The Oil Industry

Since recently starting my job, I've obviously had an increased interest in the oil industry and although it shouldn't be, it's surprising to me how little people understand it.

I recently rebutted an email I received saying that boycotting one oil company (in this case the largest, ExxonMobil) would force ExxonMobil to lower its prices, which would then force the others to do the same to compete. As with most of these emails (like the one-day boycott of all gas stations) it is of course entirely untrue. Boycotting one brand does nothing to reduce demand, it just diverts profits from one to another. If anything, it reduces competition and forces shortages at the remaining stations, which then have to buy gasoline from the boycotted brand at a markup to meet demand, which raises prices. And supplying other companies is common practice in the gasoline industry, so it wouldn't even be a huge deal.

Oil companies are, by necessity, huge global corporations. They have operations in hundreds of countries which are often shared by the local oil company or government (or both). This means they get a share of the profits for their part in exploration and drilling, but perhaps not direct control of where the oil goes. In other words, they can't take all the oil they find and ship it directly to the US. There are also many different kinds of crude oil, which require different refining processes, so oil must be routed to capable refineries*. And often, it's just plain inefficient to ship it all over creation.

Basically, vertically integrated oil companies (all the big ones) that explore, drill, produce, refine and distribute, don't necessarily refine and distribute the same product they drilled. They are dependent on the world markets to sell the crude oil they find to refineries at market prices (otherwise the refineries would buy cheaper crude on the market from those that have more oil than refineries) and buy crude at market prices for their own refineries. Basic market principles then apply!

This means when China, with a rapidly increasing demand for oil, builds a new refinery and is willing to pay $10 more per barrel, the price will go up around the world to make it worth selling to other places besides China. It means as the value of the US dollar drops, foreign currency is worth more and since oil has to be sold at world market prices, more US dollars have to be spent to get the same amount of oil. Since crude oil is sold on a speculative market, it means economic fears can artificially drive up the price of the commodity as the demand for investment in supposedly more sure-fire oil commodities goes up (higher demand + stable supply = higher prices) and demand for other riskier investments (mortgage crisis anyone?) goes down or when civil unrest threatens oil-producing countries. This also means that currently the oil companies are making most of their money selling crude oil, not gasoline. Because the market prices happen to be higher than the cost of finding and producing oil currently (which in many cases started decades ago when it was cheap to do so), they are currently making a profit selling crude. Their refining operations currently have a smaller profit margin than they used to, in order to keep gasoline prices as low as possible. Current exploration and drilling is by far more expensive per barrel than it used to be, meaning the if prices stay the same, the investment won't yield as much and the profits will be lower in the future.

So how is the next president going to fix this (besides going back 30 years and investing in public transportation)? Apparently nothing worthwhile. First-generation biofuels have turned out to be an environmental bust (see this site), perhaps even exacerbating food shortages (read this article), but there's no talk of eliminating subsidies. There has been recent talk of a federal tax moratorium on gasoline. Many are rightfully calling this idea ridiculous. For one, the federal tax on gasoline is one of the few taxes that actually makes sense, because it provides the money to keep up the highway infrastructure by taxing those that use that infrastructure the most. By eliminating it, you reduce the cost artificially (cost being the only thing holding back demand), which as Economics 101 will tell you, will increase demand, which will raise the price until it's back where it started, except we're polluting more and our highway bridges will collapse.

The popular thinking is that a reduction in federal taxes should be compensated with a "windfall tax" on oil companies. Basically, tax "big oil" more when it is successful, because they are apparently unfairly forcing people to buy gasoline. I also have many problems with this idea, the least of which is that it may affect my salary. First, basic logic would show that increasing taxes on a product will cause the price of that product to rise, not lower. Second, taxation is already part of the problem. Oil companies currently pay more in taxes than they make in profits. This might work if there were enough supply to meet demand. This leads to Third, which is that oil is getting increasingly harder to and more expensive to find and produce, and the oil companies need to invest those profits, while they're there for the having, into exploration to keep up oil production in 10-20 years, when demand will be even higher. Fourth, oil company profits are at or lower than the profit margins of other industries (if you want to see "windfalls", check out the pharmaceutical companies' profit margins), they just make a lot because they happen to sell billions and billions of barrels. It will be interesting to see what the government's plan is when oil production goes down from American companies because they can't afford to invest in exploration (which requires billions of dollars).

One more thing to remember when grumbling about gasoline prices and big oil profits. ExxonMobil, Chevron(Texaco), and ConocoPhillips are all owned publicy. About 1.5% of shares are owned by insiders. The rest are owned by private stockholders and mutual fund holders -- regular people all over America. When these companies do well, people's retirement funds do well. There is not a cadre of super-wealthy oil executive robber-barons running the operations.

