's affair in the U.S. Senate offered no evidence to the contrary. Consider a few quotes from Wednesday's Judiciary Committee hearing that heard testimony from executives of the country's largest oil companies:

Is there anybody here that has any concerns about what you are doing to this country, with the prices that you are charging and the profits that you are taking?

- Sen. Dick Durbin

Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline.

- Sen. Diane Feinstein

Consumers are angry, and they have every right to be. You're making more money than ever. It doesn't seem fair, guys. It just doesn't seem fair.

- Sen. Herb Kohl

On Wednesday, there was also this intriguing colloquy between Sen. Patrick Leahy and two oil executives about their salaries. The Senator's point, as far as we can tell, was to alert the American public that high-level oil executives make a lot of money. That's not unusual, compared with many other industries. But oil, of course, is different.

And, this is a political year and politics is in high gear in Washington, perhaps more so than usual. The problem is that political grandstanding is as irrelevant as ever when it comes to intelligently discussing, much less solving America's energy problem.

It's all too easy to use publicly traded oil companies as scapegoats for the high price of oil and gasoline. But if this is a conspiracy, why aren't futures traders called to testify as well?

In fact, contradiction is everywhere when it comes to talking about energy in America. Here are a few examples:

  • On the one hand, some politicians are calling for lower gasoline prices. Meanwhile, others are complaining that America's "addiction" to foreign oil only seems to go up? News flash: the two are connected. Lower prices induce higher consumption, which necessarily leads to higher imports in a country with falling oil production.

  • Despite calls for raising supply, attempts at bringing new energy capacity on line are often attacked. A recent example is Delaware's successful effort at blocking BP's (BP) plan for building a new liquefied natural gas plant. The Supreme Court decision on New Jersey v. Delaware on March 31, 2008 comes at a time when politicians are complaining that energy companies aren't doing enough to increase supply.

  • Politicians charge that oil company profits are too high, at least as defined in absolute terms. But in relative terms, the profits are more or less middling. As CNNMoney.com recently pointed out, citing data from Thomson Baseline, the average net profit for the S&P Energy sector is 9.7%, slightly higher than the 8.5% for publicly traded companies generally, as per the S&P 500. In comparison, Microsoft's profit margins are a dizzying 28%, according to Yahoo Finance.

    • Nonetheless, everyone focuses on the absolute profit levels for oil companies, and certainly the dollar amounts are staggering. But the scale is necessary. Finding, pumping and shipping oil is a business that demands massive up-front investments that may, or may not pay off in the years, perhaps decades ahead. In the meantime, there's lots of expense.

    Drilling for oil 10,000 feet under the ocean simply doesn't allow for small-scale operations. Yet this fact is conveniently overlooked. Criticizing the scale of oil company operations, and then asking the same companies to deliver more supply, is nothing if not contradictory. If you want the latter, you need the former.

    There are many more examples we could cite that remind us that intelligent discussions about energy can't be assumed as the natural course of affairs. Granted, oil companies aren't saints and so we assume that all the usual imperfections that infect human activity in other industries, and government, apply in the energy patch.

    The fact still remains that the supply and demand equation has changed for energy, thus the rise in prices. The idea that it's a conspiracy is ludicrous. Otherwise, one has to assume that the oil companies engineered the collapse in oil prices in the 1980s, and again in the late 1990s. If they were really in control of price, why allow such extremes on the downside?

    The answer, of course, is that supply and demand are running the show. Not entirely, not absolutely, and not for each and every minute of the day. But generally, price trends are a function of supply and demand. Yes, the supply is manipulated in some parts of the world, but that tends to occur beyond these United States. But we digress.

    When it comes to talking about oil companies, particularly Big Oil - publicly traded Big Oil, that is - reason seems to take a holiday, at least by the standards of discussion that usually holds for chatting about, say, cement manufacturing. Or even coal. When, an inquiring mind might wonder, will there be hearings on "excess profits" earned by coal companies? Don't hold your breath.

