In a recent email announcing the introduction of The Domestic Drilling Act (H.R.6593) and The Consumer Energy Supply Act (H.R. 6578), Congressman Nick Lampson (D-TX) stated, “As we find ourselves competing with rapidly growing nations such as China and India for energy, it is clear that we must increase supplies to reign in skyrocketing prices.”

I must disagree with Congressman Lampson. It is not only NOT clear, it is IMAGINARY.

According to the Energy Information Administration, the US produced 5,064,000 barrels of oil per day in 2007 and world production was 82,532,000 barrels/day in 2005. This means the world controls the supply of the world’s oil. It also means increasing drilling locally will not “reign in the skyrocketing prices” of gasoline.

Here’s a quote on the matter and some simple math to show why Lampson’s proposal won’t work.

In an article about T. Boone Pickens’ wind and natural gas plan and Pickens’ support of more drilling, there is this statement at the end of the article:

“When we drill more, OPEC drills less,” Gal Luft, executive director of the Institute for the Analysis of Global Security.

To consider what Mr. Luft says, lets take Lampson’s numbers for what the US might recover by expanding US drilling, about 96.4 billion barrels including ANWR, and see how that might affect world supplies and fuel costs.

These US reserves represent a little over 1,150 days worth of oil for the world, if they could be extracted at the EIA 2005 daily rate for the world. But this is very unlikely since the US would have to increase the number of producing wells by over 16 (82/5) times based on our 2007 EIA rate of production.

In other words, the number of US rigs would have to grow from July 25, 2008′s level of 1,957 to over 31,000 to equal the worlds 2005 output. Not very likely.

Even if we could double the number of rigs, this would only increase the US contribution to the world’s oil supplies by 6 percent (5/82). So, the impact on world supplies of this proposed expanded drilling will, assuming the rest of the world cooperates by maintaining there production, be hardly noticeable.

However, one thing will happen if Lampson’s bills become law. Corporate oil revenues will shift from the rest of the world to US oil producers. Only the US oil companies will gain from this increased drilling – NOT consumers.

As for his “twist” of using royalties to fund alternative sources of energy. That won’t make it into the final law.

Mr. Lampson’s proposals will not make a difference to any consumer as long as the rest of the world controls ninety-four (94) percent of the world’s oil supplies.

Wake up America and smell the ‘crude’ realities of world oil supplies. We may be the policeman of the world, but we’re just the junk yard dog of oil production.

In Congress is drilling a dry hole, Senator Kay Bailey Hutchison tries to scare us into supporting the poor abused CEOs of the oil industry. I couldn’t resist. I had to send her the following message via her web site.

Senator,

First of all, as an elected representative of the state of Texas, shouldn’t you be listening to your constituents – not telling them what the oil industry wants?   I would only expect this kind of commentary from a lobbyist for the American oil companies.   You even admit that “CEOs consistently bring to my attention”  the “constant meddling in the tax codes” by Congress.    Well poor under-appreciated and over-compensated CEOs.   If they aren’t complaining, then Congress isn’t doing its job of keeping the power of these CEOs checked and balanced, just like Congress hasn’t done with GWB.

Secondly, your mild attempt at fear mongering does not help.   As you have done in other communications with me, you over use the phrase “national security” like you are trying to scare us into believing you.  Also, near the end of your comments, you state that if we follow your suggestions we will “reduce our dangerous dependence on foreign oil.”  What about our dependence [on] China and Japan for their money to pay for the war you and GWB got us into?   With the recent devaluation of the dollar, what will happen to this nation’s economy when China and Japan decide to stop investing here and invest in the European Union where the Euro is worth fifty percent more than the dollar?  Who will pay for the war then?

As for the $16 billion in additional taxes on the oil industry, over what time period does this apply?   What is the annual impact on oil profits?  Why don’t you tell us that?   Probably because it is not that significant.    In fact, if I go to Yahoo Finance and look up the three year total profit for BP, ConocoPhillips, Chevron and ExxonMobil, I find that this $16 billion tax, if spread over those three years, would reduce their profits, $927 billion, by  only 1.7 percent.   That’s what these CEOs are complaining about, 1.7 percent over three years or 0.6 percent a year?

