Redstate

I'd agree with you if the matter were solely between the Industry and the consumer; at whichever level. It isn't: It is between the Industry, the consumer, and the government. There are times, and this is one of them, that the upstream Industry must let its "gross margins suffer as much as it can tolerate" because if it doesn't, the Government will intervene. Only at the producer level is it relatively immune from government because most of that level around the World IS government.

I'm not an Industry proponent; I've lived with it and often fought with it for most of my adult life. Since my State owns a lot of oil, we are often, or at least should be, adversaries of the Industry; they want to pay as little for the oil as they can, we want to make as much off it as we can. As the recent scandals here demonstrate, the Industry will lie when the truth is better and steal when they could have what they want as a gift.

The Industry may or may not be an oligopoly in a definitional sense, but when allowed to, it will behave oligopolistically from the well to the gas tank, and that includes the "mom n'pops." There are so relatively few of them anymore that the gas station owner isn't going to drive around town to see what others are selling for and then try to increase his market share by dropping his price a penney or two; he's going to see just how high he can price it and not lose too much market share to his "competitors." It is the same all the way down the chain.

At the crude producer level, there is no incentive to compete or to produce beyond that necessary for market share. Exxon-Mobil, BP, and Conoco-Phillips aren't going to spend a dime on adding production in Alaska; they have a long-ago amortized field and transportation system and they can just suck oil at ever increasing profits, subject only to the State deciding it wants a greater share - which we just did. And they will cheat on the tax scheme, and we will sue them, and they will try to buy a Governor or Legislature that will settle with them. If that doesn't work, they'll appeal you and see if they can cost you more in legal fees than you might gain by prevailing, see, e.g., Exxon-Mobil's case before the USSC in which they claim, based on an 1814 Admiralty case, they they aren't responsible for the vessel Master's actions in the Exxon Valdez spill.

Don't get me wrong, I'm not really bitching and I'm not one of those fools that thinks you can regulate this sort of thing. This is a big boys game and big boys play rough. I just don't pretend that it has anything to do with pristine market economics - and you ain't learn'n this game in Marketing 101.

In Vino Veritas

The cost of crude is now quite a bit higher compared to the price of gasoline and distillates, as Vladimir points out. When XOM's last quarter came out, I remember writing a post about it here, making a similar point about how this affected their overall profitability.

The interesting phenomenon is that downstream is proving to have little in the way of pricing power and can't simply pass crude-price increases along to consumers and industrial users.

Some of this might be due to the substitution of alternates like natural gas, but I don't have the information to say for sure.

Thinking macro-economically as I usually do, I'm more inclined to see this as a sign that the US economy has the (perhaps surprising) flexibility to be less dependent on energy inputs. It also confirms ample signals from other data that US monetary inflation is subdued, even as it rages elsewhere in the world.

...is that "fuel switching" (oil for natural gas) has already taken place to the maximum extent possible. By comparison with oil, nat gas is cheap now, 1,000 cu ft being priced about 1/14th the cost of a barrel of oil. On an energy basis, it should be about 1/6th.

There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa

Another possibility is that the current high (but not unprecedented) prices for refined products actually are reducing demand. The conventional wisdom that demand for fuel is price-inelastic may be wrong. Yes, no, maybe?

demand is at a seasonal low.

There is a great deal of seasonality in the refined products such as gasoline and heating oil.

for #2 heating oil, and that was with all the discounts that a longtime customer with a big tank gets. You'd pay fifty cents or so more if you just called for a hundred gallons. So, while gas may not be going up as one might expect, fuel oil sure has.

That said, I do think that the upstream side is sensitive to the politics and is trying to hold down their prices and profits; the CEOs of big, powerful companies really don't like being hauled before Congressional Committees and excoriated and threatened.

In Vino Veritas

there is no incentive to compete or to produce beyond that necessary for market share

Say this for Marketing 101: taking it will prevent saying things like that.

Drink Good Coffee. You can sleep when you're dead.

that is spinning up production or cutting prices. The only development going on is just enough to offset production declines in older fields, and not always even that much, e.g., the North Slope, and some smaller players getting in the game on higher risk/cost provinces that the majors have avoided. When you're rolling in money sucking the oil out of old, paid for fields, why would you spend tens of billions to bring on a new field when the only result would be driving down the price. If there were competition and the pursuit of individual interests involved, somebody would jump in, spin up a field, and throw some oil on the market at an attractive price, but none of them are going to spend the money to bring on new when they make more by not doing it.

