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Wednesday, September 06, 2006

Whose Oil Is It Anyway?

According to one article in Associated Press, oil companies have found a large oil deposit south of New Orleans, with the capacity to "boost the nation's reserves by more than 50 percent. Big Oil taps big deposit in Gulf".

According to the article, "Chevron on Tuesday estimated the 300-square-mile region where the test well sits could hold 3 billion to 15 billion barrels of oil and natural gas liquids."

"America consumes 5.7 billion barrels of crude in a year," the article states. The article cites a analyst who estimates production to come on line "...after 2010."

The depth of the project is an astounding 28,000 feet deep.

My Analysis

I am struck by how American energy independence rides alongside the ghost of massive ecological damage and ongoing dependency on oil. Even as the impact of fossil fuels can be firmly traced to the use of petroleum, our government insists that we need to pump more from our own shores.

The A.P. article seems to attach particular emphasis on the failure to "...reduce the country's dependence on foreign oil." This of course begs the question of what good is it if as much as "50%" increase in our oil supply isn't enough to offset our growing appetite for foreign oil.

The article goes on to state "...it won't help lower prices at the pump anytime soon." Extraction costs are going to drastically impact the break even point in drilling and its return payoff.

The second part of the desired effect--"anytime soon". I guess we'd probably have figured that out ourselves, being that the reservoir lies at a depth of 28,000 feet in the middle of the Gulf of Mexico!

It's my opinion that the project could be prohibitively expensive. Geological factors would definitely impact drilling safety at that depth. I do admit, though that my knowledge of undersea land masses and oil is hardly deep, har har har.

I can figure out for myself what's going on with Big Oil, however. Regardless of how much oil is made available, we've grown dependent on it. The status quo is built around maintaining the price of oil. And unfortunately for us average consumers, we will lose whether oil is cheap or expensive. If oil's scarce, finding it becomes more problematic and extraction becomes more expensive for us, not the oil company, as they simply pass the costs along.

Rather than cope with the problem, the US is trying to pump us out of the problem. And unlike most markets, oil doesn't seem to get cheaper even with new finds. Oil is either getting more scarce--sufficient to warrant development--or cheaper--and therefore not worth finding and extracting and thus, eventually... scarcer.
So either way we end up paying more, assuming the supply is finite which it must be. Only the costs of extraction rise, based on how easy oil is to find.


Regardless of the quantity of oil extracted, the price we consumers pay isn't be decided by its availability alone but by a host of demand-side factors. As a matter of fact, demand for petroleum worldwide exceeds supply now and is projected to continue to surpass supply indefinitely.

Extraction costs are relative to the value of the commodity. If the costs of extraction go up, oil must become more expensive. In fact, forecasts of the price of oil motivate the scope of global extraction. Its a fait accompli to see an oil field developed when developing that field makes sense relative to the cost of extraction.

With a surge in oil prices, more oil is discovered and more extracted. Development costs are paid for that much sooner, assuming oil maintains its value or goes up. The profits are the refiners', less any lease fees paid to the government for the field. {See the comment at the bottom of this post for more on how the US government has exempted Big Oil from paying lease fees.}

Whether the world has reach peak oil or not has yet to be decided. If it can produce more than we think, the price will go down and development costs will take longer to pan out. Less will be discovered. If the world's supply of oil is more limited than thought, its price will go up, making the investment of capital worthwhile. More will be discovered, and development encouraged.

In real terms, nothing changes the value of oil except how scarce we perceive it to be. If prices rise, they rise because supply is finite. Even a huge increase in supply can't change the underlying dynamic, and though it may reduce price in the short-term, the demand is simply too large and growing at too fast a rate.

Big Oil wins either way--consumers get their own oil sold back to them, once the costs of extraction have been repaid, alongside taxes and profits for distributors. Whatever the development costs are, they will be passed along to the consumer, so Big Oil makes its profit regardless. Sure they make less when oil is cheap, but even then they get their cut--albeit of a smaller pie. They invariably make money by controlling the supply.