A little over half way through your commentary, you refer to diversification of resources.   You state, “In particular, biofuels are vital to making our nation more energy independent” and you don’t like what “Some in Congress” want to do – “increase the renewable fuel standard.”   Poor industry – why can’t Congress just leave them alone.    On the other hand, biofuels will not make any real long-term difference.  You mention biofuel goals of 7.5 billion gallons by 2012 or 36 billion gallons by 2022 and it appears these are annual goals from your writing.   Now compare these very meager goals to the 2006 total U. S. supply of crude oil, both domestic and foreign, of 233.31 billion gallons.   Biofuels will not break this addiction to crude oil and I have yet to see Congress or industry present a real long term solution.

What ever the solution is, it will take sacrifice by not only the oil industry but also the citizens of the United States and the world.   Do you, Senator, have what it takes to not only make such self sacrifices but to also require your favorite industry CEOs to make similar sacrifices?  

Do your voting constituents a favor.   The next time you meet with these poor tax abused CEOs, ask them about their company vision, goals and objectives.   Is there anything in them that indicates they include, in the least little way, anything about doing what is best for our national interest?   I doubt, and would not expect, that they will respond in the affirmative.   After all that is the job of Congress and you – our national interest.   And what is in the best interest for the nation is not necessarily best for industry.

I wonder, when the senator retires – which oil company or K-Street oil lobby will provide her first non-government paycheck?

According to the Energy Information Agency (EIA) of the U. S. government, “In 2005 the price of crude oil averaged $50.23 per barrel, and crude oil accounted for about 53 percent of the cost of a gallon of regular grade gasoline. Taxes (not including county and local taxes) account for approximately 19 percent of the cost of a gallon of gasoline. Refining costs and profits comprise about 19 percent of the retail price of gasoline. Distribution, marketing and retail dealer costs and profits combined make up 9 percent of the cost of a gallon of gasoline.”

Also available from the EIA are the historical crude and gasoline prices. The chart below displays these EIA data from 1978 to 2006. All prices are adjusted to 2005 dollars. The red line represents the average annual U. S. domestic crude oil cost. The blue line is for the average annual cost of retail gasoline – all grades. The numbers for 2006 are an estimate based on 2006 data from the EIA.

Click on image for full view.

Note that the prices for crude oil are for one tenth (1/10) of a barrel to provide scale.

Do you see the correlation and that maybe gasoline prices could have been much higher if the correlation was tighter?

The United States consumed almost 284 billion gallons of finished petroleum products in 2005. About half, 49 percent, went to power our autos, pickups, hybrids, and SUVs. Another 22 percent, distillate fuel oil (diesel and fuel oils), went to space heating, on– and off–highway diesel engine fuel (e.g., railroad engine fuel and fuel for agricultural machinery) and electric power generation.

Our gasoline and diesel consumption is supplied from both domestic sources and foreign imports. Imported gasoline covered about 6.6 percent of our consumption or 9.3 billion of the 139.9 billion gallons consumed in 2005. Imported diesel in 2005 covered about 8 percent of our consumption or 5 billion of the 63 billion gallons consumed in 2005.

If we want to reduce our dependency on imports and if we concentrate on the two products we consume the most of, gasoline and diesel, what would we need from ethanol and biodiesel to break this dependency?

According to the U. S. Energy Information Administration, ethanol production in the U. S. was 3.9 billion gallons in 2005. This is a long way from the 139.9 billion gallons of gasoline consumed last year, but represents 43 percent of the imported gasoline for 2005. (Note: We also imported about .16 billion gallons of ethanol in 2004.)

According to Bio G-3000 FAQs, “The United States produces about 20 million gallons of biodiesel per year using soybeans, used cooking grease and other feedstocks.” Twenty million gallons is only 0.4 percent of our consumption of imported diesel.

In conclusion, ethanol has a chance of replacing our gasoline imports, but biodiesel is a long way from having much effect on our consumption.

Every time the issue of oil profits makes the news or is part of a nearby conversation, I wonder why we only get upset with big oil? Why don’t we rant and rave about others who make fast growing profits like the high tech companies that survived the bursting of the tech bubble? Well, I may have stumbled across a possible answer.

Thousands of companies do what they are supposed to do – make money. Most never make the news and are certainly not heard about around the water cooler or over lunch. Some, like the oil and high tech companies, have a string of years where profits grow rapidly. Most of these make the news, but only the oil company profits result in Congressional pandering to the electorate and bad pictures of oil executives.

New companies can go years without making money and never be noticed except by their investors. Some never make money and go away without being noticed except by a few former customers. Some (think Enron) aren’t making real money but cook the books to indicate they are and then the result is real heartbreaking news. But we only get angry at oil profits. Are they really excessive or is there something else more basic that causes raised voices and pontificating politicians? Maybe taking a broader look at the situation might provide another perspective.

