A Christian Liberal is NOT an oxymoron.

Posted by XT on April 29th, 2008 in US News

Amazingly, with both crude oil and refined product prices at record highs, oil companies are turning record profits. Here’s a nice little fact tucked away in the story:

Shell’s Chief Financial Officer Peter Voser said oil companies are not to blame.

“We don’t understand the oil price at this stage,” he said. “The fundamentals will not justify an oil price as we see it at the moment.”

Shell’s earnings from oil production rose 52 percent to $5.14 billion (3.3 billion euros), due almost entirely to the price increases. The company said combined production of gas and oil equivalents increased by less than 1 percent to 3.4 million barrels per day, as a 9 percent rise in gas production outweighed a 6 percent fall in oil production.

Stripping out the impact of oil inventories that have risen in value, refining profits would have fallen 20 percent, Shell said.

Hmmmm. The CFO of Shell doesn’t understand why oil prices are so high? Well, I agree with him that a six percent reduction in production should not cause a fifty-two percent rise in profit. Refining profits are down? Someone isn’t telling the whole story.

Shell has invested heavily to improve production after a string of setbacks, including an accounting scandal in 2004. More recently, it has faced attacks on its pipelines in Nigeria and a forced sale of part of its stake in a major project on Russia’s Sakhalin Island to a state-run enterprise.

Yeah, that’ll cause problems. But it doesn’t explain why the world oil price is so expensive.

I’ve said before - and I’ll stand by it - a large part of the problem is the weakness of the US dollar. Oil contracts the world over are bought and sold in US dollars, so when our currency’s worth drops, the price of oil must rise exactly the same amount even if no market conditions change. When Chinese politicians begin to talk openly about selling dollars, that drives the value of the dollar down, and the price of oil up. It doesn’t matter if China actually sells its dollars (actually, it does - it would be even worse if they did), what matters is that marketeers think that China will. Wanting to get ahead of the dollar’s plummet, they sell their dollars and accomplish, in minature, what China could do on a grand scale.

The other problem is structural throughout the US. Boutique blending of gasoline means that short runs have to be accomplished to meet spot demand - and that means a complete shutdown and cleanout of the entire refinery. That means they can’t refine for about two weeks or so. Gasoline stocks - the level of gasoline in those huge tanks - drops because it isn’t being replaced. Moreover, gasoline from upstate New York, as an example, cannot be sent into New York City or New Jersey to meet spot demand because of environmental demands. So gasoline spikes in one area and stays high.

Don’t fall for this “we haven’t built any new refineries” stuff. It’s technically true - but American refineries have added capacity on an annual basis, so it isn’t as desperate as some would indicate.

Want to make gasoline cheaper throughout the country? Have the EPA mandate a single blend and give sufficient lead-time to make the switch. That would require the building of some mixing stations - not necessarily the same as a refinery, but pretty close - because some blending agents don’t transport or store for long periods of time well. Not everyone will see the price go down, but irregularities in the market will be smoothed out so that demand can be met more fluidly.

Major cities could help a lot by mandating such things as taxis move to flex-fuel and then to total electric drives. Federal subsidies would probably be needed, but I’d rather help rationalize the market at the solution side than the problem side.

Forget about ANWR. If we start drilling today it wouldn’t be online for at least two years. I say we should ban drilling there until oil remains above $200 a barrel for eleven months - then the environmental degredation would be worthwhile. The concession payments should go to the federal government to help retire debt - perhaps even dedicated to that cause.

The real problem on a world basis is that China and India are coming online as gasoline using economies. That’s two billion people who are going to start trying to use gasoline like the other half billion or so of us in the big economies. Shortages are almost inevitable - unless we diversify. Since no one really knows when demand will spike - could be next week, could be next year (or maybe twenty years) - everyone wants to buy as much oil as possible now. That way their investment is safe and sound and inflation-proof.