The only thing worse for producers, most of which are countries, not private companies, than some massive government intervention would be someone bringing on a big field. It was only government intervention that brought the North Slope and North Sea on in the early eighties with dramatic uplift rates to break the OPEC price. If there are fields like that out there, nobody knows about them, and in today;s political climate, I don't see the US or British governments doing it anyway. The closest thing to that on the horizon would be getting Iraq up to full production and throwing their oil on the market, something lots of people are trying to prevent.

In Vino Veritas

But you just told us that your State will, upon seeing any increase in profitability by these producers, move to "take it." Now you're telling us that for some mysterious, probably conspiratorial reason, these companies aren't increasing production in your state.

Drink Good Coffee. You can sleep when you're dead.

it is just good common sense on the producers' part; they can make more money without spending any money. Who could blame them?

The 19th Century agrarian populists said, "raise more Hell and less corn." Whenever the prices went up, the farmers planted more and more corn until the price collapsed, same with any other commodity in a free market. Well, oil isn't a free market, governments and cartels largely control it and even the private produces move in sympathy with them.

The producers helped the US and British governments break the OPEC price in the eighties and their reward was bankruptcy for many and a forced consolidation in order to survive or prosper for the rest. They're going to be damned reluctant to throw a bunch of oil on the market again - as is my State.

In Vino Veritas

...for every barrel you produce that you don't find another barrel to replace it, you're just holding a prolonged "going out of business" sale.

I've rarely seen companies just ride production and hoard cash. A company that would employ that strategy must think that they can add reserves more cheaply in the future -- meaning their crystal ball says there will be declining prices. Crystal balls haven't been too reliable for, well, forever.

Some of these companies are pretty actively exploring the Gulf of Mexico deepwater, even with $500,000 per day rig rates. If I'm reading between the lines, it sounds like landowner relations are pretty sour up your way and the operating companies would prefer to spend their money elsewhere for the time being.

There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa

that there are "landowner relations" issues here. Veco, Inc. sprang from nowhere to become the pet oil field services company here and acted as the bag man to dispense generous "walking around money" to Alaska legislators to assure the "right" vote on any oil issues, particularly the oil tax initiative that was the Industry's quid pro quo for gas line development. Veco no longer exists; it's principals took the fall and are headed for jail. How long depends on how cooperative they are with the USDOJ. Three Alaska Legislators are currently checking in to the CrossBars Motel, another is scheduled for trial in a few weeks, and indictments and rumors of indictments abound. So, yeah, nobody's real happy with the Industry right now. I'm not so offended that legislators could be bought as I am at how cheaply they could be bought.

I do think the Industry has decided that there are greener pastures, but there are some non-majors beginning to work here a bit and some thought of the State taking an equity position with some of them to develop some reserves on State land.

They're doing some things to at least maintain production

In Vino Veritas

I thought oil companies either purchased land or mineral leases from private entities, therefore, they (the oil companies) would own outright every drop of oil produced, and they would pay the lessor a fee, or perhaps and percentage of the production profits. Is it different in Alaska since the government owns most of the land up there?

“.....women and minorities hardest hit”

usually is simply a royalty per barrel plus the value of the lease to a private owner. Here, the NS leases were sold in '68 for $968MM and the State retained ownership of 121/2% of the oil as its royalty; the companies pump it and ship it right alongside their oil and it is sold on the open market with the State getting the take less transportation. The cost of that transportation is something we've fought with them about a lot. There are then severance taxes, property taxes on the field and other infrastructure and taxes on the income derived to the Produces from the sale of the oil. We've fought with them almost constantly about the income tax and it has been litigated over and over; we've got lots of lawyers who get paid every two weeks whether they do anything or not and so do they. During the price crunch, they pursuaded the Legislature to give them some fairly serious tax breaks, but as the price began to come back up, those breaks capped the State's share allowing them much larger profits than they'd ever had here. So, we've restructured the taxes so that we take in more revenue from the oil at high prices. The producers all say it is the end of the World and they're going to pack up their oilfield and go home, of course. But in the aftermath of all the bribery scandals, saying you're an oil company lobbyist is the only thing worse than saying you're a Republican, so they got rolled. We'll see how it works out; they're not developing any more production and haven't in years for the reasons I discussed above. They'll lie and cheat like they always have and we'll try to catch them; success in that endeavor depending largely on how much influence they have with the Administration at the time.