    In fact, while we're dreaming up ideas for Senate hearings, here's a thought: let's talk more about boosting energy efficiency, which conceptually represents a synthetic equivalent of finding a new Saudi Arabia. Yes, some of that goes on, but it's a lot more fun to bash the usual suspects.

    Indeed, the debate in Washington is hot and heavy when it comes to passing new taxes on oil companies to penalize their "high" profits of late. Perhaps that's warranted. But no one should expect that it will solve Joe Sixpack's problem of paying more at the pump. In fact, if Joe owns shares in the oil companies, either directly or through mutual funds, imposing punitive taxes may end up hurting the man on the street even more.

    No matter, since oil habits die hard. Some of the thinking about Big Oil is a legacy of decades past, when the Seven Sisters prevailed. But the old days are gone. The publicly traded oil companies' power today pales by historical comparison. Yes, that's another inconvenient truth, but so be it.

    The new Seven Sisters, as the Financial Times dubbed them last year, are: Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras (PBR) and Petronas of Malaysia. Notably, all of the new seven are government-owned companies. Collectively, they hold one third of the world's oil and gas production and more than one-third of the world's oil and gas reserves, the Financial Times advises. In the grand scheme of today's energy markets, the publicly traded oil companies are bit players by comparison with the new Seven Sisters.

    Yes, the old Seven Sisters have lost much of their clout when it comes to the price of crude. On the other hand, they're much easier to drag into Senate hearings than the new power brokers.

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    This article has 58 comments:

    •  
      May 23 08:07 AM
      Well, gee, now we know Picerno's political preferences. And was he as exercised when a bunch of power companies all pulled their capacity offline simultaneously causing a spike in rates, and the Bush Justice Department forbade the states to investigate?

      I find it equally risible when Washington bloviators parrot Ronald Reagan and Milton Friedman slogans that have proven just as untrue, irrelevant and off-the-wall. I love "the magic of the market" that gave us Enron, LTCM and Bear Stearns. But I guess we'll hear about that brainless silliness in Mr. Picerno's next post.
      Reply
    •  
      May 23 08:16 AM
      I didn't really see anything political in this article. It's pretty accurate.
      If Panskeptic knew anything about how much an oil well in the North Sea costs, or the hoops oil companies have to jump through to build or even repair anything, he's be less skeptical. A 10% profit margin isn't unreasonable.
      Watch 'em, don't hang 'em.
      Reply
    •  
      May 23 08:46 AM
      Washington and their hearings would be funny if were a Hollywood movie and not something that affects the entire world. Refusing to expand energy, making ethanol the #1 alternative energy -- ethanol that is pushing inflation as badly as the price of energy -- rather than natural gas and wind -- scary.

      But we all must remember that this is an election year. And getting reelected is much more important than the reality of our countery going to H.... in a Handbasket.
      Reply
    •  
      May 23 09:10 AM
      Finally the Anerican people are seeing that the Democratic congress which is taking orders from politically correct fanatical environmental groups is at the crux of the problem. Thank God for elections this year.
      I bet if you followed the money funding our continued congressional dependence on foreign oil you would find the source is OPEC.
      Reply
    •  
      May 23 09:21 AM
      The US has huge inflation from oil and other places. I write about it today:
      theinvestingspeculator...
      Reply
    •  
      May 23 09:24 AM
      Picerno is dead on. These congressional hearings have been going on since the 1970s energy "crises"--ev... time gasoline prices spike--and have produce nothing but hot air. If the public is so stupid not to see the contradiction between a senator trying to jawbone down gasoline prices while at the same time advocating and voting to subsidize higher priced alternatives, then we deserve to go to H...in a Handbasket. Ethanol is a farm program, not an energy program, and will never be more than a gasoline additive. It will always be more expensive than gasoline.
      Reply
    •  
      May 23 09:28 AM
      When you read these articles you ask "who are the idiots that elect these moronic senators?".- Answer, Panskeptic...a typical liberal that can't stay on point when it comes to an argument. Bear Sterns?
      Reply
    •  
      May 23 09:29 AM
      User, you're right on - ironically we can convert vehicles to LNG for about $1k a car and that is substantially cheaper than gas, and we have a ton ofit- we'd cut of emissions by more than half from cars if we did that, while working on longer term solutions, like electric cars.
      Reply
    •  
      May 23 09:43 AM
      According to Democrat Party Communists, 10% profit margins for Big Oil are too high but 33% tax profit margins for Big Government are too low.
      Reply
    •  
      May 23 10:16 AM
      Remember a few months back when the Congressional elections were going on. We kept hearing about how poor Congress was doing under their then leadership (GOP) and how we needed to elect new leaders (Dem's). Well you guys did (can't blame me as I would never ever vote Dem again) and the Dems are now in full control of both houses of Congress. So, where is all that leadership? Where are all those solutions we were promised? Why aren't the Dem leaders doing something?? Have they passed anything that has come close to solving a problem?? Other than bills that just throw more money at problems that haven't been solved by the first trillion dollars already wasted?

