Myth: "Big oil" is bad

"Big oil" is a favorite expression frequently used in a derogatory manner by many in the media, and others who, for various reasons wish to turn the public against oil producers. The myth is that somehow "big oil" is bad.
Reality:
It is true that worldwide oil production is becoming a bigger and bigger business. The reason is that the easy to find, shallow oil has been found. Now, more and more significant discoveries have to be searched for in remote "frontier" areas (arctic, or jungle) or must be sought after in deep water offshore areas which involve very expensive exploration programs. Costly leases must be negotiated with foreign governments, and if the area of interest is offshore, huge drilling platforms which may cost half a billion dollars or more must be built. Oil exploration is being conducted offshore Greenland and in the frequently violently stormy North Sea. These are expensive areas in which to operate. Oil exploration and development in the areas east of the Andes Mountains in Peru, Ecuador, and Colombia means building roads and hauling equipment through difficult terrain. Ultimately pipelines must be built over the mountains. Oil companies must be big to do these things and deliver gasoline to consumers. Individuals, or small companies with small amounts of money cannot do it.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: Some remote special group of people run oil companies

Here, also, people frequently believe that persons who are not part of the general public run the oil companies, just as they may believe that some distant remote group owns the oil companies.
Reality:
People who run oil companies just as those who own the companies are again not "they" but us. Geologists, engineers, accountants, and business administration majors make the oil companies function. They are our sons, our daughters, our neighbors. I taught petroleum geology at a state university. From my experience, which is typical, I cite two examples of who runs oil companies. One student had worked as a meat-cutter in a butcher shop in his small Central Oregon hometown during his high school days to help out his family. He worked his way through college by various jobs and went on to graduate school and received a well-earned Ph.D. He worked his way up through the oil industry and is now vice president of a major U.S. oil company. He is based in London in charge of the company's North Sea operations. Another student worked as a clerk in his father's shoe store during both his high school and university days. After earning a graduate degree he held various positions in an oil company, and now represents one of the world's largest companies in examining oil prospects from Russia, to Norway, to Africa. Each of these men was the boy next door. The people who run the oil companies are us.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: "They" own the oil companies

To gain popular favor, many politicians, frequently joined by the media, assert that oil companies are vague and distant entities owned by "they" and it becomes "they" versus "you." The oil industry is a favorite whipping boy for politicians seeking to gain votes. Because the average citizen is not well informed on these matters, political rhetoric often reinforces prejudices against the oil industry rather than dealing in realities.
Reality:
Who does own the oil companies? During the 1979 oil crisis I was invited to address a luncheon meeting of a State Employees Association in the State Capitol. The topic was the oil crisis. The oil industry was being widely blamed. I asked who among the State employees owned any oil company stock. Not a hand was raised. However, just prior to the meeting I had been in the office of the Public Employees Retirement System which administered the pension plan for all State employees. I had examined the holdings of the fund and discovered that the largest single industry holding in terms of dollar value, was oil company securities. The fact was that everyone in the room owned oil company stock. The conventional myth is that large oil companies are owned by some vague group distinct from the general public, the "they." The reality is that "they" are us.
And this is very broadly true. Insurance and investment companies place the funds of their clients in a variety of investments among which traditionally have been oil companies. Through life insurance, and other insurance policies, annuities, and mutual funds, the major oil companies as well as the mining companies are owned by the general public.
A recent study of ownership of stocks in the six largest oil companies in the United States disclosed the following: nearly 200 mutual insurance companies hold close to 16 million shares. Ninety-one colleges own these stocks, and about 1,000 charities and educational foundations in the United States are holders of these oil company securities. In direct ownership more than 2.3 million Americans hold stock in these six companies.
Many other Americans own interests in smaller oil companies. As to who produces U.S. oil, it should be noted that currently in the United States, excepting the North Slope Alaskan oil which is a very high cost operation and requires a very large investment, more than half of the oil produced in the U.S. is produced by small independent producers. It is the oil produced abroad in such high cost areas as the North Sea, where major oil producers are dominant. This is inevitable as expense of operations in these areas runs into billions of dollars, and are much beyond the financial and risk taking abilities of small independent oilmen. And, as noted, these larger companies are owned directly, and through pension plans, annuities, and insurance policies, by millions of citizens.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: Don't drill this prospective field. Only 90 days of U.S. oil supply there

