Another reason for the high cost of oil

This is a perfect example of how governments, and in particular, socialist governments, can and do destroy the viability of any wealth creating endeavor.

Look at what is really happening to oil production in nearly all of the oil producing nations and consider why the price of crude is going to continue to go through the roof. It’s a pattern that is being repeated in virtually every oil rich nation in the world. Consider the basics of oil exploration and extraction.

Exploration and discovery - It is getting more and more expensive to find new fields of oil as all the easy ones have already been discovered. Most oil fields will produce for only ten to fifteen years after which the cost of extraction increases the cost of that oil to more than the price at which it can be sold. If it costs $125.00 a barrel to extract and the going price is $115.00 a barrel, the field is shut down. Hundreds if not thousands of oil fields have already gone this way worldwide. (Of course, some of them that shut down when oil was $20.00 a barrel are being reopened like the huge fields in West Texas.) Oil exploration companies know this and are constantly searching for new fields. This costs a great deal of money, with greater and greater risk of failure. Oil exploration equipment wears out and costs a great deal to replace. These costs must come out of the profits from oil production starting with the first barrel of oil.

Extraction and transport - As oil is extracted, fields slowly give out and the cost of pumping including equipment maintenance and replacement goes up as the flow rate goes down. These costs too must be provided for out of the profits of the companies that extract and transport the petroleum.

Refining and distribution - Converting crude oil into saleable gasoline and fuel oil components is another infrastructure intensive activity necessary to turn petroleum into the end products that finally generate the money to pay for all that exploration, extraction, transport, refining and distribution. No one actually makes a dime until that fuel is finally sold to the end user. During the process from the ground to the user’s tank, around a third of the petroleum is used or lost. At every level in the process a portion of the profit must be set aside to cover not only the direct costs of the three (or six) activities, but also the maintenance and replacement of all parts of the required infrastructure from seismographs and drill heads to tankers, pipelines, delivery trucks and fuel pumps. Lose any part of the whole and the system breaks down.

Unfortunately, nearly every oil exporting nation in the world is treating their petroleum as a money tree, skimming profits for the benefit of those in power and neglecting to invest profits to feed the petroleum goose that’s laying the egg of black gold. Here’s a quote from a Newsweek article by David G. Victor on April 17, 2008 about Mexico's oil company, Pemex.

“Pemex generates two fifth's of the Mexican government's income and is a lucrative employer, but it is ailing from neglect. For years the government has milked Pemex of cash without giving it the wherewithal to invest in and develop new sources of oil. When President Felipe Calderon proposed last week to reform Pemex and encourage more private investment in oil exploration and refining, his leftist opponents shut down the country's legislature in protest. Pemex, they claimed, is a cherished national treasure that must not be pushed into private hands."

Those lefties just can’t stand to see private enterprise succeed in providing good jobs, putting people to work and taking them off of government dependency, can they?

"Mexico is hardly the only country that treats its state oil companies as ATMs for governments, unions, cronies and others who siphon the rich benefits for themselves. A large fraction of the world's oil patch is struggling with the problem that bedevils Calderon: how to make state-owned oil companies (which control about three quarters of the world's oil reserves) more effective at finding and producing oil. Venezuela's oil output is flagging. Russia's state-owned gas company, Gazprom, is on the edge of a steep decline in production. And in different ways many of the world's state-owned oil companies are struggling to keep pace with rising demand. Simply privatizing them is politically difficult, and thus most of the world's oil-rich governments are struggling to find ways to make state enterprises perform better.

“Even among state oil companies, Pemex's performance is notably poor. Used as a cash cow for the government, Pemex has never been able to keep enough of its profits to invest in exploration and better technology, the lifeblood of the best oil companies. Until a few years ago, Pemex invested essentially nothing in looking for new oil fields. It relied, instead, on the aging Cantarell field, which was discovered in the 1970s not by Pemex but by fisherman who were angry that the seeping oil was fouling their nets and assumed that Pemex was to blame. Pemex brought the massive field online with relatively simple technology. A scheme in the late 1990s extended the life of the field, but that effort has run out of steam. On the back of Cantarell's decline, total output from Pemex is sliding; some even worry that Mexico could become a net importer of oil in the next decade or two. They're probably wrong, but even the idea makes people nervous.”

Mexico is but one example of how government run industries can become so riddled with corruption. Mexico's Constitution requires that its hydrocarbons be owned by the people. This translates to their being controlled by corrupt politicians who have no incentive to make the operation generate a return on investment or even become self sustaining. The end goal of virtually all politicians seems to be to take as much money as possible from wherever it can be taken by whatever means necessary to further their political careers.

