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Obama’s Oil Speech

Unfortunately, President Obama’s “Oil Speech” of April 22, 2011 was a rehash of the usual tired stuff:

  1. Every time, going back decades, that the gas price has risen to a relatively high level, a government task force has been appointed to investigate speculative fraud. There have been some dozen such investigations. They have never discovered anything actionable outside of a few mom and pop service-station operations. Nothing that would have any real effect on prices. The answer is simple: speculators can’t speculate on thin air. Without supply shortages, demand increases, or fears of such, prices just don’t increase. If speculation were risk-free, everyone would do it.
    (Since there is no way for an individual investor to store large enough amounts of oil to seriously affect world supply, I would like to hear some plausible scenario for how the speculators are actually making money!)
  2. When you think about it, and when all the rhetoric is stripped away, the only way alternative energy will ever be viable is if the price of oil stays high. Otherwise, people will continue to consume cheap fossil fuel energy. So lowering the oil price will have the effect of wiping out all those alternatives that Obama is supposedly trying to support. If you look at the history of alternative energy in the US since the 1970s, this is exactly what has happened. Obama is talking out of both sides of his mouth.
  3. The net profitability of the oil business in the US is 5.7% (2010), about average compared to all US business. It is way lower than pharmaceuticals, for instance, which earned 19.4%. When the oil business is losing money (such as 1980-2000), no one pays attention or cares. When prices rise, and the oil business is recouping some profit, everyone screams bloody murder.
  4. While the oil business does receive some tax breaks which could be questioned, it nevertheless pays tax at a rate higher than average for all US business – according to the Tax Foundation, “the average effective tax rate on the major integrated oil and gas industry is estimated to equal 38.3 percent. This exceeds the estimated average effective tax rate of 32.3 percent for the market as a whole”.
  5. The tax break which is usually cited is the percentage depletion allowance. However, while the use of a percentage calculation can be questioned, the accounting rationale for this is the same as that for any depreciation or amortization, and it’s hard to question that. Also, percentage depletion only applies to wells producing less that 1,000 bbl/day, so the major oil companies benefit relatively little from it.
  6. The other tax break usually cited is the writeoff of intangible drilling costs (“dry hole” costs). However, this represents cash spent, with quite possibly no return. Any business is allowed to write off a failed project. The only difference here is that the oil buiness gets the writeoff even for the 10% of wells which actually produce. So what’s the big deal?
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That ‘70s Energy Crisis

So you think you understand why the energy crisis of the 1970s occurred? That it was all due to the Iranian overthrow of the Shah?

Few people, even today, seem to understand some basic facts:

  • US domestic oil production peaked in 1971
  • US gasoline deliveries were subject to allocation controls which dated back to WW2. These controls favored farmers and rural areas over urban drivers, resulting in a situation where local shortages were likely to occur.
  • When drivers panicked and starting keeping their tanks topped off, the total amount of gasoline kept in those tanks increased dramatically, since in normal times people only keep their tanks about half full. This in itself exacerbated the situation – in other words, individual reactions to a feared shortage actually helped create the shortage.
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