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Book Review: Crude World

Crude World: The Violent Twilight of Oil by Peter Maass

Introduction

It succors and drowns human life. And for the last eight years, oil — and the people and places that make it — was my obsession. – Peter Maass

Today a new book by Peter Maass was released. The book is called Crude World: The Violent Twilight of Oil. Peter Maass is a name you may know from a 2005 article that he wrote for the New York Times called The Breaking Point. The story was a comprehensive look at where he thought oil production/prices were headed – and what the implications might be. Maass focused on Saudi Arabia in the article, and spent a lot of time covering Matt Simmons’ viewpoints. It was after reading this story that New York Times columnist John Tierney offered to bet Simmons on the future direction of oil prices. Thus arose the Simmons-Tierney bet.

I thought Maass’ 2005 article was well-researched, and it was a captivating read. So when Mr. Maass e-mailed and asked if I would like a copy of his new book, I thought it would probably be a book I would enjoy. I still have a stack of books that have been sent to me to review, but I jumped this one to the front of the queue. I hadn’t really intended to, as I am working on two other books right now*, and would normally finish those before starting another. But once I picked this book up and started thumbing through it, I couldn’t put it down.

The subtitle of the book is The Violent Twilight of Oil. The book talks about the twilight of oil, but as the chapter titles imply the focus is less on the twilight and more on the seedy side of the business. The book notes that there are some countries like Norway, Canada, United Arab Emirates, Kuwait and Brunei to which oil appears to have generally benefited the population as a whole. But then there are also many cases in which the discovery of oil seems to have brought many problems to the population. (The book suggests that countries with established democracies and strong self identities are less likely to suffer following the discovery of oil).

The Chapters

The chapters read like the Seven Deadly Sins: “Plunder”, “Rot”, “Fear”, “Greed”, and “Desire” are a few of the ‘sins’ covered in various chapters. Within each chapter, Maass then takes a look at an example that embodies that particular “sin.” That sort of style reminded me of a really good book I read a few years ago written by Matt Ridley. It was called Genome: The Autobiography of a Species in 23 Chapters. Each chapter of that book tells the tale of one gene from each chromosome. In Crude World, Peter Maass tells the story of oil one dysfunctional example at a time.

The book picked up where the New York Times story left off. In fact, Chapter 1 – Scarcity – was mostly about Saudi Arabia and incorporates much of that 2005 story. And if you liked his New York Times story, you will probably enjoy the book as the same style is evident. But I use the word “enjoy” loosely, as it is a sober read. You will find yourself shaking your head at some of the things that have been carried out as a result of the world’s desire for oil.

In Chapter 2 – Plunder – the book covers the case of Equatorial Guinea. The oil wealth was plundered, with the help of international oil companies, banks that looked the other way as government officials brought suitcases of money in for deposit, and governments eager for access to the resource. While he was investigating the oil story in Equatorial Guinea, Maass was accused of being a spy and kicked out of the country.

Chapter 3 – Rot – was all about Nigeria. I won’t tell you how that one turns out, but I am amazed at the (dangerous) lengths Maass went to for the story. Rot describes his journey deep into the Niger Delta in a leaky canoe, courtesy of one of the local warlords. It is well known in the oil industry that Nigeria is a dangerous place to operate. Oil companies generally pay very big premiums to get workers to agree to an assignment in Nigeria. Oil workers are kidnapped in Nigeria regularly (but rarely harmed) and held for ransom from the oil companies operating there. Warlords are constantly doing battle there, and Maass described his visit to one village that had been attacked. Shell also featured prominently in this chapter.

Chapter 4 – Contamination – tells the story of Ecuador, with special focus on the Chevron lawsuit. Maass notes the irony that California – one of the most environmentally conscious states – receives the largest portion of Ecuador’s exports.

