Friday, May 25, 2007

Fox News: It's the Refineries Stupid!

I just had the unfortunate displeasure of seeing "Your World" on Fox News. Luckily at least I didn't have to watch Neil Cavuto. Some other guy (with a really horrible tie) made the point that oil prices haven't increased dramatically in recent months, so why is it that gasoline prices have gone up so much? The halfwit that was on the show with him of course did not offer a very good explanation. But that's just Fox's schtick.

I will say this, to be fair: Yes refineries are a big part of the problem. But, and this is an important but! The cause is not primarily those daggone librul enviro-mentalists. There are 3 big problems, and of course Fox News is only interested in one of them, so I'll put that down as issue #1:

1. Environmental regulation. We're not building new refineries. But really how big of a problem is that. Look at this chart:




Notice how each year the consumption varies seasonally. So ok we're in a bad part of the season now. It's late spring, time to attack the tree huggaz again. This chart is a few years old but nothing much has changed since then in the way of consumption. And most importantly the environmental regulations have not gotten worse for the refiners over the past few years. So clearly it is not logical to think that the environmentalists have somehow caused gas prices to jump 50% so quickly! Regulation does increase the price of fuel but they also act as price stabilizers. Because typically those costs are constant, like a tax. For example, in Europe, if the price of an imported gallon of gasoline goes up by 20 cents, it isn't felt so harshly at the pump, because the taxes on it are already so high, people are used to it. So really that whole argument shoots itself down in multiple ways. Fox won't look elsewhere because they're not interested in the truth, but truth seekers DO need to dive deeper. That brings me to #2.

2. The peaking of global oil production. Oh boy! Of course Fox News isn't going to talk about that, nor is the "fair and balanced" sap that goes on their shows to represent the other side. The whole point of peak oil is not the issue of whether or not global oil production is in measurable decline right now. It does seem to be but it will take a couple more years to know for sure. The real point is with the quality of crude oil. You have your light sweet stuff and you have your heavy stuff. The light sweet stuff is easy to refine, while the heavy stuff is harder to refine. There may be some argument about peak oil in general, but there can be NO argument that most of the light sweet easily refinable stuff is gone. To refine what's left, we DO need more refining capacity. But not "new" refineries. There are plenty of refineries, they just have a harder time processing the increasingly cruddy crude we are getting. Hence the need for Iraqi oil. (Very light and very sweet Iraqi crude, like Saudi crude.) But that is a whole nother issue!

3. The oil companies have been trying to create artificial scarcity by buying independent refineries. One reason to do this is so that they can better control the maintenance cycles. If you want to maximize profits, you need to shut down more refineries for maintenance at the same time. Enron did the same thing in california.


Now that Exxon is raking in 300+ billion a year in profits, you'd think they'd have plenty of money to retool their refineries to increase throughput of the cruddy crude. But apparently they aren't doing it. And make no mistake, they need to spend some SERIOUS cash on upgrading their refineries to process heavy crude more efficiently. THAT is the issue. But for Fox News, it's about using these price shocks to lift regulations so that refineries can spew more crap into the air while processing heavy crude, so that they can do it without hurting the corporate bottom line. It's just that simple. They're making all this money, and they don't want to invest in their refineries, because they know that in 5 years, those refineries are going to be ramping down production because the world can't produce any more oil. From here it can only go down. In a twisted sort of way, it does make good business sense. It's like your city widening it's roads to 12 lanes just to support the increased traffic from their hosting of the olympic games next summer. Why do it? They'll just go to waste after the olympics are over!

The funny thing is that Fox's own unwillingness to be honest on this issue is actually hurting the oil companies' position. Because we really don't want them to waste ungodly amounts of money building new refineries just to have them sit idle for hours a day 5 years from now. Because they are our companies, and that waste of money hurts our entire economy. If Fox could be more honest, there'd be more of a push for conservation which could allow companies to profit from new technological strides in fuel efficiency. But instead, we have to go through these mad gyrations where we're driving SUVs one day, and Festivas the next. Just one gallon of oil contains enough energy to power even Al Gore's house for days. A thimble full of oil can do the heavy lifting of a dozen men. There is nearly limitless profit potential in harnessing that energy in more intelligent ways than simply burning it up in a combustion chamber that is rarely even 25% efficient.

Worst of all, if nothing is done then we'll just import more gasoline from refineries in countries where the environmental regulations are lax, which will cause even more pollution and cost drivers even more money, while keeping profits for Exxon on track. Of course that is a fine fallback position for the Fox News crowd.

To recap, here's how I would rate the three issues by cost:

1. Regulations 10%
2. Decline of light sweet crude 80%
3. Market consolidation 10%

1 and 3 are relative nonfactors. I would further break down #2 like this:

A. Decline due to peaking light crude 50%
B. Demand outstripping supply 20%
C. Geopolitical instability, particularly in regions that export light sweet crude 30%

In terms of dollars, what I'm saying is that a $3 gallon of gas breaks down like this:

Regulations $0.30
Decline due to peaking light crude $1.20
Demand outstripping supply $0.48
Geopolitical instability $0.72
Market consolidation $0.30

These numbers are definately not exact, and I assume error margins upwards of 50% are possible. This is a rough analysis, meant only to illustrate the obscene levels of dishonesty out there. If there were honest experts, I wouldn't need to chime in with my laymans analysis! But the point is that Fox News is trying to take that 30 cents a gallon caused by environmental regulations, and make it seem like it is really two dollars! Hell, just the cost of a gallon of crude oil alone is over $1.50, so it is not even physically possible that regulations could cost two dollars! But I bet there's Fox News viewers who think that's how the numbers work out! Like that X% of Fox viewers who think Saddam himself flew the planes into the towers. (I bet some significant percentage of Fox viewers think Saddam personally flew more than one of those planes!)

With gas prices now at $3.25, even with pre-70's regulations, we'd still be paying at least $2.80 a gallon easily. Probably still over $3.00... Is that cost savings really worth pumping millions of tons of chemicals into the sky? Hell I haven't even commented on the true cost of oil and gasoline after factoring in hidden costs such as the "hidden cancer tax". If I did that then gasoline would probably be $10 a gallon! (In truth, I really don't even want to know how much the Real costs are. I have to be able to function mentally, emotionally, and spiritaully!)

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