In short, there simply is not a way to "fix"** the price of gasoline without either reducing demand, which Americans have so far shown unwilling to do in significant numbers and the government is unwilling to do with tax policy for alternatives (read this article) and both are unwilling to do with public transportation, or increasing supply by drilling in the US, which the environmentalists have been blocking for years (read this article). Strengthening the dollar against foreign currency would also help. If none of these things happens, the price will continue to rise until the price itself forces down demand and equilibrium is found.

Personally, I think the easy oil has been found and foreign governments have turned stingy. The era of cheap gasoline is over in America and I think it's for the better. I will be glad to see all those wasteful SUVs off the streets. I would love to see better public transportation (I hate parking!). Whether or not global warming is real, pollution is real and I would welcome cleaner alternatives for power generation. I think high gasoline prices will finally force Americans to do what they've said they'd like to do, but couldn't be inconvenienced to.

You can find some more interesting reading from the oil industry's point of view here:

• The Truth About Oil and Gasoline: An API Primer
• Putting Earnings Into Perspective

*This is why ExxonMobil laughed when Venezuela threatened to stop supplying crude (after seizing without compensation the operations EM had invested in), because EM had the only refineries that could refine Venezuelan crude.

**Why people think they have a "right" to gasoline at a certain price is beyond me.

Back In My Day

I'm kept in the popular-forwarded-email loop by my mother. I have them filtered into a category in gmail so they don't crowd my inbox, but I enjoy occasionally reading the accumulation to find gems of factual inaccuracy, outright lies, broken logic, and a few really funny ones.

You might have read the ones about the older generations, and how they grew up learning how to deal with adversity and not needing the advances of modern science and social changes to have survived this long. Basically, "we didn't need brakes on our cars, we just crashed into the nearest tree to stop and look how well we turned out!" I'm sure there's some Latin phrase for how that argument defies logic, but I'll put it this way -- from what I can see, they managed to survive despite those advances. I received another one not too long ago entitled something to the effect of "To all the kids who survived" those times. Here is my tribute to all those kids who didn't survive.

• We were born to mother who smoked and/or drank while they were pregnant, and we're ok... except Billy, who was born with birth defects, learning disabilities, and asthma.
• We were put to sleep on our tummies in baby cribs covered with bright colored lead-based paints, and we're ok... except Sally, whose sudden death could have been prevented, and Johnny, who is mentally retarded from lead poisoning.
• We had no childproof lids on medicine bottles, doors or cabinets and when we rode our bikes, we had no helmets, and we're ok... except Dave, who died of an accidental drug overdose, and Jenny, who broke open her skull unnecessarily on the asphalt.
• As infants and children, we would ride in cars with no car seats, booster seats, seat belts or air bags, and we're ok... except Bobby, who died unnecessarily after being ejected through the windshield.
• Riding in the back of a pick up on a warm day was always a special treat... except for Rex, who died after being thrown from the vehicle in an otherwise uneventful fender bender.
• We drank water from the garden hose and NOT from a bottle, and we're fine... except Sammy, who is mentally retarded from lead poisoning.
• We would leave home in the morning and play all day, as long as we were back when the streetlights came on. No one was able to reach us all day, and we were fine... except for Fred, who died after getting stuck in a well where no one could find him.
• We didn't need rides. We rode bikes or walked to a friend's house and knocked on the door, and we were fine... except for Margie, whose tortuous abduction, rape, and murder went unknown by her parents.
• Little League had tryouts and only the best made the team, and we were fine... except for Ben, who didn't make the team simply because he was black, despite his superior athletic ability, and who never made the major leagues even though he deserved it.

I'm not saying that living through adversity doesn't make you stronger, but there's something to be said for taking simple measures to prevent unnecessary hardship. Let's keep the hard work and responsibility. But I see no reason to embrace fatal car accidents and easy access to toxins. What would those less fortunate than the survivors have accomplished if they'd had the chance?

Alliteration Angst

You may have noticed three phrases recently in the news that have become staples in describing the current economy:

• Credit Crisis
• Credit Crunch
• Mortgage Meltdown

It's never a credit meltdown or a mortgage crisis. Not catchy enough. Notice also that it's not a credit slowdown or credit slip-up or mortgage setback. Not provocative enough.

