Oil Slick: Presidents, Corporations, and Energy Prices

“Presidents don’t control energy prices!”

Currently, that’s one of the arguments being put forward by Democrats in defense of Pres. Joe Biden. Republicans have made similar arguments about economic trends when their party had the White House.

Presidents should not use the Strategic Petroleum Reserve to buy political polling points. That’s not a good policy and it has not had any lasting effect on fuel prices in the past. Using the SPR to offset market price increases is always a poor policy. The SPR should be for genuine emergencies, such as hurricanes in the Gulf of Mexico halting the production chain.

Just because releases from the SPR don’t significantly lower fuel costs doesn’t mean the government doesn’t influence consumer prices.

Of course federal, state, and local governments can and do affect the prices people pay directly for goods, including gasoline. The more difficult question to answer is how much any one part of government affects the final costs paid by consumers for any goods or services.

I want to remind readers that natural resources belong to the commons. No company or individual created the raw materials involved in oil production. That’s a libertarian-left perspective. It’s proper and reasonable to ensure that limited resources are managed carefully and not exploited recklessly.

However, private individuals do develop the technologies involved in this debate. Individuals designed the machinery and the processes required to produce a gallon of gas, a cubic foot of natural gas, and so on. Human creativity and innovation do deserve compensation based on open markets.

Gasoline Prices 

Let’s begin with the profit margins of the largest oil and gas companies. On average, they have net profits of 6.8 percent, though in late 2021 and early 2022 profits have reached 8.5 percent. That’s still far short of the 10 percent some politicians want to set as a windfall profit cap. So, even by the standards of politicians railing against “Big Oil” the profit margins aren’t unusual and are significantly lower than the net profits of many other industries.

The cost to extract raw crude oil varies wildly, as does the quality of the extracted oil and the future refining costs. In Saudi Arabia, it might cost $25 to extract a barrel of raw crude. In the Gulf of Mexico, that cost can reach $90 per barrel. Shale oil extraction costs $45 per barrel. Some oils require significant and costly refining processes, such as the heavy, tar-like crude from Canada’s “oil sands.” Shale is also more expensive than other sources. As the price of oil rises, it becomes more cost-effective to extract and refine low-grade crude.

The more difficult crude oils are to extract and refine, the more costly and lasting the environmental damage, too.  Increasingly, regulations require the remediation of such damage.

Now, consider a simplified breakdown for gasoline in the United States (not most other nations), since that’s what people most associate with oil and the most volatile commodity:

• 50% – the raw crude cost.
• 20-25% – refining costs.
• 10-15% – transportation and delivery.

That leaves about 20 percent of the price at the pump, which are the various taxes and gross profits. Remember, those profits are distributed across the station franchise and the supplier. The station might earn 3-5% margins on gasoline sales (which is why they want you to buy junk food and fountain drinks), and the supplier might earn roughly the same percentage.

If retail gasoline isn’t where the profits emerge, were do extraction-based energy companies make their greatest profits? Oil is key to a lot more than gasoline. Much better profit margins emerge within the chemical divisions of the energy companies.

When Oil isn’t “Oil” 

Oil is not generic. There are four major categories of oil and subcategories within each of these. There are also four major versions of “refining” oil, with different purposes. Each type of oil has to be refined in a specific manner, so a “skimming” operation isn’t generic – it’s matched one of two types of oil. (Refinery types are: topping, hydro-skimming, conversion, and deep conversion.)

Nearly a third of U.S. extracted oil has no refinery alignment within the U.S. That is why we export oil: we cannot do anything with about a third of our extracts. And, no, you cannot just convert or build new refineries.

So, sure, lots of leases exist. But if the lease extracts the heavy oil, we’re mostly set up for light crude processing. Oil isn’t a single extract that can be used for just anything and processed at just any refinery.

Biden and his advisors know this. Industry workers know this. Certainly, politicians from oil regions should darn well know this better than most. If we “pump more oil” it doesn’t automatically mean it is light crude that’s suitable for gasoline refineries in the United States.

The Misleading Lease Stories

The Biden administration actually has been aggressively encouraging new extraction leases:

New Data: Biden’s First Year Drilling Permitting Stomps Trump’s By 34%

Thousands of Permits OK’d Despite President’s Authority to End Drilling by 2035

WASHINGTON— New federal data shows the Biden administration approved 3,557 permits for oil and gas drilling on public lands in its first year, far outpacing the Trump administration’s first-year total of 2,658.