Oil is scarce because it is limited. In traditional precious resources like gold, the price of gold is treated as a constant, but there is no way of knowing if supply is constant. One day, someone could discover huge reservoirs of anything, and if the costs of extraction were low, greatly injure the price of that commodity.

It is possible that the recent decline in the value of oil--from highs in the $78 range to lows now in the sixties--is traceable to these discoveries. Or not, and the entire fluxuation could be a biennial ritual, whose torch of deception carried aloft by the Media.

Media Angle

The end of summer driving season is cited as the common reason for the decreasing price of oil. This has become I'm sure a seasonal ritual for the media, the price of gas said to be heading up because of increased driving demand over the summer. As we now happen to be in the end of that season, the pronouncements to an end to the period of high gas prices heralds the coming of Fall, as it has in previous years.

Whether we are being told the truth or not, there's clear evidence of an agenda here in this article on the Mainstream Media, spun undoubtedly for mass consumption. A.P. is quite confident in assuring Big Oil hit it big, but doesn't really explain the costs involved, or show any clear short-term benefit for consumers.

To avoid talking about the real limitations of oil dependency, Big Oil and their corporate representatives in the Media demand huge new swaths of land under Interior Secretary's Kempthorne's lease in environmentally sensitive Teshekpuk Lake.

We can pump our way out, is the refrain, sold by multinational oil companies in the Mainstream Media, bloated as they are with oil revenue. This new drilling despite the fact that a 50% increase of reserves won't help decrease our dependence on foreign oil.

If this large a field can't reduce our dependence on foreign oil, this could also indicate our existing domestic reserves are declining at a quicker rate than previously thought.

Speaking of reserves at Prudhoe Bay, BP's recent shutdown due to "leaking pipes" may not have been the product of 'pipe degradation' caused by the environment at all, or even necessarily a surprise to BP. An article by Jason Leopold raises the possibility BP had neglected the pipes for years. The cessation of pipe maintenance--coupled with harassment of a whistle-blower who tries to reveal the scope of neglect--could indicate BP may have been anticipating a decline in overall pump flow out of the facility when the leaks occurred, and had neglected the pipes in order to reduce on substantial maintenance costs.

The easily avoided consequences of environmental disasters deny accountability for Big Oil's actions. Instead of protecting the environment, Big Oil pollutes recklessly and enrich themselves at the expense of the public and environment. To date "Exxon Mobil still owes for Valdez spill" and has yet to pay any of the billions it owes, this despite a claim by A.P. that "Exxon Valdez Restitution Paid"...by Captain Hazelwood! Even after a legal judgement, accoutability is non-existent, and the preferential treatment of the Oil industry repays the lobbying investment made in Washington.

As their CEO's rake in huge pay raises and their tax rates decline, these giant companies can claim to represent the consumer's best interest while soaking them at the same time by talking up big finds, while knowing they ultimately won't change the price of oil for consumers.

Big Oil must support wars and other destructive stimulants for the price of their commodity. Looks at the record billions they've made as a result of US military intervention in the Gulf. Neo-cons claimed oil revenue from Iraq would pay for the costs of occupation, instead the Iraq War has made oil more costly.

The secret energy meetings held by Dick Cheney before the invasion may not have been as concerned with extracting Iraqi oil as guaranteeing a higher price by destabilizing the region. The only Iraqi government building guarded by the US after the invasion was the oil ministry. Before Iraq, and even before 9/11, Cheney and his Big Oil friends looked at maps of Iraqi oil fields during their meetings.

Preferential tax treatment for Big Oil soaks the Treasury and burdens future generations of oil-dependent Americans with the environmental and fiscal costs of their greed. Even as profits surge to unpreceded levels, Congress shies away from a windfall tax.

Like the co-conspirators in the green-shaded backrooms of corporate privilege, spin comes from sympathetic media conglomerates responsible for reporting the news. Strategy session for driving up the price of oil must be freckled with laughter as Congress seems incapable of not caving in to their demands, let alone stopping their power play, not unlike the glee of Enron in its catastrophic drive towards unadulterated greed.

Do something!

Learn more. More information on efforts to open Alaska's North Slope to drilling, you can check out this .pdf from '03 or this article from Boston Globe.