      Regardless of the letter behind the name, either R or D, they are all clueless fools in Congress and we are clueless fools because we keep electing them! And now, our president will be one of the clueless fools from Congress! Great work everyone. Keep those votes coming! Maybe there should be limits on voting...like a basic education or being a tax payer.
      Reply
    •  
      May 23 10:29 AM
      The more "evil" profits the oil companies make, the more incentive there is for them to produce more oil. Also, others will invest where there is money to be made. For all of you "Dim-wit-O-crats&... this is know as capitalism, or a free market economy!

      More oil being produced will ultimately result in oil prices going down.

      Duh!
      Reply
    •  
      May 23 10:44 AM
      Representative Maxine Waters, Democrat of California, let the cat out of the bag. Congress wants to emulate OPEC and nationalize US oil companies. As it is, our government is no more trustworthy than Chavez and dozens of other dictators. Now they want to steal my retirement money just as I retire.
      Reply
    •  
      May 23 12:02 PM
      It seems that we (Americans) are in a state of denial. Until we stop looking for the "great conspiracy" and admit there really is a fundamental problem, we won't start to solve the issues in front of us. We (Americans) aren't the only ones pay high prices. It's global!..global! There are those in the world who can afford it less than we can, but are having to pay the price. The blame/shame game will not solve the problem. That game is only smoke and mirrors and delays action that would fix the problem.
      When supply and demand for a basic neccessity are roughly in balance, it doesn't take much tweaking to control price. OPEC is a business, not a charity folks!. They don't have to turn up the taps, just because we whine. They don't owe us any more than what we pay for. I actually felt bad for the guys that had to put up with the humiliation in front of Congress. The Congress thing was just for show. It was a feel good thing. It changes nothing. We really ought to listen to what those execs said about what we have placed off limits in our own country. It going to take everything we've got to get out of this mess. Oil, natural gas, wind, hydro, solar, nuclear, fuel efficient fleet, hybrids. All of the above. We've got the know how and the resources. Now, if we can just get the will. But until we admit there is a problem, we can not solve it.
      Reply
    •  
      May 23 12:28 PM
      there are two main reasons for the oil/commodity explosion:

      1. too much demand. resources are finite (yes, sorry to tell you that). now get used to it. stop wasting them and use them wisely. that means smaller cars and public transport, too.

      2. too much one way leverage in the futures markets. the commodity markets have finally figured out that growth trumps inflation in the Fed's dual mandate. Since the Fed will pump growth under any circumstance, inflation is bound to rise. The easiest way to profit from that is hard assets. Hence the one way tickets in the futures markets.
      Another way of looking at this is that the Fed will not take away the punch bowl. That job will now be done by the commodity traders.

      3. Too much money around with not enough productive investment to chase (a quaint idea anyway in Greenspan/Bernanke Fed whose main mandate has moved on to supporting investment bank bonuses).
      Reply
    •  
      May 23 12:31 PM
      1. too much demand.

      2. too much loose money.

      3. growth is far more important politically than inflation. corollary - shortage of natural resources, first leading to dramatic price rises, then political disturbances, then wars over resources.