One of the most misleading arguments used against drilling a particular area is the statement that it would only supply X number of days or months of U.S. oil demand. Yet to the average citizen this is one of the most "logical" reasons for not allowing drilling in a particular area. It is one of the most widely and most effectively used arguments against oil drilling. It appears frequently in numerous newspaper editorials and letters to the editor, and at public hearings.
With regard to the long-running debate about opening a portion of the Arctic National Wildlife Refuge in Alaska for oil exploration, in 1995, the president of a prestigious environmental organization said "...there may be at best only 90 days supply of oil for the U.S. There can be no justification to develop the arctic refuge."(27) Let us pursue this argument.
Reality:
At the present time the U.S. uses about 18 million barrels of oil a day. A 100 million barrel oil field is regarded in the petroleum industry as a "giant." They have been discovered only infrequently. Yet if one of these giant oil fields was used to supply U.S. oil demand, it would last less than six days!
To put this in further perspective, at the present time only 15 oil fields in the United States have produced as much as a billion barrels of oil. This is done, of course, over a period of many years. But if the argument is applied that the oil field would only supply oil for a given length of time in the U.S., it should be noted that the oil from each of these 15 fields, if it could have theoretically been used alone at one time, would have only supplied the U.S., at its current rate of consumption of about 6.6 billion barrels a year, only about 57 days.
If the argument used by the president of the environmental organization was to be followed, there would be no oil drilling at all in the United States. These days, a ten million barrel oil field discovery is an important event in U.S. oil exploration. But that amount would last the U.S. less than 14 hours! The fact is, we are not discovering ten million barrel oil fields every 14 hours in the U.S. That is why our oil reserves are in decline. Prudhoe Bay, the largest oil field ever discovered in North America, would have lasted the U.S. less than two years if it alone had been used.
But it is not possible to produce all the oil out of Prudhoe Bay or in any other field in 90 days, or six months or two years. If one divides the number of producing oil wells in the U.S. into the total proven U.S. reserves, each well has a reserve of about 38,500 barrels. These 38,500 barrels of oil, if they could be immediately produced, would supply U.S. oil demand for about three minutes. On this basis, it might be argued that none of these wells should have been drilled, in which case the U.S. would have no oil production. But oil supplies are produced over many years from many wells which make up the total U.S. production.
Each well makes a contribution, and each discovery serves to stretch out domestic supplies a little longer. Individually most fields, with the notable exception of the huge Prudhoe Bay Field, and each well produces an insignificant amount of oil relative to total U.S. production. But taken together they add up to the 6.4 million barrels a day now being produced.
People who use this argument presumably drive to work in gasoline-powered cars. Where do they want that gasoline to come from? People demand and use oil. With few significant prospective areas now still open to drilling in the U.S., where is the oil supposed to be obtained? Those who would curtail exploration first need to reflect on what is causing the huge and increasing demand on mineral and energy resources, and address that cause and not the symptoms of the problem. The cause is the resource demands of growing numbers of people, and the desire to continue to maintain the largely petroleum-based standard of living enjoyed by citizens of the industrialized nations. Use no oil and there is no need to drill. Otherwise drilling is necessary—somewhere. And each well and field are a necessary part of the total supply picture.
Politics and Oil
In the United States, and in many other countries, gasoline is the commodity which most touches individual lives even day. It has been politically popular to proclaim that it is the right of even American to enjoy cheap gasoline, and if this does not occur the politicians blame someone—usually the oil companies. It is "they" versus "us". "They" are the oil companies. "Us" is the public, and the public elects the politicians. When considering the problems of gasoline supply, people should simply look in the mirror to see the major part of the problem. The United States uses more gasoline per person than any other nation in the world, except Venezuela. In the Los Angeles area more people drive more cars more commuting miles every day than anywhere else on Earth. To a lesser extent this occurs in many other cities in the United States including greater San Francisco, Houston, New York, Chicago, Denver, and Seattle.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: Gasoline is high-priced