Above all, take action with what you've learned. You can do something and get results. If we don't take action here, we won't preserve our environment. Our complacency could even cost us our democracy.

You can make an impact by voting for political candidates who support environmental cause. Otherwise, money will have an even bigger say, particularly in matters of the exploitation of public land by oil companies favored by President Bush.

Sierra Club was attempting to stop the leases of environmentally sensitive Teshekpuk Lake. I recently sent this letter through their activist system to the Secretary of the Interior:

[Sierra Club Action 8/31/06 (savetlake.org)]

To J.J. Mulva of ConocoPhillips and Secretary of the Interior Dirk Kempthorne:

I am writing in hopes that you will honor the integrity of your office and
preserve Teshekpuk lake. The wild areas around the lake represent an ancient
and irreplacable environment. By depriving these lands of their rightful
designations, you put money and the temporal state of power you have over the
choices your predecessors made.

By ruthlessly exploiting any reserve in the Teshekpuk Lake area, you sell our lands out to commercial purpose, in direct conflict with the conservation purpose for which they were intended.

The benefits of the leases will be short-lived. The costs to the environment are severe; the destruction that oil and gas extraction cause will linger long after
the leases terminate.

Clearly the auctioning off of America benefits a narrow constituency of corporations and their shareholders. It is not our current government's place to exclude other Americans from benefitting from the sale of public land--or the gross devaluation of such a land subsequent to drilling and transport?

Is your corporate suitor appealing to the authority you claim in your office? Is the sale process occuring behind closed doors? Has the Secretary worked for, or does he plan to receive compensation from those who intend to buy these public lands? Our Vice President's continued compensation from Halliburton has created a dangerous precedent for this Administration.

I hope a legal firewall precludes the Secretary from profitting. Assuming this, I can hardly believe that such a sale benefits the US or its people.

Please preserve Teshekpuk Lake as it was meant to be preserved. It is neither your place nor right to sell what isn't yours. Nor should any company or private venture profit from the sale (or lease when the consequences of development are so devastating) of public land.

I implore the Secretary, his Department, and/or any representative of the American people to disengage from the lease of Teshekpuk lake properties.


I hope the letter makes the point that needs to be made. Please don't let the President and his oil ministers sell public land to enrich their true consituency: Big Oil. Stop the theft of our publicly held natural resources and save the land for the conservation purpose for which it was set aside.



  • At 2:21 AM, Blogger johnbpeebles said…

    Came across an unsourced article that spotlights massive inadequacies in the existing oil leases for the newly discovered resevoir in the Gulf. Under the government contract Chevron can avoid paying billions in royalties!

    So, to get this straight. Big Oil finds oil out on US-controlled areas in the Gulf. Big Oil extracts the oil, but gets to take the oil for free! Big Oil then turns around and sells you gas which was originally yours! Kinda redefines that cost-of-gas chart; the Feds get their cut, naturally, off the top.

    The anonymous article states that as much as $10 billion in royalties could be foregone!

    Supposedly someone made a mistake in the contracts. I wonder if that special someone isn't right now working in a Big Oil-supported consulting job in a very plush office. Kind of makes you wonder how mistakes work their way into contracts, eh?

    A congressional investigation discovered that "...federal leasing officials failed to correct the mistake even after Chevron raised the issue." Huh? Exactly who are the people signing away our public lands working for?

    The article is here.

    Fearful of Congress, Chevron will try to renegotiate the flawed contract. Undoubtedly, they'll be looking for as many 'mistakes' in the next contract as their were in the first.

    Rather than roll over, we Americans need to demand fair market value for public assets our current Administration intends to give away--quite literally--to their Big Oil friends. And the underlying purpose of the land--conservation--must not be systematically undermined by unscrupulous, unelected government officials.

    If someone out there is waiting for more proof of a government conspiracy to defraud the public, here you have it. Act before Kempthorne sells off Teshekpuk, for what will undeniably be a lopsided deal benefiting ConocoPhillips at the public's expense, as loopholes in royalty arrangements for discoveries in the Gulf have shown.


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