As oil prices soar, so does the worldwide public outcry against Evil Big Oil. Consumers are squeezed dry as Evil Big Oil soaks up the profits. Why don't they flood the markets with oil to give consumers some relief?
Informative article from BusinessWeek. To quote: There's no way the oil majors can flood the markets, for the simple reason that it takes years to find the oil, build the refineries, and construct the pipelines that will turn a shortage into a surplus.
The shortfall in refining capacity is appaling: No new refineries have been built in the U.S. since 1976, because of a combination of regulatory hurdles and local opposition. And the majors still see refining as a poor business, although profits on refining are now very lucrative at $20 per barrel, vs. under $5 per barrel as recently as the fourth quarter of 2004.
Nor is finding the oil a walk in the park: Despite the risks, oil companies have boosted exploration substantially. Norwalk (Conn.)-based consultants John S. Herold Inc. report that 200 oil companies have roughly doubled exploration spending to a combined $180 billion for this year. "They're certainly spending a lot more. Whether or not they are spending enough, that's up for some debate," says research director Nicholas Cacchione. But while they explore more for oil, the oil is harder to find. Companies are being forced to replace their depleted sources of oil and gas in the West with new supplies in politically and geologically more challenging areas, from Russia to the deep water off West Africa. "The companies are making more money, but they have more risks," says J. Robinson West, chairman of Washington-based consultants PFC Energy.
The biggest risk comes from the inability to predict the long term trend of oil prices: Executives need to make multibillion investment decisions without knowing whether oil prices are going to keep rising or plunge to the $20 range that prevailed through the 1990s and inched up gradually until 2004. Now companies are slowly increasing their pricing assumptions. Browne says BP figures prices will remain around $40 per barrel for the next five years. But the industry's leaders, who rose up the ranks in the relatively lean times of the '90s, are still being conservative -- some think obstinately so. No oil executive will cut a deal for five years out assuming that today's spot price of $65 will prevail.
Do you want to make sure that oil will cost over a hundred dollars a barrel? Easy. Compound the uncertainty facing Big Oil by threatening taxes on windfall profits. Send them a signal that whenever it becomes more attractive to invest in oil drilling and expanding refinery capacity, along comes Big Government to take it all away. Since you've pushed the return on investment down, don't be surprised that investment to expand oil supply goes down. Supply stagnates, while demand continues to grow.
It's that simple. Let's give it a try.