The rest of the book’s ten chapters covers a litany of oil-induced miseries. Iraq, Russia, and Venezuela are all profiled. Former ExxonMobil CEO Lee Raymond is presented as the face of “Greed” (albeit it in the “Fear” chapter). There is an interesting explanation in “Greed” on why companies function as they do. Maass discusses a court case between Henry Ford and the Dodge brothers, in which the court ruled that a company’s mission “is organized and carried on primarily for the profit of its shareholders.” Thus, Maass argues that if Mr. Raymond had decided to run ExxonMobil in a more altruistic manner, the board would have removed him for not operating in the best interests of the shareholders.

The complaint that some will have about the book is that it isn’t balanced. There are a number of villains portrayed, but the oil companies really stand out. It seems that those who are telling the tales of misdeeds are generally trusted in the book, but those who are interviewed for balance are treated with suspicion. For instance, in the chapter on Nigeria, the author interviewed the director of Shell’s operations in Nigeria. The interview appears to proceed like a cross-examination. A Nigerian warlord’s words, on the other hand, seem to be taken mostly at face value.

But this is not intended to be a balanced book. It is a book designed to highlight the downside of our oil dependence. We can all think about ways in which oil has made our life better, but in the Western world we are generally spared from the nasty side of the business. In this book, Maass brings that message home loud and clear.

Conclusion

Crude World was released today, September 22, 2009. The general theme of the book is that the world’s dependence on oil has come at a very high price. This is not a book on peak oil, climate change, or renewable energy. It is not a technical book on the oil industry (for that see Morgan Downey’s Oil 101). The book covers the misery – the wars, the corruption, and the ruined lives – brought about primarily by greed from the lure of black gold. The book highlights the irony that oil could be used to improve the lives of a country’s citizens, but in far too many cases a country’s citizens end up being worse off after oil is discovered. The book was a fascinating read, and I couldn’t put it down once I started it. Now I can get back to my regularly scheduled reading.

Footnote

* The other books I am working on right now are Axis by Robert Charles Wilson and Outsourcing Energy Management by Steven Fawkes. The former is a science fiction book that I picked up because I really enjoyed Wilson’s previous book Spin. The latter has been a difficult read; I have been working on the book for six months. I met the author earlier in the year when he visited the Titan Wood plant in the Netherlands. We had quite a lot in common, and he sent me a copy of his book. But it is really a textbook, and so I have been reading it in small doses.

September 22, 2009 Posted by | book review, Matt Simmons, oil companies, oil consumption, oil exploration, oil production, peter maass | 55 Comments

About That $72 Billion Subsidy

I am going to be pretty busy for the next few days, and probably won’t be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:

U.S. Tax Breaks Subsidize Foreign Oil Production

(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.

Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn’t even go to Big Oil.

One of my diligent readers took the time to actually read the study, and broke it down:

I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items – I didn’t read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out “BIG OIL Subsidy!!” I found it useful to consider 10 categories of fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there’s no free lunch. A higher take might mean lower bids or less development.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

– Numbers 1 and 3 may have room for revenue take ($22 bn);

– Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

– Number 2 would clearly have a negative impact on US production ($16 bn);

– Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

– The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don’t benefit the large mutlinationals much at all.

Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support “antisubsidies” – higher taxes – for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn’t lump money destined for research into carbon sequestration into all-encompassing “oil subsidies.”

September 21, 2009 Posted by | carbon tax, gas tax, oil companies, subsidies | 47 Comments

Our Ironic Energy Policy

Energy policies in the U.S. often seek to punish our domestic oil and gas producers, while at the same time we work hard with foreign producers to ensure that the oil continues to flow. I noted in a recent essay:

It is ironic that Steven Chu doesn’t seem to feel the need to work with our domestic oil industry, but warns OPEC not to cut production, and then is pleased when they don’t. I believe the blind spot in the present administration over the need to support our domestic producers will simply mean that future energy secretaries are even more beholden to OPEC.

Now, over the weekend we have two bits of news that continue to show the irony of our energy policies:

Clinton on oil mission to Angola

LUANDA (AFP) – US Secretary of State Hillary Clinton shifted the focus of her Africa trip to business on Sunday, arriving in Angola to boost relations with the continent’s key oil producer.

The top US diplomat is on a one-day visit to the southern African nation, which vies with Nigeria as Africa’s biggest oil producer but where two-thirds of the population lives on less than two dollars a day.