When gasoline in the United States crossed the one dollar per gallon retail price there was a general public resentment of the oil companies. Gasoline was "too high priced."
Reality:
In the 1990s in the U.S. the basic cost of gasoline (before taxes) was less in terms of inflation adjusted dollars than anytime in the past 40 years. In fact, it was nearly as cheap as anytime in the history of the oil industry. It was also historically inexpensive in terms of how long the average wage earner had to work to buy a gallon of gasoline.
The cost of gasoline at the pump is the basic cost of exploring for, drilling, producing, refining, and marketing the gasoline together with the taxes which are placed on this commodity. Lesser costs are the cost of transporting and storing the gasoline enroute to the service station. Profit margins are spread all through this system, and are generally in line with average market returns on investment. The biggest single cost in the final price of gasoline at the service station is taxes. Gasoline is a favorite source of revenue for government. In 1993, for example, U.S. President Clinton signed a bill which increased the U.S. federal gasoline tax by 4.3 cents. This was not dedicated for the purpose of road building and maintenance, but went into the general U.S. Treasury, and was stated to be for the good cause of reducing the annual government deficit, which end result has since seemed rather elusive in practice. States and cities also impose gasoline taxes. In the United States, federal and state gasoline taxes on the average are in total equal to more than the basic cost of the gasoline at the refinery.
Based on constant 1967 dollars, exclusive of taxes, the retail price of gasoline in the U.S. in 1920 was 49 cents, in 1930 it was 39 cents, in 1950 it was 37 cents, in 1970 it was 30 cents, in 1974 it was 40 cents. The price in 1995 was 67.7 cents a gallon.(19) But this 1995 price is for a much improved quality of gasoline with additives for better engine performance, and also for reduction of air pollutants. The price is also for unleaded gasoline which was not available in 1974, and which costs more to produce than does leaded gasoline. This record of price stability is in marked contrast to the large increase in prices of virtually all other consumer items. The oil companies have done a remarkable job in supplying the world's largest consumer of gasoline, the U.S. citizen, with inexpensive high-quality gasoline without restrictions as to quantity.
However, because gasoline price touches so many people, the political posturing over gasoline prices in order to gain voter favor seems to be a continuing phenomenon. In the U.S. in the spring of 1996, gasoline prices rose about 10 to 15 cents per gallon. This was due to the fact it had been an exceptionally long, hard winter, and refineries had delayed their shift of refinery output emphasis from fuel oil to gasoline. There were also weather related problems in the North Sea and Mexico which interrupted oil shipments, and the world oil price rose from about $17 a barrel to $25. U.S. oil companies have no control over the price of world oil, from which now comes more than half the U.S. oil supply.
But both major U.S. political parties tried to make campaign advantage of the situation. The administration announced that the Justice Department would immediately look into the matter of a possible price conspiracy among the oil companies. The opposition in the Congress said it would try to repeal the 4.3 cent gasoline tax increase which the administration had pushed through in 1993. The media interviewed motorists at the filling stations who by and large were of the view that the oil companies were greedy, which view was widely echoed by cartoons, editorials, and radio and TV commentators.
Some of the media, however, had more informed observations. The syndicated columnist, Mike Royko, viewing oil prices both historically and currently, wrote some very direct comments about the 1996 oil price situation:
"What I didn't hear any reporter say was: 'Of course, in this country, we pay far less for gasoline than they do in Canada, Europe, or just about any other developed nation.'
"Nor did they point out that when you factor in inflation that the price of gas is less than it was 40 years ago.
"If the broadcast hysterics took note of these few simple facts, there wouldn't be any talk of a gas pump crisis...
"If CNN insists, every half hour, that helpless American motorists might suddenly be sputtering to a stop on the shoulder of the road, is the White House or Congress going to deny that we are suddenly fuel-starved? Is any self-respecting politician going to stand up and say: 'Hey, what's the fuss? You want to see high gas prices, go to Canada or Europe. What are you network magpies chirping about?'
"Of course not. When the nation's broadcast babblers, from whom the majority of Americans get their news, say we have a crisis, it's time for the political speech writers to crank out something, even if it is something stupid.
"That stupidity includes the instant-investigation into the vague possibility that the oil companies have somehow conspired to pick our pockets.
"All that the investigation will show is that if there was a conspiracy, they've somehow conspired to give us the world's cheapest fuel for our cars."(21)
In terms of oil, American's live in a "fuel's paradise." A British observer on the scene has written, "...by European standards petrol [gasoline] is almost given away in the United States..."(28)It should be noted that in other countries, the retail cost of gasoline without tax is about the same as in the U.S. That gasoline costs more than five dollars a gallon in some nations is due chiefly to taxes, and to a lesser extent to retailer's profit, which commonly is higher than in the United States. Also, in some countries the gasoline distribution system is less efficient than in the U.S. and it costs more to transport the gasoline to the retail outlets

