THE LATEST
« »

Search Archives:

Custom Search

Thursday, April 28, 2011

An Anti-Offshore Drilling Argument From... Wait, Exxon?

With gas prices rising through the roof, some aren't sweating the increase.

CNN:

Oil platformExxon Mobil said Thursday that first-quarter profits jumped 69%, helped by a spike in the price of crude oil.

The world's largest publicly traded oil company said it earned $10.7 billion, or $2.14 per share, in the first three months of 2011. That's up from $6.3 billion, or $1.33 per share, in the same period last year.

Analysts had forecast earnings of $2.06 per share, according to Thomson Reuters.


"Exxon chief executive Rex Tillerson said the performance reflects higher crude oil and natural gas 'realizations,' using industry jargon for prices," the report goes on. Higher prices, bigger profits. Duh.

↓ CONTINUED AFTER THE JUMP ↓


But when is good news not entirely good news? When it's bad PR. There's talk in Washington of cutting oil subsidies -- which, you've got to admit, are looking pretty unnecessary right now -- and even of instituting a windfall profits tax. The Justice Department is investigating the possibility of price manipulation.

So off Exxon goes to... their blog. There Exxon VP Ken Cohen makes a lot of arguments -- not all of them relevant -- and, in the process, shoots down an argument the industry and the Republican Party have been making for years.

Oil is a commodity; prices are set in the global market
Crude oil is a commodity, and like all other commodities -- such as corn, wheat or sugar -- the price is determined by buyers and sellers in a global market. Buyers are paying more for oil because the global economy is strengthening, and demand for products derived from crude oil is on the rise. Political instability in some oil-producing nations is also contributing to uncertainty about future supply. Oil markets are well supplied today, but uncertainty about tomorrow's supply is reflected in prices today. Finally, the U.S. dollar is at a three-year low against other currencies -– accelerated last week after a warning by Standard & Poor's about the country's $14.3 trillion debt and relative economic weakness. The weaker the dollar, the less it will buy –- meaning more is spent for the same amount of a commodity, whether it's crude oil or nearly all of the commodities in the chart at right.


This is actually about the truest thing in the entire post. Basically, oil prices were high before the global economy crashed and it was the resulting decline in demand that brought the price down. Now that the economy is recovering, gas prices are going back to about what they were before. Gas prices aren't really inflating, they're just going back up to where what the Bush administration laughably called an "energy policy" had left them -- i.e., gas prices are recovering to what we'll call the "Bush normal."

But the fact that the economy's in recovery is not the argument I was talking about. If it's true that crude oil is a commodity, that this commodity is "well supplied," and that "uncertainty about tomorrow's supply" (i.e., speculation) is responsible for rising gas prices, then the industry's and the Republican's argument for offshore drilling just died. Increasing supply in an already well-supplied market doesn't do squat, since oil is a commodity that doesn't spoil -- there's no rush to sell it before it turns green.

As Cohen says, "the price is determined by buyers and sellers in a global market." It helps to think of all the oil in the world going into one big vat and then anyone who wants to buy some draws it from the same spigot as everyone else. You drill off Florida, it goes into that big global vat and there's no way to know if it goes to St. Louis or to Beijing. Even if an overabundance of oil could bring the price down, it wouldn't; because US oil production is incapable of making a dent in that global supply with increased production. There's just too much in the total to make our contribution the price-setter. Further, even if there were a danger of US production bringing prices down, OPEC could simply scale back production to get it where they want it again. You probably haven't noticed, but that's kind of what they do. It is, in fact, OPEC's entire reason for existing.

So go ahead and bookmark that post at Exxon's blog. The next time "drill baby, drill" becomes a campaign slogan, you can use Exxon's own argument to shoot it down.

-Wisco


Get updates via Twitter Amplify
Enhanced by Zemanta