Angola is now China’s largest supplier of crude oil, but it is also a key provider to the United States. Angola sold 19 billion dollars in exports to the US market last year, 90 percent of it oil.

I certainly understand the need to work with other countries to keep the supply chain open, but those policies don’t seem to extend to our own country. How about sending Clinton or Chu on a mission to ExxonMobil to figure out how to better work with domestic producers?

Then, we have the following two stories:

Other countries ink deals for oil drilling off the Florida Keys

While the debate about drilling off the coast of Florida continues in Washington and the state Legislature, several international companies are getting started on projects that could bring oil rigs within 60 miles of the Keys by year’s end.

Companies from nations like Norway, Spain, India, China, Russia and Brazil have signed exploration agreements with Cuba and the Bahamas that could mean drilling south of Key West this year, and 120 miles east of the Keys in the Cay Sal area of the Bahamas in fewer than two years.

“Wouldn’t it be ironic if the Russians could drill closer to our shores than American oil and gas companies? The losers would be the American consumers who are cut off from the trillions of dollars in government revenue and thousands of new jobs that could be created if more of America’s oil and natural gas resources could be developed,” Katie Matusic, media relations manager for the oil industry lobbying group American Petroleum Institute, wrote in an e-mail.

Russian oil rigs just 45 miles from Florida?

New York – Remember the Cuba Missile Crisis and the threat of Russian nukes 90 miles from Key West? Now, there is the possibility of Russian oil rigs even closer, drilling in Cuban waters off the Gulf of Mexico.

Last week, the Cuban government announced it had signed contracts with Russia, allowing Russia to hunt for oil and natural gas in the Gulf of Mexico, perhaps as close as 45 miles from US shores.

The US oil and gas industry is hoping the Cuban drilling causes the US to rethink its own policy in drilling in the eastern gulf of Mexico, an area the USGS estimates has 3.06 billion barrels of oil and over 11 trillion cubic feet of natural gas.

Last July former president Bush lifted the executive moratorium on drilling on the Outer Continental Shelf. The Congress, which usually renewed the moratorium each year, let it expire.

But, in February, Interior Secretary Ken Salazar, announced he was extending until Sept. 21 the period for public comment on a proposed five-year plan for drilling offshore.

Proponents of drilling maintain it would provide the Obama administration with a dramatic influx of $2.2 trillion in new revenue from royalties and taxes on profits. They estimate it would add 1 million new jobs as companies build new oil rigs and roughnecks get hired in Florida for the new rigs.

If you think we need to reduce our dependence on fossil fuels – and I do – then that’s one thing. Adopt policies that encourage this. But don’t adopt schizophrenic policies that result in us treating foreign producers better than we do our own domestic industry. The result could be that we will end up buying oil produced in the Gulf of Mexico from Russia, creating jobs for them and advancing their economy – at the expense of our own. And that is simply asinine.

August 9, 2009 Posted by | energy policy, Florida, Gulf of Mexico, oil companies, oil production, politics | 11 Comments

King Corn and Big Oil

Over the weekend, I watched the documentary King Corn. It was released in October 2007, but I just now got around to watching it online at Netflix. The premise is that a pair of college friends from the East Coast wanted to learn more about where our food comes from. When they learn about the importance of corn in our food supply, they move to Iowa and decide to grow an acre of corn over a growing season in order to better understand its role in the food chain.

As the movie progresses, U.S. farm policy with respect to corn is explored. It struck me during the movie that U.S. farm policy has many parallels to U.S. energy policy. Both systems have been set up with the goal of providing the cheapest prices to consumers. Both Big Oil and Big Ag work within the systems that have been created, but there are many negative consequences of these systems. I am grappling with the trade-offs.

On the one hand, the movie made a point that I often hear in relation to the oil industry: Consumers are now spending less of their disposable income on food (or energy) than they have in decades. So the consumer benefits from having extra money to spend on other things. But that also means that less money is flowing to the farmers, which drives vicious cost-cutting and has decreased the viability of the small family farm.