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: Oil companies have capped producing wells to keep up the price of oil

This is one of the oldest and most persistent myths about the oil industry. The idea is that oil companies will drill wells and then cap them, thus withholding production from the market until the price of oil goes up.
Reality:
It is true that many wells are drilled and then capped. Almost all of them are capped because they are dry holes—that is, they are failures. Less than one in eleven exploration wells is successful. The law requires that failed wells be filled with cement at key points in the well to avoid groundwater contamination, and then capped. To the landowner who had great hopes for the well drilled on his property, the face-saving statement to the neighbors is that "they found oil but just capped the well." Only when the oil company drops the lease does reality arrive.
There are some wells which could produce oil which are temporarily capped. There are two common reasons for this. One is that there is no facility for transporting the oil from the well at the moment. Either a pipeline does not exist or it is too expensive to truck it out. Generally, if the well is a producer, other wells will be drilled in the area to establish the presence of enough recoverable oil to justify developing a transport system by which the oil can be brought out economically.
A second reason may be that occasionally it is true a well may be drilled, completed, and capped when the current price of oil is not high enough to pay for the expenses of producing the oil—the pumping costs and perhaps the problem of the disposal of the salt water which may be produced with the oil. However, capping a well and leaving it for a time is risky because sometimes the well cannot be restored to production.
Drilling a well is so costly that if the well is productive and capable of bringing a return on investment, the well will be produced. If a million dollars is involved in exploration, lease, and drilling costs—and one million is much less than many wells cost—then the cost of that money in lost interest which that money would otherwise bring, demands that the well be produced. No one can afford to tie up a million dollars, or many millions with no economic return. And it is not done.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: Just drill deeper for more oil

The statement is sometimes made that deeper drilling would find more oil.
Reality:

Oil occurs in sedimentary rocks which are a fairly thin part of the Earth's crust. In the long-time oil-producing State of Kansas, for example, granite or something else besides sedimentary rock exists everywhere at depths of 15,000 feet or less. All over the world, at some depth, non-petroliferous rocks are encountered below which there is no oil. Where there are great thicknesses of sedimentary rocks, 16,000 feet is, with a few exceptions, the limit of oil occurrence. Below that depth, because of the temperature of the Earth, only gas exists.
Myth: Oil companies have capped producing wells to keep up the price of oil
This is one of the oldest and most persistent myths about the oil industry. The idea is that oil companies will drill wells and then cap them, thus withholding production from the market until the price of oil goes up.