In pondering this phenomenon, I couldn't help but wonder if public perception of the situation is fatefully influenced by something as inconsequential as the availability of alliterative words. If crisis and crunch (and catastrophe) were not words, would we be facing the less intimidating credit conundrum? Or if meltdown didn't exist, would we hear of the less sinister mortgage mistake or mortgage mess? How would consumer spending change if we called it the Sub-prime setback? Financial fiasco? Banking blunder? Interesting to think about.

In unrelated news, the pope's recent visit made it abundantly clear that it is impossible to narrate a newscast about him without alternating the titles pope and pontiff.

I, Watercooler

My technical mentor came by to tell me something this morning. He's a nice guy, and has been here a very long time and knows the official (and unofficial) workings of the company inside and out, so he's a great resource to a newcomer like myself. He also has a tendency to talk when nothing else is being said. I have a tendency to not talk when nothing needs to be said. This usually turns out to be a bad combination. Add this to the fact that his voice is extremely soporific and induces uncontrollable yawning and the situation often becomes slightly awkward.

So you can imagine this morning's scene when he came to tell me this information:

Here's the hard copy of the files the packagers need. They might want to see it if they didn't know to get it off the network. If they don't need it, just take it down to storage.

It didn't happen nearly as concisely as I've written above, but I took the CD and agreed to see if they needed it, then take it to storage afterwards. That's when the necessity for conversation ended. It is not, however, when the conversation ended. I will now list for you, in order, the course of the 20-minute conversation, sparing you the intricate details:

• Employment history of the packaging group
• United Way Golf Tournament
• His involvement in a singing group
• Mattress Max's involvement in the community, advertising practices, and same-day delivery

Despite the apparent impossibility, he even managed to segue smoothly between topics, although I am at a loss now to remember how.

Vulture Towing

I actually had some fun work to do today and was thusly engrossed when I heard a crash coming from the highway area. My window looks north, and I could see that the cars on the southbound feeder road (to my right) were slowing at the T intersection of the east-west road that my building is on. (I should really just post a picture of the view some day) The cause of the disturbance, however, was on the east side of the building, and I couldn't see it. I finished my programming thought and went to join the crowd in the conference room on the southeast corner of my floor to see what was going on.

There was a car, facing the opposite direction in the middle lane of the three-lane (one-way) feeder road, its front end all smashed up. There were no other cars involved, so it looks like the woman driving turned right from the road my window looks over onto the feeder road and for whatever reason didn't turn completely and crashed into the guardrail on the opposite side, bending the guardrail in, sending two of the wooden supports flying, spinning her car backwards, and probably totaling it.

The woman appeared to be ok (the airbags had gone off), but perhaps the most interesting part of the "show" was that within minutes of the accident, there were at least 7 or 8 tow trucks waiting like vultures to tow the car away. When the cops were finished with the accident scene, they all gathered in a circle and drew straws to see who got the carrion. The winner bounded away to get his truck in position and the others all drove off. I had no idea they did that.

Site Feed

In poking around the settings for my blog, I realized that I had the site feed turned off. I turned it on, but I don't think it will republish anything until I write another post. Hopefully this should do it, and anyone who so desires can add me to their feed reader of choice. You can find the link at the bottom of the page.

Meetings

One of the joys of working for a large company in an office environment is the preponderance of meetings. Normally I only have a weekly meeting with my immediate coworkers, but last week I was treated to additional 2 hour and 2.5 hour large group meetings. These extra meetings, while relating to my job in an overarching way, had very little to do with me specifically and except for the free food were rather torpid affairs. Now I see why my job required a college degree. Nothing prepares you for business meetings better than sitting through class.

The 2.5 hour meeting was on a Friday afternoon and by this time I was looking to keep myself entertained. This invariably means that I look for ways to misinterpret what the speaker is saying in humorous ways, which is why I had to stifle my laughter when a 30-something black woman repeatedly used the phrase, "Biz Ops" (as in "business operations") while answering a question. It sounded so similar to street slang that I just wanted her to bust out a "fo' shizzle my bizzops!" but she so obviously didn't talk that way that the mental image kept me chuckling the rest of the day.

Prodigal Blogger

I recently read through the majority of my old posts and I realized that I was quite the prolific blogger. Even before it was cool, I regularly updated my blog and with some pretty decent content. Then Amber came along and ruined everything, of course. It was fun, though, to go back and read about what I was doing and it gave me the conviction to consider having enough conviction to start blogging again regularly. I'm a horrible journal writer and I fear my blog may be the only way I can atone and leave something for posterity. I'm still not sure if I've convinced myself or not, but the idea is appealing. So consider this my self-motivational attempt to get back into a blogging mindset. Stay tuned for more details.