Cheap food and cheap energy also lower the financial penalty to consumers for over-consumption. Cheap, subsidized corn has led to cheap corn sweeteners, which can be found today in many of our foods. The rise of obesity and diabetes in the U.S. has been linked to the rise of high fructose corn syrup (HFCS) in our diets, which can be traced back to a farm policy that encourages over-production of certain crops. (I have to admit, if the choice is high fructose corn syrup or ethanol, I will choose ethanol).

King Corn implicates former President Nixon’s Secretary of Agriculture Earl Butz as the man responsible for sending us down this path of industrialized agriculture with a radical rewriting of U.S. farm policy in the early 1970’s. (For more details on Butz’s legacy, see A reflection on the lasting legacy of 1970s USDA Secretary Earl Butz by Tom Philpott).

Of course people are responsible for the choices they make. The government can’t be everyone’s mother. But they do put policies in place that influence choices. It is easy for me to choose not to over-consume if I can’t afford to do so. There is a reason most of us don’t eat lobster twice a week, and it isn’t because we don’t like lobster. But the calories from HFCS are much cheaper, so food dollars of those whose incomes are stretched gravitate in that direction.

Thus, I grapple with the dilemma of whether it is better that consumers spend more disposable income on food and energy in order to limit consumption. I don’t want to see people starving, but I also don’t want to see people dying from diabetes. The annual costs attributed to obesity in America have been estimated to be $100 billion, and the cost of diabetes at over $200 billion. That is $1,000 per year for every man, woman, and child in the country – and a loss of the quality of life for those afflicted. Those costs are at least partially attributable to the policies that have led to over-production of food.

I am both the product of an American farm, and a former employee of Big Oil. These experiences have shaped my views on and my interest in our respective agriculture and energy policies. I think these policies over the past few decades have led us to an unfortunate place: Fat, diabetic, and with a level of dependence of foreign oil that threatens to bankrupt the country. Further, there are entrenched lobbies that spend lots of money to maintain the status quo.

I certainly don’t blame the farmer for this. As one man said during the movie “I will produce what consumers demand. If they demand (leaner) grass-fed beef over corn-fed beef, that’s what I will produce.” That’s the same reason oil companies produce gasoline and car companies have produce SUVs.

But somehow we have to change what consumers demand before it kills us all.

July 28, 2009 Posted by | energy policy, farm policy, oil companies, politics | 105 Comments

Oil Companies Acquire More Ethanol Plants

As I noted in my essay Big Oil Buys Big Ethanol, I expected that we would see more oil companies buying up troubled ethanol assets. Per the Houston Chronicle, Sunoco has become the latest:

Oil companies shop for discounted ethanol plants

FULTON, N.Y. — When Sunoco closed this week on the acquisition of a bankrupt ethanol plant for pennies on the dollar, it became just the latest oil refiner to step into the alternative fuels market.

Traditional refiners under pressure to reduce emissions are finding new avenues to meet evolving environmental standards, and finding big bargains along the way.

However, I think the article largely misses the point of why these transactions are taking place:

The plant is close to Sunoco’s main operations in the Northeast where many of its 4,700 gas stations are concentrated, but the shift in U.S. energy policy was a big motivator.

The entry of traditional oil companies is part of a natural industry evolution, [Matt] Hartwig [of the Renewable Fuels Association] said.

I don’t think these transactions are taking place because oil companies want to go green, or because they see this as a fantastic growth opportunity. They are doing this merely because they have been required to put ethanol in their gasoline. To meet their commitments, they can either purchase ethanol from the ethanol producers, or they can buy their own ethanol plants. If you can acquire ethanol plants for pennies on the dollar, it is cheaper for them to go that route. If, on the other hand they thought the mandates were going away, I don’t think they would be jumping in.

But don’t be surprised if the top U.S. oil companies — Exxon Mobil Corp., Chevron Corp. and ConocoPhillips — don’t make the leap, Kment said.

“For them, a 50 million gallon, or even a 100-million gallon plant would only produce a drop in the bucket of their total needs,” Kment said.

