Sunday, August 21, 2005

Inability to solve Oil Problem

There are two theories doing the round as far as higher oil price is concerned:
- Saudi Bush theory of no shortage in crude oil production, but distribution disturbances only and
- Prevalent market accepted theory of reaching peak Oil Production.

According to Saudi Bush theory, as demand increases; crude oil production will increase. The higher gasoline prices are due to distribution disruptions and lack of more refining within USA. One unanswered (there are many for this theory) question is why would oil companies keep on bidding for higher oil and store that as an expensive inventory when they do not have enough capacity to refine that oil. But even if this issue is left aside, a nagging question comes to mind is what the USA Federal Government is doing to do remove this refinery shortage? A refinery of 1 million barrel per day processing capacity may be around $2 Billion. But for a company like Exxon with $25 Billion as net profit last year and $15 Billion in the first six months of this year (with declining production!); putting up a refinery is not a big issue. Same with other oil companies – they can afford such investment very easily. Then why are they not doing so? Why USA government does not take any action here - legal or business pressure or imploring them; whatever works? In absence of any action it looks then that this Congress and Administration is helping indirectly to these Oil companies to retain this vice like grip and rob the common people. How else to avoid the conclusion that President Bush and VP are party to this robbery? May be USA Government spends some $2 Billion and build a refinery. It is worth doing that if it is a bottleneck. Bring some new players or give money to new players to come to the market if the existing players are gaming the market and trying to keep the oligopoly. On the other hand if “not in my backyard” attitude of American Public is contributing to the absence of creating new refining capacity; it is the job of policy makers and elected representatives to point out so. It is costing fortune to public and will seriously impact the economy going forward. If this is something public is not aware and missing; then this needs to be brought to the surface. Congress, Administration and Media need to do this part if that is the case or root cause for not adding new refineries.

What about the other theory that world oil production is near the peak or already peaked? It is also the case of how fast additional production can be brought to the market to fulfill increasing new demand. Many experts have said that this is the core problem and we need to face this reality. It is amply proven time and again that American Congress and President do not have the ability and will to tell this hard truth to American People. Ever since President Carter’s jibe of reducing energy consumption did not benefit politically, American Politicians have developed singular inability to talk about controlling oil consumption. Nay, it simple never happens in United States of America. We do not do business that way in Beltway, is the refrain. I am sure President Clinton must have felt to be lucky not to deal with this problem ever. With President Bush - he is from Texas, he is former oilmen, his VP is from Oil Industry and more important, he sees virtues of pro market thinking when he “sales” his soul to Big Oil. So we do not expect anything here from him. Naturally, the measures like adding any tax on Oil to manage the consumption are blasphemy in this Republican era.

Not only the inability of American Politicians manifests in terms of no initiative to control oil consumption directly; it is also extends to any indirect measures like specifying higher mileage for passenger cars and SUVs. So it will be na├»ve for people to expect that this Congress will be able to enact any useful laws in this regard – specify higher mileage standards. That will not happen. Any hopes that all individual states would do anything, like the initiative of California to specify higher emission standards; is nothing but too much optimism. Legal challenges are too many for such initiatives. States are not that powerful to withstand the pressure of vested interests of Automobile and Oil Lobbies.

So what do we do and what will happen? We do not know which of the two theories is true. But there is less validity with the first one. People’s initiative in supporting non-oil transportation will be one way to try to address this challenge. Wider adoption of such alternatives as well as better acceptance of such measures in market may be the real key. So those in Congress, those in power, may do best when they back such initiatives. California Governor did good when he talked about infrastructure for Hydrogen cars. When Silicon Valley VCs see the business potential in such alternative market opportunities; it will have more meaningful impact on this impasse. May be California needs to pass a bond measure which raises money for such initiatives, technology and businesses as it did for Stem Cell Research. Granted, even that measure is grounded by legal challenges; but care can be taken so that the proposed alternative energy bond does not face such hurdles. Besides, such initiatives can concretely help to generate new employment in the state. People can believe in such private or state initiatives more than American Politicians in Washington at this point. Those elected representatives who want to side with real energy problems of people will help such “peoples solution” to emerge. Total inaction to reduce the impact of higher oil prices would further erode credibility of Congress in people’s mind. Energy bill 2005 is not the pass is very clear. People look at the pump price and they realize very well that, that bill is hogwash.

**Some Numbers to think:

- USA crude oil daily consumption ..............~ 20 Million barrels

- At $10 per barrel, the cost is .....................$200 Million per day
...............................................................~$75 Billion per year

- High price with minimal impact ................$30 to $35 per barrel

- Average “acceptable” national cost ............$225 to $262 Billion per year

- At $60+ per barrel, the cost is ...................$450 to $550 Billion pre year

- New “Bush Oil” Tax ...................................$250 Billion per year
Or Cost of not developing alternatives to Oil

- America’s new contribution .......................$100 Billion per year
to “Mullahs of Middle East”
(at 40% of oil supplied from that region)


Umesh Patil
San Jose, CA
August 21, 2005.

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