Blaming the Oil Companies

Email: Today I received an email from a friend. It was one of those chain emails meant for forwarding. The thrust of the text was that the narrator had this friend who worked at Halliburton who suggested that the way to bring gasoline prices down was to stop buying products from Exxon and Mobil gas stations. The theory was that if Exxon/Mobil were hurt badly enough that they would have to lower their gas prices.

The Blame: The thrust of the narration of this email was to suggest that the Oil Giants Exxon/Mobil had control of crude oil prices. On Exxon leases where they own the rights to the oil, their wellhead cost is probably $15.00 or less/barrel. They do make a lot of money off of those leases by selling their downstream products as if their crude prices cost whatever the market dictated. Those totally owned leases are a minority holding for Exxon/Mobil. The many foreign countries that Exxon/Mobil has to deal with also expect a share in the booty for the oil extracted from their sovereign lands and coastal areas. Wellhead cost goes up dramatically dealing with those foreign governments. One result of having to pay for the extraction of the oil in foreign lands is that the profit margin for Exxon/Mobil is small. The dollar figure is high, but they are a very large company with an unimaginably large volume of business.

Profit Margin: Suppose there were two bread makers. One hired a lot of people and made a lot of bread. The other bread maker operated a 'family' business with just his immediate family to make the bread. The bread that both produce cost the same amount of money, but the bread maker who sold the most bread made the most money. Even though they have the same profit margin, because of the volume of the first bread maker, he was able to earn more. But what a difference in value to the community that the larger bread maker makes. Many people are able to make their living from those larger bread sales, including the workforce, the vendors, and the owners. The further downstream effect was also good. The very people that made money from the bread also spent some of that money in other shops and in turn, helped those shop keepers and their employees.

Exxon/Mobil: The oil giant is like the large bread maker. There are untold thousands of ordinary people making their living from Exxon/Mobil. They include but not limited to - the drilling crews, oil field service companies, pipe manufacturers, bit manufacturers, well loggers, poor people in countries that most of you wouldn't even visit, the thousands of repair and vendor shops that service the oil industry, and refineries and all of the dependent businesses that depend on refining oil. In the downstream marketing sector of the business, there are the truckers, the filling station workers, the station owners, and the many restaurants and their employees. And Guess what? All of the people who are fortunate enough to work in the oil business in some capacity spend their earnings with all of the other businesses who employ millions.

What if: Suppose Exxon/Mobil cut their prices dramatically. It would not take long for their supplies to run short because everybody would be purchasing from them. When Exxon/Mobil supplies run low, guess what happens to the price of oil? You guessed it; the price would go higher, instead of lower. Their lower prices would encourage motorists to use the cheaper fuel and thus deplete the oil and fuel stocks in this country. When the supply is low, the prices go higher.

Remedies: If there was a way to solve the problem without compromises of some sort that solution would already be enacted. But because the remedies are not without compromises, every possible solution angers some constituency or the other. The environmentalists wield the largest club. The United States has great reserves of oil but oil companies cannot drill in most locations. We have proven energy resources in the Arctic National Wildlife Refuge (ANWR) in Alaska, almost boundless reserves of coal, oil and gas reserves offshore Florida and California, and oil producing shale in the Rocky Mountains. These are known energy reserves that could help with the price we pay for both electricity and auto fuel. Then there is Atomic Energy. Atomic energy is clean and would free us from using millions of barrels of oil or millions of tons of coal, but again, the environmentalist will not allow it. The paranoia spread by the environmentalist garners enough public support to keep Atomic energy off the table.

The Mid-Streamers: Lastly, other than the above-mentioned remedies for cheaper energy are the speculators. These people purchase oil contracts without ever needing the first drop of oil, but insert themselves into the bidding process for the delivery contracts for oil. A good trader can make millions trading in oil contracts by driving up the settling price for those who do need the crude oil. A slight change in the way the market operates might have an effect on the bid price of oil; that change would be to require anybody who wins a contract for crude oil to have to take delivery of that oil before he can resell it. That would not deny anybody from trading in oil contracts, but would certainly bring more responsibility to that market. For the first time, these buyers would have to worry about storage, transportation, and the resale of the oil.

In Conclusion: Hurting Exxon/Mobil only hurts us. It makes a lot more sense to increase our domestic supply and crowd out those traders who do so much harm to us. Also, we must adopt atomic energy. That investment would not only help with energy costs but also with the environment.

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