But again, it isn’t about their total needs. It is about meeting the ethanol mandate, which they can do by producing “a drop in the bucket of their total needs.” This isn’t about oil companies trying to become ethanol companies. The scale of ethanol is far too small for that. Even if the oil companies bought up all of the ethanol capacity in the country, it would still be only a drop in the bucket. But it would enable to them to fulfill the government mandate.

June 19, 2009 Posted by | ethanol mandate, ethanol subsidies, oil companies | 13 Comments

The Art of Spinning

As the previous post indicated, we in the U.S. have a pretty low energy IQ. One of the reasons is that energy stories are often reported in a very biased or uninformed manner, which tends to distort public viewpoints. For instance, you may think those evil oil companies are wrecking the world. You are entitled to your opinion, and admittedly the oil industry has done plenty to help forge those sorts of views.

However, in the U.S. we take an especially negative view of the oil industry relative to the rest of the world. Why? Odds are that your opinion has been shaped by stories like the examples in this essay. Make no mistake: Your views are carefully nurtured and cultured by various groups with agendas, often by publishing stories full of misinformation. (Full disclosure: I am attempting to influence your viewpoint here, but I am going to do so by pointing out shenanigans).

Here is a perfect example of a story in which words and examples were carefully chosen to convey a very specific (negative) viewpoint:

Big oil companies, little investment in renewable energy

The Center for American Progress released a new report analyzing 2008 oil company profits and lack of investment in renewable energy, even while the companies spend millions of dollars on ad campaigns touting their emphasis on renewable energy.

Note the wording. There was a “lack of investment” in renewable energy, while they spent “millions of dollars” on ad campaigns. The problem with that line – as you will see – is that the “lack of investment” is in the billions, which dwarfs the millions spent on the ad campaigns. But I suppose “billions spent on renewable energy and millions spent on ad campaigns” doesn’t convey the desired negative impression as does “4% spent on renewable energy and millions on ad campaigns.” The first phrase would likely elicit a response of “Uh, OK.” The second one on the other hand? “Why that’s outrageous! Those misers!

These kinds of stories also inevitably fail to note that the ‘miserly’ oil companies paid several hundred billion dollars in taxes as a result of those profits (if the stories mention taxes at all, it’s that the oil companies aren’t paying their ‘fair share’). According to the Tax Foundation, oil companies have paid out some $2.2 trillion in taxes over the past 25 years – far more than they earned over that time period. But such a misleading picture tends to get painted, that many may think this MoveOn.org petition is rational:

Stop subsidies for Big Oil

Think oil companies should pay their fair share of taxes? So does President Obama. In his budget, the President has proposed cutting billions of dollars in special subsidies and tax loopholes for oil and gas companies.

Just what is a fair share? Will it only be a fair share when oil companies are funding the entire U.S. government? But back to the initial article:

It should come as no surprise that last year’s record high oil prices also led to near record profits for big oil companies.

No, we were bombarded with headlines about it all the time. It should come as no surprise at all. So someone should tell this guy, who thinks it is a secret:

Obama braces for big oil backlash

Little known fact: While most every other industry was falling to pieces last year, the oil industry posted record profits. ExxonMobil alone made $45 billion. So Obama, in his attempt to bolster the sinking U.S. economy, is likely not feeling too much sympathy for the industry as he goes after the clearly unnecessary tax credits the industry currently enjoys.

Another example of a highly misleading article (which actually led me to the MoveOn.org petition). Important to note once again that while other industries were falling to pieces and requiring multi-billion dollar bailouts, the oil industry was making big profits and paying big taxes; taxes in part which enabled those bailouts. But let’s continue to dissect the initial article:

Despite their soaring earnings, the big five companies were very stingy with investments in renewable and low-carbon energy technologies and fuels that would reduce oil dependence.

Media tracking group TNS Media Intelligence reported that $52.5 million was spent in the first quarter of 2008 along by the oil industry on greenwashing advertisements that boast about investments in wind and solar power or efficiency.

In fact, a CAP analysis of their investments reveals that the big five oil companies invested just an average of 4 percent of their total 2008 profits in renewable and alternative energy ventures.