      1 and 2 are related, btw.
      Reply
    •  
      May 23 12:33 PM
      It really is about supply and demand. The politicians just don't get how badly they are hurting our economy. For example, did you know that spending $1 trillion in Iraq is destroying our economy. We could do better spending that money at home. But, we can't drill in ANWR! That's a financial loss of $1.4 trillion that goes to our 'friends' in OPEC. Part of the reason that oil prices are so high is because the value of the dollar is falling. That hurts everyone in the country, not just because gasoline is more expensive, but because the buying power of the dollar is falling. Food is more expensive.

      Companies like Exxon are slowly going out of business because they can't replace their reserves as fast as they are depleting them. They produce 2.5 million barrels per day. Were do these people in congress expect us to buy our oil? Some of these people think the solution is a windfall profits tax! How much new oil is that going to produce? How much money do they expect to collect from the tax? I guess to be 'fair' you have to make everyone equally poor and miserable.
      Reply
    •  
      May 23 01:43 PM
      Excellent article which is right on . Panskeptic is a perfect example of the idiocy of the democratic left .A total and complete lack of the intellectual capacity to understand facts and analyse them appropriately . The price of oil and gas is going up because of the democrats and they are relying on this subterfuge to fool people like Panskeptic into keeping them in office which will cause even higher cost . People won't be satisfied until the oil companies are destroyed (just like the steel ,auto and pharmacueticals ) .If you think this is going to bring down the price of gas you're an #@&%*&.
      Reply
    •  
      May 23 02:28 PM
      My oh my, what an attack on poor Panskeptic who brought to light a couple of "inconvenient truths". Oh, poor Exxon, about to go out of business, poor babies-wish they would get around to cleaning up their mess of a decade ago in Alaska. And talking about That mess reminds me that we should trust these guys in ANWR-don't think so. Let me ask you right-wingers this: if the seven sisters are not making excess profits and paying CEOS too much money who, besides the oil producers (Canada, Mexico, Nigeria and 11% from OPEC) is and why is their bottom line so 'robust'? I see a lot of mini-mart/gas stations go out of business but never see an Exxon or BP go out of business.
      Reply
    •  
      May 23 02:53 PM
      Please clarify, is Mr. Picerno's article insinuating the environmentalist movement has been hoarding select sacred mushroom crops for the pleasures of the political class and for the benefit of unidentified lobbyists. . . or has the US Congress just been functioning in such a manner for the last generation?
      Reply
    •  
      May 23 04:45 PM
      until the electorate take seious THEIR responsibility[vote out the pandering fools, vote in some leadership], nothing much will change. if that lesson is not clearly noted, Lord help us.

      as the "stockholders&quo... of the nation, we'll get the "return" we demand and work for. demand/vote in a new effective board[legislature] and ceo.

      WOULD YOU BUY STOCK IN A COMPANY RUN BY THE CURRENT CONGRESS AND THE CURRENT LIST OF CEO CANDIDATES???

      it's your company America.


      signed

      Gerrymandering
      Reply
    •  
      May 23 04:45 PM
      Just as with the mortgage mess, there is more than enough responsibility for our energy problems to go around. People who screech that the "whacko environmentalists"... or the "democratic left" or the "greedy oil companies" are the sole cause of our current ills are all equally moronic. WE ARE ALL TO BLAME, ALL OF US.

      We can fix this problem if we confront it honestly. It's my opinion that we need to drill everywhere now, AND that we need to increase refining capacity as well as investing heavily in nuclear, wind, geothermal, solar, biomass, and other alternatives for electric generation.

      More important than drilling everywhere, though, is recognizing that drilling for more oil doesn't solve anything - it merely pushes out the horizon of the end. Unless you are among those few who do not believe that oil is a finite resource, you must recognize that we will eventually use all of it (within economic limits; yes, I'm aware of those arguments). We must, must, MUST develop alternative fuels for transportation AND alternative infrastructures. These changes are going to demand culture change as well. That's not a left/right, positional argument, it's just what is.