The chart below shows a relative ranking of 38 companies including seven oil companies. This ranking is based on the growth in annual earnings per share (EPS) of stock. The time frame for the growth is from fiscal year 2001 to 2005. The scale is logarithmic to graphically normalize the differences. A chart with a linear scale is also viewable.

Click on image to view full size version.

The top eight companies include five high tech, one coal (Peabody), one mining (Phelps Dodge) and one reinsurer (Berkshire Hathaway). The next eight companies include the top six oil companies with one engineering services company (Haliburton) and an agricultural products company (ADM).

The average five year EPS growth for the top eight is 2,567 percent. The average five year growth for just the top 4 oil companies is 258 percent, or about one tenth that of the top eight.

Now let’s take a closer look at number 1, Google. Not only does Google have the greatest five year growth in EPS of 7,486 percent, it also has the highest gross profit per employee for 2005 of $627,020. Compare that to the 2005 average gross profit per employee for ConocoPhillips, Chevron and ExxonMobile – $296,268. That’s less than half. So, if we are that angry with the oil companies, why aren’t we in an outright revolt over the even higher profit growth of the top 8?

Maybe it’s because someone else is paying, willingly, for those profits. Again, if you look at Google, the cost for our use is zero. Advertisers are the ones paying for Google’s profits while we are the ones paying for the relatively smaller, but still high, oil profits.

If we could only get the oil companies to think like Google and figure out how to get others to pay for their profits and take at least some of the burden off us. However, where’s the insentive for the oil companies to change? What would make them spend some of their profits on developing a high tech idea that isn’t oil related? Only one thing.

Oil has to become unprofitable and something else has to replace it. In the mean time, we either pay the piper or change how we live.

World wide demand for black gold is increasing as Brazil, Russia, China, and India motorize billions of their citizens.   Hurricanes have wreaked tens of billions of dollars in damage to our oil infrastructure.     The desire to conserve died in the eighties.   The supply of oil is limited and the cost of a barrel of oil peaked in early September at over $70 per barrel.   With all that in mind, what will it cost to keep our US economy going and our SUVs and hybrids humming?   What are our options, the likelihood of their success, and when does it become cost effective to invest in those options?

In Why $5 Gas Is Good for America, Spencer Reiss wrote, “For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence.    But growing demand is outrunning the oil industry’s carefully computed supply curves, bidding up long-term expectations for the price of energy.   The long term may not mean a lot when you’re standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes.   Crude hit $70 a barrel last August, but oil companies have learned the hard way how quickly prices can crash.   They adjust their expectations accordingly – downward.”

Mr. Reiss goes on to say that recent oil industry long term expectations for making profits on investments in new technologies have been based on $20 per barrel of oil, in today’s dollars.    So far, this level of investment has resulted in “advanced analysis of rock cores, 3-D seismic imagery, software for diagnosing underground oil flows – all integrated using something called fuzzy logic.”   There is also the “digital oil field” that takes the well to the petroleum engineer half way around the world and could add oil reserves equal to more than what is available from Iraq by 2013.   Then there are the deep water free-floating rigs that drill in water twice as deep as 30 years ago that account for 90 billion barrels of liquid oil reserves.

Unfortunately, all of these recent investments only improve access to about 16 percent of the world’s known reserves – those that are liquid.     According to a graphic in the published version of Mr. Reiss’ article, over 49 percent of the known reserves are in tar sands and the rest, 35 percent, are in oil shale.

Tar sands “is a hot commodity at today’s prices,” but the environmental issues of open-pit mining will take time to resolve and that will increase the costs of extraction from the current $15 to $20/barrel.   Also, most of the reserves are outside of the USA -  Venezuela, Canada, and elsewhere.

As for Oil shale, Mr Reiss reports, “The US has 85 times more shale oil than crude,”  which could provide the US with independence and enough oil for “212 gasoline years”.     A gasoline year is the calculation of how many gallons of gasoline we all use each year.   However, the problem here is that crude oil would have to cost $70-$95 a barrel to make this option a profitable long term investment.   On the other hand, recent efforts by 160 Shell employees, 30 in Colorado and 130 in Houston, may bring this cost down to $25-$30, and the extraction won’t require the bulldozing of the countryside.

So, if oil is to remain our best option, then oil shale might be the best possible source for the future.     