So, let’s have fun with math. According to the story, 4 percent of total 2008 profits was spent on renewable and alternative energy. That amounts to $4 billion, which the writer considers “very stingy.” $52.5 million spent on advertising – which is only 0.0525% of 2008 profits – amounts to a “smokescreen PR campaign.” Just once I would like to see one of these articles stick in a line like “In fairness, spending on their tax bills amounted to 250% of total 2008 profits.”

What planet do these people live on? Oh, right. The planet where oil companies are run by psychotic madmen and profits go to a select few executives and insiders who conspire in smoke-filled rooms. The planet where novices ‘know’ that the industry should invest their profits into ventures that aren’t their core business, and which would likely cause their profits to vanish (potentially leading to a bailout scenario!) These people live in a cartoon world, but the problem is that most of the population lives there.

Voters have been conditioned to hate Big Oil, as Robert Bryce points out in:

Exxon, Big Oil Profits Evil Only Until You Weigh Their Tax Bills

Bryce notes:

While it’s unlikely that the general public’s attitude toward Big Oil will ever be changed, the public should recognize that Exxon’s profits have come along with an enormous tax bill and that those tax payments are helping governments all over the world stay solvent. According to the company’s income statement, the amount of taxes it paid in 2008 was 2.5 times as much as its net profit.

In 2008, Exxon’s tax bill averaged about $318 million per day. And it paid those taxes at the very same time that the whiz kids on Wall Street, the geniuses at AIG, and the mavens at Freddie Mac and Fannie Mae, were begging Uncle Sam for multibillion-dollar life preservers in order to prevent financial chaos. Exxon made huge profits—and paid record taxes—at the very same time that the U.S. financial system was undergoing near-fatal convulsions brought about by excessive speculation, uncontained greed, and a basic failure to provide goods and services needed by the overall economy. How many Americans really need credit default swaps or collateralized debt obligations? Now compare that number with the tens of millions of Americans who absolutely must have gasoline every day.

What about the original article at the Center for American Progress (CAP)? Funny story on CAP. I was invited to D.C. a few years ago for an energy conference, and I happened to be acquainted with the Director of Environmental Policy at CAP (which is a liberal think tank). I was invited to drop by and talk to CAP about the oil industry. Even though I expected a hostile audience, I was looking forward to it, because I thought I might be able to address some gross misconceptions. But at the last moment, my company decided that it wasn’t a good idea for me to make the trip as oil prices were at all time highs and they were worried that I might find myself in an awkward situation with the media. But, back to the original CAP article:

Big Oil Misers

That certainly looks like a balanced title from an organization that describes itself as “non-partisan.” The strategy in the article is the same as the earlier article: Use a percentage to downplay the multi-billion dollar investments in renewable energy, and then quote the advertising money in “millions” to make it appear that more was spent on advertising than on renewable energy. But why must a truly non-partisan organization spin like this? Shouldn’t a balanced article mention the monumental tax bill that has been used in part to bail out other industries?

Worse, there are blatant falsehoods in the article itself. After noting that the American Petroleum Institute claimed that “most people support putting more of America’s oil and natural gas to work”, the CAP article claims:

And API’s assertion that “most people” support more oil and gas drilling is misleading at best. An NBC/Wall Street Journal poll asked “When it comes to addressing our energy problems, which one of the following do you think should receive the most emphasis?” (italics used for emphasis). Six of 10 respondents favored “developing alternative energy sources.”

Misleading at best? Hmm. Let’s have a look at the poll, shall we? On Page 26, we see Question 35:

I’m going to read you several steps that could be taken to ease America’s energy problems. For each one, tell me whether you think this is a step in the right direction, a step in the wrong direction, or if you do not have an opinion either way. And do you think this will accomplish a great deal or just a little in dealing with America’s energy needs?

How did people answer? While 92% felt that developing alternative energy sources would either accomplish a great deal or at least a little, 63% said the same about expanding areas for drilling for oil off the coast of the United States. Where I come from, 63% is “most people” and there is nothing misleading about the API making that claim. It is quite disingenuous, though, for CAP to suggest that API’s statement was misleading. CAP is either spinning or they didn’t read the survey very carefully. They have interpreted the question “Do you support this?” – which is the question API commented upon – as “Do you support this as your number 1 priority?” The ‘misleading at best’ charge aptly applies to CAP in this case.