      The longer we scream and screech about partisan nonsense, the longer we remain paralyzed and the closer we get to total self-destruction. It's time to recognize that we have all contributed to the madness and that we can all work together to overcome it.
      Reply
    •  
      May 23 04:48 PM
      Demonizing OPEC makes no sense, when the biggest supplier of foreign oil is....CANADA!!! Oh, Canada, how we love thee.

      Anyway, the author is spot on about the limited impact publicly traded oil companies have on the global scene. The largest oil company in the US, Exxon/Mobil, is not among the top 10 in proven reserves. In fact, US oil companies control less than 10% of proven reserves worldwide. (Go to Harris Interactive for a survey. The answers may surprise you.)

      Furthermore, less than 15% of our imported oil is supplied by the Persian Gulf countries. Most of their exports go to Europe, Asia and Africa.

      Might as well nationalize the few oil companies that are left. Then let Congress try to figure out how to find new oil when the same Congress prevents drilling even exploratory holes in 'environmentally sensitive' regions of the US.

      We're not going to change our habits. If you don't like the price of gasoline, stop driving your car. If you don't want to give up your car, shut up and pay it.
      Reply
    •  
      May 23 05:09 PM
      Good article. As for "left vs. right", I am a bit confused by the points brought by the "left" here.

      I know US corporations and The Sever Sisters are making enormous profits. However, I believe such profits are not "excess". Demand has outstripped supply.

      In the US, the left political argument is that such profits should be redistributed to society via taxes/transfer payments rather than investors may by popular.

      However, I must ask barnburner and Panskeptic, is the US the only arena you seek to influence? (e.g. cut "reckless" US consumption) After all, fossil fuels are cheapest form of energy the world has. Most other governments and nations (e.g. BRIC) would rather grow than conserve. Now, that other nations' have the technology and scale to produce, they are buying natural resources.

      The most efficienct was to grow is use/buy cheap(er) fossial fuels.

      Do you propose the US conserve while others' grow?
      Do you maintain that state owned energy companies are easier to regulate, faster at innovation, or better for society than US/Western corporations? That would be an interesting assertion .... The Social Benefit of Gazprom vs the "average" of (Enron, Exxon, Chevron, Shell, BP)...


      So, what balance of US growth ("less consumption"?) vs. global growth you seek? At some point, do you expect to influence other governments & entities to conserve as well? (e.g. Seven Sisters, Gazprom, China Petroleum, Tata, Venezula or China's government)

      If you expect to influence non-US entities, I would suggest you let the US economy and US companies like Chevron, Exxon, etc. grow. Unless our consumers and companies are more efficient, non-US politicians have little reason to listen to you otherwise.

      Reply
    •  
      May 23 05:54 PM
      I appreciate this article which is pure reason, not emotional gibberish. The USA still enjoys the cheapest energy of all the so-called developed countries. And we cry like babies when the candy is taken from us. BIG OIL is not the fault here. China and India and Brazil and Russia and Thailand and Vietnam, and Cambodia are all on a huge growth boom. The MTV and CNN etc. have flooded the minds of billions with the dream of the American lifestyle , ie big cars, bigger houses, and expensive toys, what to speak of homo sex, free love, etc. You better get used to is becuase you are 300 Million, and they are at least ten times that.
      Reply
    •  
      May 23 07:18 PM
      Using my computer I printed out address labels saying:
      "Democrats Won't Let Us Drill in ANWR.
      Defeat the Democrats, Defeat High Oil Prices"


      I will keep them in my car and each time I fill up I will put a sticker on the gas pump.


      If you support this and can get others to do so, we can have this message on EVERY gas pump by November.

      Power to the People!
      Reply
    •  
      May 24 12:04 AM
      Dear Mr. Davis-

      The "evil speculators" drive up the price of Oil & other commodities - like wheat. While they are doing this, the wheat farmers make real money, correct?

      During this year's oil bubble, American oil producers are busy pulling marginal oil out of the ground, new production is being chased, and consumers are engaged in "permanent demand destruction".

      Once the oil bubble pops, won't all those "evil speculators" be the ones who get wiped out?

      And doesn't every barrel extracted in the U.S., and every whiff of domestic demand destruction lead to an improved balance of trade?