But what about the non-oil options?   What about other liquids or gases?   Liquids can be created from coal and plants like soybeans, corn, or other biomass.   Gases include methane, natural gas, and hydrogen.

To help compare other liquid and gas options to the cost of oil, the article introduces a ‘barrel of oil equivalent’ (boe), which equates to what oil would have to cost to make investing in the other option profitable.      

To make coal liquefaction profitable, its cost would have to be around $35 to $40/boe, which makes it more expensive than tar sands and the low end for oil shale.   On the other hand, this option could provide 363 gasoline years for our cars and trucks and improve carbon emissions.   However, the land would suffer considerably.  

As for gases, the most promising of the bunch is methane hydrates.    There is the equivalent of 10,882 US gasoline years locked away in the Arctic permafrost and seabeds.   There are also serious technological issues and the cost is around $90/boe.

One other option of note is biodiesel.    It rates high for environmental friendliness and technical maturity, but has a cost of $45 to $50/boe.    There is also the issue of having enough arable land to grow the soybeans needed to replace just one US gasoline year.   The amount of land needed is approximately 2,000 times larger than what is used for growing soybeans now.     To put that in a little better perspective, this required land is about 30 times larger than all the arable land in the US.   There is also a moral issue.   Which do you prefer, burning food or feeding the hungry? 

A more likely alternate liquid replacement is ethanol.   It only requires about one third of all arable land in the US to replace one US gasoline year and has a cost of $60 to $75/boe.

For more details, and other alternatives and their chances of keeping your SUV or hybrid humming, here are other articles by Mr. Reiss from the same issue of WIRED.   To see the related graphics referenced for this article, you will have to buy the magazine.

1.) As Prices Rise, Technologies Emerge
2.) As the long-term price of a barrel of oil reaches $20-$30
3.) The Data Pipeline
4.) As the long-term price of a barrel of oil reaches $30-$70
5.) Fill ‘Er Up With Frankenfuel
6.) As the long-term price of a barrel of oil reaches $70 & up
7.) Tapping the Rock Field

There has been lots of news on ‘excess’ profits lately, but it’s only been about Big Oil.   How evil are they compared to other companies we know?

The table at the bottom of this article ranks 31 companies and provides related financial information.   They are listed by the percentage growth in their ‘normalized income after taxes’ for the most recently reported 5 year period with the highest growth first.   The table includes the company name and their 5 year percentage growth in normalized income.   This is followed by the earnings per share, the actual normalized income after taxes, and total assets for each of the five most recent years.

The chart below displays the 5 year income growth for 30 of the 31 companies detailed in the table.   Apple Computer, at a 5,234 percent increase, is excluded from the chart to allow improved display of the remaining 30.   The company next in line and shown farthest to the left in the chart is Conoco Phillips.

Click on image for full view.

Conoco Phillips not only has relatively high earnings per share for each of the last five years, but also has a significant growth in income of 337% over the same time frame.   This income growth is not anywhere near the improvement at Apple, but it is much greater than Time Warner, next in line at 191%.   Further down the list are Wal-Mart and Exxon Mobil.   The income growth for both of them is less than one fifth that of Conoco’s.   Also, Wal-Mart and Exxon Mobil come in 10th and 12th after other well known companies like Toyota, Walgreens, and Coca-Cola.   Imperial Oil, BP, Total SA, and other oil companies appear even further down the list.

For a little more perspective, I just looked up the income growth for Johnson & Johnson.   It was 69%.   How about Hershey Foods (chocolate)?   Their income grew 76% during the last 5 years.   Home Depot comes in at 94%.   All higher than Exxon Mobil, at 52%, but still nowhere near Conoco Phillips.

To add to this, I checked the growth in my average gasoline cost for the last 5 years. I have had the same car, same home, same office for that time. After discounting for some vacation by car in 2000, the growth in my average gasoline cost for the last 5 years is 59 percent.

For a little more perspective, how do you think earnings for Saudi Aramco, who the oil companies in the chart/table buy their oil from, have grown over time.   Well, in one two year period, they grew 929% to $27.8 billion.   This is according to Saudi Aramco World : Foundations: The Introduction.   That was during the last big oil crunch in the early 70s.   In 2001, their earnings were up to $63 billion, according to International Spotlight: Saudi Arabia.   In 2004, earnings were estimated at $116 billion in Saudi Arabia Country Analysis Brief. That is a growth of 84% in three years. The same report indicated that expected earnings for 2005 are $150 billion. That’s another 30% – in one year.