I wish there wasn’t such an antagonistic relationship between the oil industry and Democrats. There is too much at stake. Historically, Republicans are more supportive of the oil industry, and in turn the oil industry overwhelmingly supports Republican candidates. (Or it may be the other way around; the oil industry supports Republicans who in turn support the industry). On the other hand Democrats (except for those in oil-producing areas) are generally hostile to the oil industry, which ensures that not much money from the oil industry will go to support the Democratic party (although Diane Feinstein has reportedly received $100,000 from the oil industry in the past decade).

My view that Big Oil and Democrats should find common ground has nothing to do with wanting to make nice with a new administration. My views are based on the belief that any intermediate success at achieving some level of energy independence must involve a large contribution from oil and gas. I think it goes without saying that oil and gas provide the overwhelming majority of our transportation fuel, and that they are forecast to provide the overwhelming majority for decades to come.

The problem is of course that some naively think they can marginalize the oil industry with punitive taxes, and alternatives will step up and fill the void. (To be clear, I also don’t subscribe to Newt Gingrich’s viewpoint that encouraging the development of shale oil will lead to energy independence). What will happen in reality is that punitive measures will discourage domestic production, which will quicken the pace of shifting our supply to imports. It is ironic that Steven Chu doesn’t seem to feel the need to work with our domestic oil industry, but warns OPEC not to cut production, and then is pleased when they don’t. I believe the blind spot in the present administration over the need to support our domestic producers will simply mean that future energy secretaries are even more beholden to OPEC.

This might change if we could have a more balanced discussion on our energy policy. However, I am keeping expectations pretty low. I have learned to do this when the topic is energy.

April 5, 2009 Posted by | American Petroleum Institute, api, energy iq, energy policy, ExxonMobil, oil companies, politics, Steven Chu | 94 Comments

Valero Now in the Ethanol Business

In an update to Big Oil Buys Big Ethanol, it is official:

Valero Energy, the Oil Refiner, Wins an Auction for 7 Ethanol Plants

Valero Energy, the country’s largest independent refiner, said on Wednesday that it would buy seven ethanol plants from VeraSun Energy for $477 million, giving the biofuel industry a lift at a time when it is suffering from excess production capacity and falling gasoline consumption.

VeraSun, the nation’s second-largest ethanol producer after Archer Daniels Midland, filed for Chapter 11 bankruptcy protection last fall. Valero’s purchase signals important new support for a flagging industry from an unexpected quarter. In recent years, refiners have opposed Congressional mandates for refineries to blend increasing amounts of ethanol in gasoline, arguing that it made neither economic nor environmental sense.

So, for the price of $477 million, which would be less than 5 days of profit for someone like ExxonMobil, you can be the 2nd largest ethanol producer in the country. Even for Valero, $477 million is a piece of cake. Like I say, people who think the ethanol industry is a threat to the oil industry don’t understand the difference in scale between the two. If ethanol starts to look like a good business model, the oil industry will buy up the assets without breaking a sweat. The first salvo has been fired.

March 20, 2009 Posted by | ethanol, oil companies, verasun | 14 Comments

The Oil Industry Helps Bail Out AIG

OK, maybe that’s an exaggeration. But they did just chip in close a billion dollars to the government coffers that are propping up AIG:

US Central Gulf Lease Sale Bids Total $703 Million

HOUSTON -(Dow Jones)- U.S. Interior Secretary Ken Salazar said the Central Gulf of Mexico Oil and Gas Lease Sale 208, held Wednesday in New Orleans, attracted more than $703 million in high bids.

The sale was conducted by Interior’s Minerals Management Service, or MMS, and had 70 companies submitting 476 bids on 348 tracts comprising over 1.9 million acres offshore Louisiana, Mississippi and Alabama.