In Vino Veritas

I'm an engineer by training and the operations manager for a (very) small, privately held Gulf of Mexico producer.

Would that my company had the heft to throw around as achance describes. ("We could do it... but it would be wrong!") In reality, there is a love/hate relationship on the producer side between the "majors" (i.e., the integrated companies) and the non-integrated independents like my employer. For example, I argue in favor of opening ANWR because I think it's the right thing to do policy-wise, but there's not a chance it will help my pocketbook, as 500,000 barrels a day of domestic production would drive prices down. Come to think of it, from a purely selfish standpoint, I think we should all hug a caribou.

There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa

and that's why it won't be opened absent a government initiative. Even at `$100/bbl., the US economy seems to be absorbing the energy price without real damage to the economy. So long as that is the case, no new significant production will come about from American provinces. Remember, even in the face of lines and "stagflation" TAPS was only authorized by the vote of the VP - and the envirowhackos were in their infancy in the early '70s.

ANWR or NPRA aren't the "elephants" that Prudhoe Bay was, but either is big enough to disrupt the current scheme and force prices down. The Producers don't want that, they remember '86, and the Greenies don't care. If energy prices start to take an alarming bite out of US economic activity, maybe, just maybe, there would be a political iniatiative to bring on significant new production.

I think Alaska is now positioned such that we have the wherewithal to bring some of our own oil online without the leave or participation of the majors, but we need very high prices to do so as well, so we won't bring on anymore than is necessary to offset the decline in Prudhoe Bay production.

In Vino Veritas

The Brazilian discovery is in deep water, and it's going to take a long time to bring it on production. Meanwhile, existing producing wells will decline. Therefore, the Brazilian discovery will be like a bug squashed on OPEC's windshield. The world is running out of oil, get used to it.

F. Leza
Caracas, Venezuela

of oil that can be had easily and cheaply; there's plenty of oil out there, but none that's cheap to get or which can be gotten without massive Envirowhacko opposition.

In Vino Veritas

if we permanently removed protectionist tariffs on Brazilian ethanol.

lesterblog.blogspot.com

what's your take on the upcoming referendum there in Venezuela?

lesterblog.blogspot.com

______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

It's just that soooo many people seem to be "it's my way and my guy" or I'm outta here.

All I know is... that whomever the Republican candidate will be, the Democratic candidate is going to be to the left of our guy... on everything...

If you want to end abortion, you're more than likely to get it from even Rudy than you will from ANY Democrat.

If you want border security, you're more than likely to get it from ANY Republican over ANY Democrat.

If you want to continue to prosecute the War on Terror, it's going to take a Republican over ANY of the Democrats.

If you want to see taxes low, it'll take a Republican over the Democrats.

If you want to see Federalism restored, some of the Republicans will be way more likely to do it than ANY of the Democrats.

The list could be even longer.

But I apologize if I was over the line.

______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777

I was typing while under the crazy influence of Ron Paul vapors.

It won't happen again.

Guess I did go to a public school.

First off, where in my post did I say anything about the second amendment? I believe I was talking about the first amendment. Second, since when is an internet website someones private property? Are you maybe a little scared of an opinion that's differents from your own? I'ts not like I'm saying something rude or offensive. Grow up.

obviously the 2nd Amendment was a typo, and I acknowledge that... but it's very frustrating to deal with your types here.

I'm clearly surprised you haven't been swept up yet by a moderator and blammed.

I'm not scared of Ron Paul... I'm disturbed by how ridiculous the MoRons are.

And the servers that this site are private property, as well as this being someone's intellectual property... and you have no right to demand constitutional protections here.

The government can't prevent anyone from kicking you off of their property, whether that property is physical, intellectual, or intangible.

your limited understanding of what private property is probably explains why you want to return to the gold standard.

a particular post. It's makes reading these comments easier.

And mentioning Ron Paul is not prohibited, it's a limited right that you have to earn by being here and posting rationally for a couple of months.

And yes, he makes a couple of good points... then goes WAY off into black helicopter land with the NAU stuff.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.
I'm with Fred!

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