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May 03, 2006

Follow the (Oil) Money

There’s a lot of energy money around and everyone wants a piece of it – not a very inspiring spectacle and perhaps very dangerous.  Or, to a wild optimist, maybe a chance for free markets to perform one of their greed-into-fishes miracles.

We know we’re paying more for everything energy related.  And we know that the cost of extracting oil, natural gas, coal whatever from the ground didn’t suddenly double even though the cheap-to-get-out stuff is slowly being used up. 

You don’t need a conspiracy theory to know why the price is going up: hundreds of millions of newly-minted middle class consumers in China and India are consuming – not consuming as much as we are, of course, but still consuming a lot more than the pittance of energy they used before.  If they all get motorcycles, they’ll use more gas than we’ll save if we stop buying SUVs.

But, with price going up, volume of hydrocarbons traded going up, and the price of extraction only up at the margin, there’s a lot more money to be made between the mine or well and the fuel tank than there was just a couple of years ago.  Unfortunately, I’m not the only one who noticed.

Should the “oil” companies get all the profit?  A pure economic answer would be “yes”.  If they make a lot of profit, capital should flow into funding competition to them.  Supply of energy (perhaps from different sources) will appear to meet the only somewhat elastic demand.  Look how many “social tagging” companies we got springing up before ANY are profitable.

Trouble with that argument is that new direct competition is almost impossible.  Places where mining and drilling are permitted are already tied up in long term  leases and contracts.  Many new places are off-limits – sorry, I do think we ought to be drilling more in both Alaska and off the East Coast of the United States.  We even ought to build windmills on the beautiful ridges of Vermont and off Nantucket.  And we ought to allow the building of new refineries and nuclear power plants.

But – not to make any excuses for anyone – when we make expanded competition impractical, the extra profits that go to the oil companies seem to end up in executive pension plans.  To be fair, the stockholders do get a return and, if you’re an investor in the US, you could’ve bought oil company stock.

Hugo Chavez and Evo Morales say that a greater share of the consumer hydrocarbon dollars ought to go to the countries from whence the hydrocarbons come – particularly now that there are more dollars to go around and it’s a seller’s market.  Of course we know they’re just lefties who want to reneg on valid contracts although, just perhaps, some palms were greased when these contracts were signed.

The US Congress, on the other hand, would like to “renegotiate” the royalties for extraction from national lands and repeal various tax breaks that the energy companies bought fair and square and paid for in campaign contributions.  And, if we’ll just stop bellyaching, we can have a $100 tip per family out of the take.

In theory it wouldn’t be bad for impoverished countries to get a greater share of the oil dollars.  Trouble with the theory is that the dollars somehow don’t get to the people or even stay in the country.  They end up in Switzerland in the pension accounts of dictators.

And, in theory, it wouldn’t be bad to use higher US royalties to fund our own bankrupt retirement system.  But I don’t have a lot of confidence that would happen.

BTW, higher royalties, higher taxes on fuel, less tax  breaks for energy companies DON’T necessarily mean higher prices at the pump.  Those prices are being set by demand and speculation (OK, you economists, maybe by marginal costs of new supply) but they are certainly not merely the sum of the costs and “reasonable” profit margins along the way.

Really scary is the extra money that goes to regimes like Iran (and used to go to Saddam Hussein, especially when the UN was managing oil sales for Iraq).  The Middle Eastern countries did years ago what Chavez and Morales are only starting to do.  Really absurd is the oil money being considered as the personal fortune of the Saudi Royal family.  Somewhere between this absurdity and the availability of weapons at the right price,  Osama bin Laden got his start.

Enter China and the situation gets scarier, yet.  China wants and needs oil.  The rulers of many countries which have it are quite literally for sale.  Other potential suppliers just want a little support in the UN when they are unfairly criticized for a few atrocities or for preparing to nuke their neighbors.

Weak countries which supply strong countries with critical energy are in greater danger than they know.  There is only so long that the strong countries will tolerate an increasing share of their wealth going to weak suppliers – or the rulers of weak suppliers.  Cynics say that’s why we’re in Iraq.  I don’t think that but we’re not in other places that have dictators but not much oil.  It’s not inconceivable that China or even India could become increasingly colonial if oil is all that stands between them and prosperity.

There is no quick fix.  There is no almost quick fix.  I have posted and will continue to post about long term maybe fixes.  But today is just a rant.

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