Copyright 1997, Walter L. Youngquist -- Posted with permissionfrom GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

Myth: There is no oil supply problem in the United States

During the two oil supply crises of 1973 and 1979, in the U.S. the average citizen frequently stated the belief that no "real" oil shortage existed, and that the shortages were caused by the oil companies withholding oil from the market. But when the individual is asked two basic questions: How much oil does the United States produce each day, and how much oil does the United States consume each day, there usually is no reply. People are "experts" on the oil situation with no knowledge of the facts. This serves no useful purpose.
Reality:
The United States passed the point of oil self-sufficiency in 1970, and has been an importer of oil ever since then. In 1996, the United States produced about 6.4 million barrels of crude oil a day but imported more than 7 million barrels of crude oil plus 1.7 million barrels of refined oil products. The U.S. is now importing more oil than it produces.
The United States is the most thoroughly drilled area in the world and there is no possibility that this nation will ever again be self-sufficient in oil in the volumes and ways in which it is now being used. In what are reasonably prospective available oil areas in the United States, there are very few undrilled places left large enough for a major oil filed to be discovered onshore. Offshore there are some prospects, but offshore drilling has been banned in many areas.
A major oil field covers many square miles and almost all sizeable prospects have been drilled onshore U.S., except in a small comer of the Arctic National Wildlife Refuge, which has been under environmental limitations. Some prospective areas do exist in more distant offshore areas open to exploration but these are generally in increasingly deeper waters, and are difficult and expensive to drill. The amount of oil which would make the United States again self-sufficient in petroleum cannot be found and produced in what areas remain to be explored, either onshore or offshore. As one petroleum geologist put it, "Exxon has run out of real estate." This is true of all the major companies who have now had to mostly go abroad to obtain acreage prospects of worthwhile size.

Copyright 1997, Walter L. Youngquist -- Posted with permission
from GeoDestinies, by Walter Youngquist PhD & Chair Emeritus,Department of Geology, University of Oregon;National Book Company, 1997; ISBN 0894202995

The Ideal Prospect

The Ideal Prospect can be one of several types:

Bypassed Pay - Focuses upon an existing well that has already identified a reservoir that, based upon all known criteria, contains hydrocarbons that have not been drained by that wellbore or nearby wellbores. Enough is known about the aerial extent of the reservoir to indicate that is has the sufficient volume to yield commercial quantities of oil and gas. A prospect that focuses on a bypassed pay target involves either production through the existing, identified wellbore, or the drilling of a new well or sidetrack to capture the reserves. Inherently, this is a lower-risk type of prospect.
3D - Supported Prospect With Associated Hydrocarbon "Shows" - Combines the identification of a prospective structural or stratigraphic target reservoir with the inferred presence of hydrocarbons as indicated by oil and/or gas shows that have been documented in a wellbore that encountered the reservoir in an unfavorable position - i.e., in a downdip ("wet") position, too close to a reservoir "pinchout", etc. This optimal seismic prospect represents the best overall balance of risk vs. reward.
Frontier Play - A prospect that develops as the result of a new or unique approach to an area which is typically on the perimeter of a producing basin, and which previously had either been ignored, poorly understood, or unknown to the industry in general. Many such frontier areas contain huge untested structural or stratigraphic traps; as a rule, these areas were in the past leased and drilled by major oil companies, looking for elephants off of the beaten path. And many elephants were found. But, with the majors having abandoned the United States for other (ironically - frontier) projects overseas, the domestic frontier play has gone wanting. Until now. Such frontier plays typically have inexpensive lease terms with low royalty burdens. And, while these types of plays are inherently higher risk, they harbor enormous potential and excitement

Tax Advantages of Oil and Gas Drilling

Congressional Incentives Encourage Domestic Petroleum Development
Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.

Intangible Drilling Cost Tax Deduction
The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the Tax Code.)

Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)

Active vs. Passive Income
The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).

Small Producers Tax Exemption
The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the "Percentage Depletion Allowance", is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free. It is possible for small investors to structure their investments so that 100% of their net income is tax-free. (See Section 613A of the Tax Code.)

Lease Costs Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion.

Alternative Minimum Tax Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preference items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.