So, with the exception of Conoco Phillips, shouldn’t everyone be equally upset with all companies that have seen earnings growth that is even higher than Exxon Mobil? This includes Home Depot, Johnson & Johnson, Hershey Foods, Toyota, Walgreens, Coca-Cola.

As stated earlier the table below shows earnings per share.   Notice how varied they are between companies.   One of the factors that changes this ratio is stock splits.   For example, Apple had a 2 for 1 split in the last reported year.   If that had not occurred, their EPS for the last year would have doubled to 3.30. Similarly, when a company buys their shares back and takes them out of trading, the EPS will go up.

The total assets for the companies are listed just to show their relative ‘size’.

Yes, oil companies have seen an increase in their profits, but I’m more concerned about another company with high earnings.   Not only has this company made $2.54/share in the last year, it has rewarded its CEO with $12.5 million in compensation (not counting stock options) and $100,000 to cover personal use of the corporate jet, while it has also developed a plan to adjust its employee benefits.   (I used to work for such a company and we engineers organized a union to have some effect on our benefits.)
 
What company is this?   Wal-Mart, who closed one of their Canadian stores after the workers voted in union representation.
 
Here is some of what their VP of benefits suggests (see attached company memo) according to The New York Times:
 
“hiring more part-time workers and discouraging unhealthy people from working at Wal-Mart”
 
“reducing 401(k) contributions and wooing younger, and presumably healthier, workers by offering education benefits”
 
“all jobs to include some physical activity (e.g., all cashiers do some cart-gathering)”
 
“Ms. Chambers proposed that employees pay more for their spouse’s health insurance.   She called for cutting 401(k) contributions to 3 percent of wages from 4 percent and cutting company-paid life insurance policies to $12,000 from the current level, equal to an employee’s annual earnings.”
 
“Ms. Chambers’s memo voiced concern that workers were staying with the company longer, pushing up wage costs, although she stopped short of calling for efforts to push out more senior workers.”
 
I have no doubt that the benefits at the high profit oil companies are much better than those at Wal-Mart.
 
For more on Wal-Mart’s profits vs. employee benefits:

Wal-Mart forfeits soul to low prices
By LOREN STEFFY

Wal-Mart memo sparks criticism

Then there is the new Wal-Mart DVD.

Because consumers don’t like paying higher prices for gasoline? Because consumers don’t want to give up their SUVs and Hummers? Because the supply is shrinking and demand is rising and consumers are in denial? What about taxing Apple Computer’s excess profits on their new iPod nano? What about the excess profits some of those SUV drivers are making on the real estate they are ‘flipping.’

“Market research firm iSuppli says that Apple’s margins on the iPod nano could be as high as 50 percent, making the extremely thin player as profitable as earlier models of the iPod. ”

“Real estate prices have risen dramatically in recent years, with annual appreciations of 20 to 30 percent in some areas. The study shows that flippers obtained returns far in excess of those strong gains — above 100 percent per year in many cases.” .

Why is it that only big oil is subject to this tax? What about the dairy products we all buy? If supply dries up due to some mad cow epidemic, won’t prices and profits increase? If profits don’t rise, how will the farmers be able buy new cows to make the dairy products we need to get the prices back down by increasing the supply?

The difference with oil is that supply is difficult to increase. Even OPEC is near it’s maximum output. So who can solve the problem? How about the consumer giving up gas guzzlers? How about new technologies like hybrids? Maybe the oil companies, who need to stay in business long term, are working on the next fuel source? But won’t they need profits to pay for changing the way they do business from selling oil to selling ???? Maybe in the short term, oil companies could use ‘excess’ profits to build some new refineries to make more gasoline? So profits would be used to increase supply or just turned over to the Fed Gov to be wasted on some pork somewhere.

“The ceiling will be maintained the same and we will offer the market what Opec can produce,” said Venezuelan Energy Minister Rafael Ramirez.

Click on the image for full view.

“Will the world ever physically run out of crude oil? No, but only because it will eventually become very expensive in absence of lower-cost alternatives. When will worldwide production of conventionally reservoired crude oil peak? That will in part depend on the rate of demand growth, which is subject to reduction via both technological advancements in petroleum product usage such as hybrid-powered automobiles and the substitution of new energy source technologies such as hydrogen-fed fuel cells where the hydrogen is obtained, for example, from natural gas, other hydrogen-rich organic compounds, or electrolysis of water. ”

Yes, a lot of small businesses and low income families are severely affected by the cost, but who should they be angry with?