As high gas prices hit consumer wallets everywhere, the politicians are coming out of the woodwork trying to draft all kinds of legislation to punish “gouging”.
Armed with their one cent worth knowledge that West Texas intermediate prices have not risen proportionally to gas prices, the politicians are looking for oil company scapegoats. In addition, a number of “experts’ have come out and blamed oil companies for not investing in new refineries.
These 2 issues have the public too clamoring for some sort of retribution against oil companies. I just saw an interview on CNBC which featured Jerry Taylor from the CATO institute and Daniel Weiss from Center for American progress. It was indeed refreshing to see Jerry Taylor slice through all the nonsense spewed by Daniel Weiss. Full Video
I wanted to take this opportunity to address a couple of relevant points to this issue.
Firstly, using the bench mark WTI price to gauge oil prices is akin to using prices at one retailer to gauge the price of clothes everywhere in the world. While WTI prices have languished ( reasons addressed here ) grades of crude which typically trade at discounts to WTI are trading at premiums to it. Malaysian Tapis oil actually hit a high of $79 a barrel a few days back. So while the crack spread may appear enormous based on WTI, it isn’t so based on other grades of crude. Since we import a lot of our gasoline we obviously have to pay a high price to refiners who are using extremely expensive oil to produce it.
Secondly, the reason we have not built any refineries in this country for about 30 years has a lot to do with the fact that it is an extremely expensive capital intensive process and the NIMBY syndrome.
But above and beyond that there is another reason. Right now refining capacity and crude supply are finely balanced. In 10 years refining capacity (in my opinion) will exceed oil supplies by 5-7 million barrels per day even if we do not build another refinery anywhere. I really do not see the Valeros and Teseros making record profits when all the refineries are clamoring for the same crude. So why invest?
But this reality has not sunk in with the public. It is quite possible that if Gas Pains increase we will see Big Oil CEO’s dragged into the senate to answer the same inane questions.
One can only hope it will play out as it did in “A Few Good Men” [a play and movie. Please note that the following is satire. Rex Tillerson is chairman and CEO of ExxonMobil.]
We start with Lt. Kaffee interviewing Rex Tillerson on why he has not built new refineries.
Kaffee: Just one more question. If you plan to increase capacity to 5 million barrels per day and Exxon always executes on time then why aren’t you building any new refineries? Mr. Tillerson? You stopped building refineries because you knew there is not going to be enough oil to run through them didn’t you? You saw your own discoveries and that of other companies, you saw that accelerating treadmill you were climbing just to stay in place and you knew we were in deep trouble. Fearing windfall taxes from hell and nationalization everywhere you spun this yarn that peak oil will arrive after 100 years. Mr. Tillerson are we at Peak oil?
Mr. Tillerson: You want answers?
Kaffee: I think I’m entitled to them.
Mr. Tillerson: You want answers?
Kaffee: I want the truth!
Mr. Tillerson: You can’t handle the truth! Son, we live in a world of petroleum products and those products have to be produced in increasing amounts to keep our economy alive. What are you gonna do it with? Corn ethanol? I have a greater responsibility than you can possibly fathom as the acknowledgement of peak oil will itself have grave consequences for the world economy. You weep at the gas prices and you curse the Oil Companies. You have that luxury. You have the luxury of not knowing what I know: that gas prices though higher than before are still cheap. And Exxon’s existence, while grotesque and incomprehensible to you, produces 4 million barrels of oil a day for you NASCAR morons. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me producing all I can. You need me producing all I can so that your American Idol obsessed culture can be spared the truth for as long as possible.
We use words like oil, rigs, refinery…we use these words as the backbone to the American life you have got used to living. You use ’em as a punchline. I have neither the time nor the inclination to explain myself to a man who consumes petroleum products 24/7 and uses those very products to protest against oil companies! I’d rather you just said thank you and went on your way. Otherwise, I suggest you pick up a shovel, dig yourself an oil well and build a refinery in your bathtub. Either way, I don’t give a damn what you think you’re entitled to!
Kaffee: Are we past peak oil?
Mr. Tillerson: I am doing the job you want me to!
Kaffee: Are we past peak oil?
Mr. Tillerson: You’re goddamn right we are!
© 2007 Saif Lalani