Nearly 2,000 of the drilling permits were approved on public lands administered by the Bureau of Land Management’s New Mexico office, followed by 843 in Wyoming, 285 in Montana and North Dakota, and 191 in Utah. In California, the Biden administration approved 187 permits — more than twice the 71 drilling permits Trump approved in that state in his first year.

“Biden’s runaway drilling approvals are a spectacular failure of climate leadership,” said Taylor McKinnon at the Center for Biological Diversity. “Avoiding catastrophic climate change requires ending new fossil fuel extraction, but Biden is racing in the opposite direction.”

And earlier this year, the administration approved leases that were later blocked by a federal court:

Biden outpaces Trump in issuing drilling permits on public lands
The widening gulf between the president’s policies on oil, gas and coal extraction and his initial promises has raised questions about his climate goals

By Anna Phillips
January 27, 2022

Last fall, Biden officials put 80 million acres in the Gulf of Mexico up for auction in the largest offshore oil and gas lease sale in U.S. history. While it sold only a fraction of that amount — about 1.7 million acres — it netted nearly $192 million and ranked as the most profitable offshore auction since March 2019.

Before those leases could take effect, a federal judge invalidated the entire sale… delivering a victory to environmentalists.

Government Components of Cost

Leases cost money, though they are relatively minor overall costs in the extraction chain of production. Where government significantly adds to the costs of fossil fuels (even before we get to the state and federal taxes on vehicle fuels), it is in the same areas government affects in most industries: safety regulations, employment regulations, and general corporate compliance.

Many factors are reflected in the higher cost per barrel of extracted crude oil in the United States. Wages are higher, and at least a third of employment costs are indirectly related to wages, such as worker’s compensation insurance. Regulations also increase costs.

Extraction sites, refineries, transfer depots, and pipelines all require environmental impact reports, community impact reports, and so on. Those reports must often be revised several times in response to any concerns raised. Environmental groups frequently sue to block new energy projects (even solar and wind projects), leading to costly delays and legal proceedings. (Even large state projects run into these same costs: see California’s high-speed rail and the years of delays caused by EIR/CIR lawsuits.)

Most nations don’t have anything comparable to the regulatory and legal constraints facing U.S. companies. Groups can block pipelines in the U.S., but that rarely happens in Europe, which has a spiderweb of oil and gas pipelines throughout the continent.

Even my free-market philosophy doesn’t seek to deregulate pipelines, trucks, trains, refineries, or transfer depots. Pipelines go through communities, so we definitely want to ensure the common welfare is protected. Nor do I want workers put needlessly at risk. Some regulation serves us well. But when we have more regulation than nations with strong Green Party representation, we need to examine the laws that created this regulatory environment.

I am not an energy expert and I have no idea which regulatory pressures can be, or should be, reduced. Ideally, our leaders would consult with such experts to minimize the regulations required for optimal outcomes.

Pres. Biden can and should call for a review of all federal regulatory systems. Reducing regulatory burdens might reduce some costs associated with fossil fuels.

One huge regulatory challenge: Different formulations of gasoline nationally. Having “winter blends” and “California summer blends” of gasoline limits the markets served by refineries. If there were nationwide formulations, that would simplify the supply chain dramatically.

Because fossil fuels are derived from natural resources and their consumption affects our shared environment, there are clear justifications for regulations. But we have too many regulations, and those increase costs.

Decreasing Consumption

The best thing we can do is reduce the consumption of fossil fuels.

We drive too much. We rely too much on carbon-based fuels for electricity production. We need to change our habits.

We can and should increase fuel efficiency standards for commercial and private vehicles. The Corporate Average Fuel Economy (CAFE) standards don’t reflect what technologies can deliver. There’s no reason most passenger cars cannot be hybrids or fully electric within the decade. If we reduced the use of fossil fuels for electricity generation, commercial transportation, and private travel, that would lower prices dramatically. Sadly, people would rather complain about prices than alter their daily routines.

Presidents do have some influence on energy costs. I hope Pres. Biden proposes regulatory reviews, higher fuel standards, and other measures that will have lasting, long-term benefits to the country. He’s already moving ahead with CAFE revisions, for example.

The worst solution is to encourage high fuel consumption. We should be moving away from fossil fuels, not subsidizing them.