      If you're right and the oil bubble is temporary market excess, why complain about these things?
      Reply
    •  
      May 24 01:06 AM
      Spot on article - not an expert on the oil industry, so I thank those who have some expertise/knowledge on this.
      As for the left-right, good v. evil, vegetarian v. doritos thread -- i cant resist. I'm a bleeding heart liberal who learned a long time ago to vote my heart and invest with my brain. This country, people, politicians wanted the easy answers and voted accordingly - Carter was mocked when he drew the clear line in energy policy, morality and our trajectory as a nation. I own a Prius AND XOM, and when this current idiot was elected went 35% in with my retirement in FSESX - so please drill in ANWR, make the goooberment lower gas prices - i insist. While my Bush voting co-workers complain complain complain I'm raking it in with every increase - thanks suckers.
      Reply
    •  
      May 24 01:54 AM
      This is the best damn article I've ever read on this site. Finally someone, who took a step back and looked at the matter with a cool head.
      Reply
    •  
      May 24 08:24 AM
      I wait for wait anxiously for another round of brainless silliness of Mr. Picerno's next post.It seems that every time the gas prices go way up, the news media and big oil apologists such as Mr. Picerno start bleating the same old "supply and demand" line. There's plenty of oil to meet the demand! If the truth be known, the big oil companies and their speculating henchmen on Wall Street are responsible for these high oil prices.
      Reply
    •  
      May 24 09:25 AM
      Merger Mania

      You are ignorant.

      When we talk about oil prices we talk about Light Sweet crude. THE important inventory installation for that grade is Cushing, OK.

      Last year at this time there were 27.4 million barrels this year there are 20.6 million barrels. So that is about a quarter less than last year. Considering that this years dollar doesn't buy last years dollar, I cannot see anything strange in the price of oil.

      Your lack of information is just as unsettling as the lack of high quality crude.
      Reply
    •  
      May 24 10:20 AM
      Merger mania, barnburner, and panskeptic, it is unbelievable that you believe the other posters are "big oil apologists". None of you have a single fact. Mini-marts go out of business, but the big oil companies don't. That is supposed to convince me? Plenty of oil to meet demand? Please go entertain yourselves elsewhere, these discussions are obviously way over your heads. Most of us here are here to try and understand the energy environment so we might make some money. So "feelings" and "if the truth be known" types of arguments are simply obfuscating reality.
      Reply
    •  
      May 24 10:21 AM
      PBR - The Best Of Breed ...
      The stupid "herd" sold PBR last week as if they struck dirt ..
      If Xon is $95, PBR should be $150 ..
      Reply
    •  
      May 24 11:07 AM
      there have been stories that the government of china is building coal-to-liquid fuels plants to mitigate their oil import problem. why doesn't the government of the usa do likewise? the houston oil corporations aren't going to do it, they like to keep prices high like they are.
      Reply
    •  
      May 24 11:08 AM
      Look at the price of coal, man!
      Reply
    •  
      May 24 11:27 AM
      In 1980, the U.S. Government established the Synthetic Fuels Corporation to produce an alternative to imported fossil fuels.

      That was right after the 1979 Gas Crisis and the Carter Administrations answer with price controls-which put lines of cars around the block from the only station in town with gas--remember that??

      Glad we're rid of that dunce--and these other Rip Van Winkles awake 28 years later to call hearings---Here's a ?? how's their synthetic fuel Corp. doing after all that time???
      Reply
    •  
      May 24 11:52 AM
      Mr. Math--
      Your math ain't so good! Wheat prices are down 41% from their highs -- and still falling! Wheat prices are below BOTH the 50-day and 200-day moving averages. So are sugar and many other commodities.
      Meanwhile: Wheat storage in the U.S. is at the lowest point since 1948 -- that's World War II era, when the U.S. population was half of what it is today!
      Speculative traders have NOTHING to do with that. These are supply and demand issues that MUST push prices higher!
      I wrote about the commodity bubble myth on my blog this week:
      globalcapital.blogspot.../
      cheap-sugar-most-commo...
      Reply
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