No easy answers to oil and gas problems

Earlier this year we published an interview with retired oil industry man Francis Davidson of Polson. He updated those remarks in a talk to the Polson Presbyterian Men's Group last Saturday. Unfortunately, his predictions of several months ago appear to be right on the mark.

He titled his talk "Are oil and gasoline prices excessive? Obscene?" In answering those questions, Davidson provided insightful and sometimes surprising answers.

In the first quarter of this year, he said, oil company profits totaled some $35 billion, "a pretty sizable figure even by Washington, D.C. standards."

"What should we do?" he asked. Hang the company executives? Put them in jail? Create a windfall profits tax or nationalize the oil industry?

Some have said "The government needs to bring the oil companies to their knees." But, Davidson countered, "What happens to free enterprise … Where is the incentive to risk capital (industrial and corporate) with expectations of a reasonable return?"

He warned who would be bringing whom to their knees?

Surprisingly, 75 percent of oil company profits come from sale of crude oil, mostly from outside the U.S. and about 25 percent comes from refining, chemicals, pipelines, terminals and financial resources.

"Oil profits are not large," he said, "Net profits of all industries from September 2000 to September 2005 were 5.5 percent. Oil industry profits were 5.8 percent."

He compared this percentage to other industries, including pharmaceutical, 19.5 percent; banks, 18 percent; diversified financial services, 9.8 percent; telecom systems, 9 percent; food and beverage, 8.3 percent."

Oil profits for the period were 8.1 percent, he said. Overall average profit margin of all industries was 7 percent.

Cost comparison showed a similar disparity in the 1980-84 period to 2005: Tuition and school fees, up 325 percent; medical care, up 220 percent; rents, up 115 percent; housing, up 90 percent; food, up 85 percent; all consumer product averaged an increase of 90 percent.

Gasoline prices, he said, increased 65 percent during that period.

The profits, he said, can be broken down to 4 percent for dividends to stockholders and 96 percent is reinvested including 73 percent in exploration and production of new sources, and enhanced technology for existing resources, and the remainder for transportation, processing and marketing of crude and refined products.

The major oil companies plan to reinvest billions of those dollars now and over the next several years — some of it in development of alternative energy sources, as well as LNG (liquefied natural gas),

Davidson said that the major oil companies control only about 14 percent of the production of crude oil worldwide.

Countries with nationally-owned oil companies control more than 80 percent of the price — and those are countries not very friendly to the U.S.

Many had American help to get their oil industries up and running, and then kicked the U.S. firms out. Most of those nations are socialistic, dictatorial and/or are very corrupt. Their oil production is "political, not commercial. They've set low priority on locating and developing new crude oil sources."

As a result, oil production infrastructures are collapsing in Nigeria, Venezuela, Chad, Ecuador, Bolivia, Iran, Iraq, Kuwait, Libya, Russia, Indonesia and Saudi Arabia. Evidence of this, for instance, is that Venezuela's production is down 46 percent since 1998; Iran is down from 7 million barrels a day in 1980 to 4 mpd now; OPEC nations' output is down from 38 mpd in 1979, to 32 mpd today.

Even Saudi Arabia's prolific oil fields are "getting old" and production is decreasing.

Some of the countries with nationalized oil industries are beginning to think about inviting major oil companies with their expertise to come back in to enhance production.

Other factors influencing the price of crude oil are terrorist activity, social programs, corruption, political instability, supply and demand, state taxes, commodity speculators, and hurricanes (there are still at least a hundred rigs in the Gulf that have yet resumed operation after Hurricane Katrina struck the area).

Davidson took a dim view of the idea of U.S. government regulation of gasoline prices. He said that after President Nixon imposed price controls in the early 1970s, "U.S. production of crude oil dropped 50 percent. In 1980, the government imposed a windfall profits tax and oil companies quit exploring for new sources." By the time the tax was repealed in 1988, domestic oil production had decreased 6 percent and foreign oil imports increased 16 percent.

Obviously, there are no easy answers. World demand for crude is 85 mpd and supply is 86 mpd. "There is no slack," Davidson warned. It takes years to build new refineries, provided the necessary federal and state permits can be obtained.

In the meantime, he said, ask yourself, "Is this trip necessary?" And run slightly higher air pressure in tires, buy a lower octane, keep a clean air filter, do good general maintenance on your vehicle, car pool, and reduce maximum speeds.

Also, ask yourself how willing you are to pay high gasoline prices to operate your RV or large SUV.

And here's a final set of stats to mull over: It has taken 125 years for the world to consume one trillion barrels of oil. The next trillion barrels will be consumed in only 30 years.