However, that amount was lower than last year’s take (also a small fraction of the size of the AIG bailout):

The total amount of money that MMS would collect from this Central Gulf Lease sale is lower than last year, which attracted 78 companies and collected a record $3.7 billion, amid booming prices for oil and gas.

Given that we are now into AIG for $170 billion, another 242 successful auctions like the one yesterday and the AIG debt will be covered. Of course that’s assuming we aren’t soon out another $170 billion, and the oil industry hasn’t been taxed out of existence.

March 20, 2009 Posted by | AIG, MMS, oil companies, oil lease | 2 Comments

Big Oil Buys Big Ethanol

Some people think that the oil industry is hostile toward the ethanol industry because they consider them a real threat. But I always point out that the oil industry dwarfs the ethanol industry by such a large amount that it could easily buy up all the available assets of the ethanol industry – if they thought there was a good business opportunity.

My speculation has turned into reality as an announcement was just released that major oil refiner Valero is buying up the assets of bankrupt ethanol producer VeraSun:

VeraSun Energy to sell assets to Valero Energy

Ethanol producer VeraSun Energy Corp. said Friday it is selling assets to Valero Energy Corp. for $280 million amid difficult industry conditions and tight credit markets.

The assets include certain VeraSun production facilities in South Dakota, Iowa, Minnesota, and Indiana. The company will sell all production facilities and operations in separate or combined transactions.

“Given current difficult industry conditions and continued constrained credit markets, we believe that commencing a sale process is in the best interest of Company stakeholders,” said Don Endres, VeraSun’s chief executive.

For a pure refiner like Valero, this seems to be a decent fit with their business model. They buy oil and turn it into gasoline. Now they will buy corn and turn it into ethanol which will then be blended into gasoline. Their risk of course is that we see a return to the high commodity prices of last summer, which is what put ethanol producers into such dire straits in the first place.

I don’t expect that this is the last we will see of this. Despite the recent write-downs of assets, the oil industry will continue to generate cash (just not as much). They may be the only viable option for some of these distressed ethanol producers. And I know for a fact that there are companies that are keeping a close eye on some of the other troubled ethanol producers.

February 7, 2009 Posted by | American Coalition for Ethanol, oil companies, valero, verasun | 32 Comments

What Manpower Shortage?

Much has been made of the manpower shortage in the oil industry. I have been interviewed about it, I have written about it, and I saw it first hand when I was working for ConocoPhillips in Aberdeen, Scotland. Recruiting people was very difficult, and contractors – especially process engineers – were commanding unbelievable salaries. I got so many calls from headhunters – including the companies mentioned in the story below – that I literally hated to pick up the phone for fear I was going to get tied up for 15 minutes.

Well, that was then. Since oil prices have fallen, ConocoPhillips has announced they are laying off 4% of the workforce, Schlumberger is laying off 5% of their North American workforce, and now contractors in the North Sea are rolling back salaries by 10%:

North Sea contractors facing a 10% pay cut

More than 1,000 North Sea contractors will see their pay cut by an average of 10% as oil companies feel the impact of lower crude prices.

The wage reductions affect only one oil service business, Wood Group Engineering (North Sea), but its rivals could follow suit as their oil company clients seek to reduce costs.

I worked with Production Services Network (PSN) when I was there, and the story mentioned them as well:

Among the other large North Sea oil service firms are PSN and AMEC.

Bob Keiller, chief executive of Aberdeen-based PSN, said: “We are looking at all ways to help our customers reduce costs.”

One of the reasons that I decided to join the oil industry in the first place was that I felt like it was a safe harbor in a world that would be facing big energy challenges in the near future. In fact, the energy sector has been mentioned as a place to find ‘recession-proof jobs.’ Some are about to discover that even so-called recession-proof jobs can be impacted by a recession.

Note: For the gardeners who read this blog, I just started a gardening journal this morning. It is basically just a journal of my gardening experiences in North Texas. I find it easier to do this via a blog than to keep a notebook. Anyway, feel free to stop by and share any tips you might have. The URL is My Gardening Blog, and I will update it quite often as gardening season gears up.

January 24, 2009 Posted by | COP, manpower, oil companies, Schlumberger | 34 Comments