Quoting David G. Victor once more, “Part of the problem is that risk taking, which is essential to success in oil, is strongly discouraged. My colleagues at Stanford, in a study released last week, have shown that a system of tough laws that control procurement make managers wary of projects that could fail. Although such laws are designed to help stamp out corruption, a noble goal, they are administered by parts of the Mexican government that know little about the risky nature of the oil business.”

Government politicians, socialist leaders and dictators, despots of all kinds who run governments, and the vast majority of their subjects haven’t a clue how to manage any kind of business profitably. They understand virtually none of the risks of business and the risky nature of the oil business in particular. When it comes to choosing between investing profits in their enterprise to cover risks and for benefits that may come in the future or promoting their own fortunes by sticking the cash into the public’s pockets for candy and toys, you know what they’ll choose. Politicians will use it to buy votes or favor. Socialist leaders will use it to satisfy the masses. Dictators will use it to control their subjects. Despots of all kinds will use it for personal aggrandizement. Virtually all government members will use it primarily to strengthen their hold on power. The concept of investing profits back into the enterprise to cover risks or for deferred gain later is as alien to them as would be little green men from Krypton. No one from the left has the slightest clue how to run and sustain an enterprise. All they really know how to do is destroy those who do. There must be an axiom here somewhere.

Look at what the left has done to our American oil industry. First of all, they have made the entire industry the focus of constant class warfare with their hate campaigns. Next, they have prohibited exploration in virtually all of the promising areas in and around the nation. They have even prevented exploration in the Gulf of Mexico while giving the green light to our good friends in China to do so together with our other good friends in Cuba. That’s really a smart move that is certain to benefit the environment in the Gulf and keep oil spills from soiling our coasts. If the Chuck Schumers in our Congress have their way, the “obscene billions in profits” of our oil companies (actually a relatively small return on investment in the long run) will become obscene taxes in the hands of Senator Schumer and friends. Then they will have even more money to use in pork barrel projects and earmarks designed solely to buy votes to insure their reelection.

Teddy Kennedy’s “big dig” in Boston is the champion so far. The Big Dig was a project to take a pre-existing 3.5-mile (5.6 km) interstate highway and relocate it underground. It ended up costing $14.6 billion, or over $4 billion per mile. It did absolutely nothing of what it was touted to do, but it did buy Teddy and his boys a lot of votes and other more direct benefits at the expense of federal tax payers. Any private citizen who had any part in such a monstrous boondoggle would have been vilified in the press, denounced by politicians, tried in the courts and probably have ended up in jail. But because he’s liberal Democrat Teddy Kennedy he still sits in the Senate and curses others who are rank amateurs at misappropriation of public funds. And he will continue to be a champion of pork barrel projects and earmarks because he can get away with it. I guess the moral I was looking for is, Steal from a few, even a few thousand people and you will go to prison. Steal from the public treasury and if you support liberal causes, they will make you a saint. Hate campaigns and stealing public money must not bother the public much. In fact it seems to help politicians gain office. Maybe that's why there are more indicted and convicted criminals sitting in Congress than in nearly any other public group of similar size.

Thanks to the use by the left of class envy in fomenting hatred for virtually all successful businesses and industries, their friends in the media make billions by beating up on “greedy capitalists” and turning “profits” into a dirty word. They seem bent on doing to American industry what the Mexicans have done to Pemex, what Chavez is doing to the Venezuelan oil industry, and what the Russians are doing to theirs. That’s certainly strangling the goose that’s laying the golden eggs all because it's infinitely easier to destroy than to build. It amazes me that so many people will actually cut their own throats to spite those who have achieved more than they just because it’s easy. The joy that small children seem to express by destroying sand castles and other things built painstakingly by careful hands seems natural and we usually laugh at such antics. Sadly, unscrupulous leaders whip this tendency into a political force for destruction when those children become adults without the wherewithal to build and create for themselves.

Violence is the province of those who lack: the patience to build and create, the will to control their envy, the intellect to understand the real world and the love to control their hatred. It takes skill, caring, determination, intelligence, and time to learn how to build and create anything of value. None of these are required to destroy that which we cannot equal. A classic example is the soldier who slaughtered Archimedes simply because he couldn’t understand what the symbols drawn in the sand by Archimedes represented. Other examples include Czech Jan Hus (burned at the stake), the thousands killed by the Inquisition, the imprisonment of Gallileo and others like him, the demolition of ancient Buddhist statues by the Taliban, even the current flush of terrorism. All of these represent the temporary triumph of intolerance and ignorance over reason, usually through force of violence.