It's a Gas

It’s all about Oil! today at MacPhoenix. There are three illogical and pandering ideas floating out in the memesphere today. Let’s approach them one at a time.

First, we have the scary Iranians who won’t take good old dollar bills for their tainted oil anymore! There is a long-standing fear when some company or supermodel won’t take money in US Dollars anymore, but it’s irrational. Iran is certainly using it as propaganda, however. It sounds very scary.

The only thing it reflects is that, since the dollar is falling, anyone who sells something by contract will want to minimize loss between the time that they sell something and the time that they get paid. So Oil Producer sold 1 barrel of oil on Monday for $100, but didn’t get paid until Friday. If the dollar fell .1% by Friday, Oil Producer lost 10 cents because the $100 was now worth $99.90. When the dollar falls, it makes sense for any international company to try to get paid in a stable currency.

But it doesn’t affect the price of oil or whether or not our currency is falling. There are several reasons for that, the biggest being that our trade deficit is too high, but not because companies want to get paid in another currency. If oil were priced in Quatloos, and our dollar was falling, it would still be more expensive for us to buy oil.

America is not permitted to do business with Iran, in any case. Iran, as the CNN article notes well after the scary lede, has been divesting itself of dollars for years. This makes sense. When you can’t buy something from the merchant, why keep the scrip?

On the second meme, CNN provides more laughs with an interview with the head of Shell Oil. Bet you thought that the $7.8 billion profit was excessive. Well not according to John Hofmeister:

Look at our revenues and our income for the last quarter. If we had made $7.8 million on $114 million of revenue, nobody would call that excessive, because that’s 7.5 percent. We made $7.8 billion profit on $114 billion revenue — same 7.5 percent. So to me that is not an excessive number when banks and pharmaceuticals and IT companies earn a whole lot more.

Okay. For no reason in particular, I want to write out the zeros in 7.8 billion. Please indulge me. $7,800,000,000. Only eight zeros! Damn that .8! But Mr. Hofmeister is correct. In 2004, Shell Oil was only the 5th most profitable company in the world, while banks like Citigroup and HSBC, IT companies like General Electric, and that famous pharmaceutical, ExxonMobil earned a whole lot more.

Anyway, the main thing here in the CNN article is the idea that America must drill more oil in order to meet the supply, and by implication, help lower or stabilize the cost of gas at the pump. This is false. Oil is sold on market that is worldwide. If oil is extracted in America, it is still sold on this worldwide market. We have something on the order of 4% of the known oil underneath us. If we extracted ALL OF IT, IMMEDIATELY, it would raise the amount of oil on the market by 4%. Since we consume about half the world’s oil, one can figure that it would save us about 2% to purchase that oil.

Of course, all things aren’t equal and there is a cost to extracting, refining, and shipping that oil or gasoline. It also actually can’t be extracted immediately. It would take years. Additionally, there is no reason to expect that any other oil producing nation won’t adjust it’s output to keep oil the same price, since that would be in its best interest to keep the price stable and it can sit on their reserves as long as necessary. However, once we extract all our oil, it’s gone forever, leaving us in a weaker position than before we drilled the oil.

What does it do for us then, if we drill for more oil? It makes money for companies like Shell Oil who make profits on drilling, refining, and shipping oil and gasoline. It isn’t so strange then that the president of Shell would advocate drilling for more oil. It isn’t so strange that President Bush would continue his call to drill in the Alaskan National Wildlife Refuge, as he has done for 8 years now.

Finally, the last meme is the political pandering calling for a summer of tax-free gasoline. This is another bad idea. The way that John McCain wants to do it, it would amount to a tax break for oil companies. You know, the same companies that earn around $7.8 billion dollars EVERY THREE MONTHS, because the supply of gas is maxxed out. We’re paying as much as we can because it is high demand, but the supply can’t be raised. If the tax rate is dropped, it will raise demand, but there is no more gasoline to be had, which will cause the price to shoot up! Hey presto! More money for Mr. Hofmeister.

Hillary Clinton’s plan sounds more palatable to your average socialist, since it would pay for the tax relief by increasing the tax on the oil companies. Except, hey! once again, remove the tax at the pump and increase demand which will drive up prices. It doesn’t help consumers one bit, and the increase in taxes that the oil companies pay would be offset by the huge run on the tax-free cost of gasoline.

So, OPEC may continue to accept dollars, we may open up protected parkland to oil drilling, and we may have a tax-free summer at our gas pumps, but not one bit of this will help consumers. The only thing that would seem to help our falling dollar and the price of gasoline is to reduce our demand for oil.

When is that meme going to start floating around our oil-slicked stream of consciousness?

Posted by Jonathan at 06:06 PM, 30 April 2008

Comments