Millions of barrels of oil go into U.S. strategic reserves as domestic supplies wane

By H. JOSEF HEBERTThe Associated Press8/6/03 1:58 AM
WASHINGTON (AP) -- Despite precariously low oil supplies, the government has been pumping millions of barrels into its emergency reserve, which some critics charge has contributed to a surge in crude prices and kept gasoline costs high.
The Energy Department discounts the impact of the purchases, almost 11 million barrels since the beginning of May. And energy economists and analysts are divided; some say many other factors are keeping prices high.
Nevertheless, Sen. Carl Levin, D-Mich., urged Energy Secretary Spencer Abraham on Tuesday to suspend the oil shipments into the Strategic Petroleum Reserve immediately, "until the price of oil falls from its current high levels and the private sector inventories increase."
He produced figures showing that while 11 million barrels of oil were being diverted from oil markets into the SPR, commercial inventories during the same period were declining by 10 million barrels.
"This administration's actions to fill the SPR regardless of the price of oil or the amount of oil available to the commercial sector is a major reason for these high (crude) prices," wrote Levin, senior Democrat on the Senate Governmental Affairs investigations subcommittee.
Energy Department spokesman Joe Davis said both Democrats and Republicans in Congress have made clear they want the strategic reserve, now at 611 million barrels, filled to its 700-million-barrel-capacity.
"The vast majority of Americans realize that ensuring the SPR is key to our energy and national security. That's why there is bipartisan support to fill the reserve," said Davis.
Critics, who note the administration suspended shipments to the reserve last winter because of the loss of Venezuelan oil and a looming war in Iraq, questioned the timing.
Commercial U.S. oil stocks have been at uncomfortable levels all year, putting upward pressure on prices.
While stocks rebounded slightly last week because of a boost in imports, they remained 37 million barrels, or nearly 12 percent, below the five-year average and 30 million barrels below what they were at the corresponding time a year ago, according to the DOE's Energy Information Administration.
Also, oil prices have been creeping higher to more than $30 a barrel, prompting gasoline prices to increase as well. The national average price of regular-grade gasoline increased 2 cents a gallon last week to $1.536, about 14 cents more than it was a year ago, after declining in the spring.
Light sweet crude sold for $32.22 per barrel Tuesday on the New York Mercantile Exchange. Crude prices are expected to stay above $30 a barrel into December, according to the futures markets. The EIA predicts high prices as long as commercial stocks are tight.
A number of analysts said the supply problem stems from a variety of factors: the problem in getting Iraqi oil flowing again; OPEC producers carefully scrutinizing production; and U.S. refiners refusing to buy oil at $30 or more when they anticipate lower prices.
John Lichtblau, chairman of the nonprofit, New York-based Petroleum Industry Research Foundation, dismissed suggestions the SPR shipments had a measurable impact on the global markets.
"It's a very small amount, 80,000 to 100,000 barrels a day out of total crude imports of nearly 10 million barrels a day," Lichtblau said.
Energy consultant Phil Verleger, an economist, disagreed. He said in an interview that because commercial inventories are so low, any oil taken out of the market has an effect on price.
"If inventories get lower, each barrel counts more," said Verleger, who estimated that the 11 million barrels put into the SPR "probably translates into a buck or a buck-and-a-half a barrel" price increase.
Levin's staff has closely tracked commercial oil inventories and shipments to the government reserve.
When the SPR shipments resumed in May, private sector inventories dropped, said Dan Berkovitz, a Levin staffer on the investigations subcommittee. "The SPR shipments compounded the (supply) problem by taking oil off the market just at the time when the market was tightening up." Continuing the diversion, he said, "is just helping prop up prices," said Berkovitz.
Since January 2002, the amount of oil in the SPR has increased from 554 million barrels to nearly 611 million. The United States uses about 20 million barrels of oil a day, with about half coming from imports.

Crude Oil Prices - "The Oil Factor"

By Scott Patterson April 15, 2004
IT'S NO SECRET the price of crude is hitting historic highs. But oil has been expensive in the past, and it has always drifted back to reasonable levels again, so there's no need to worry that things will be different this time, right?
Wrong, says Stephen Leeb, co-author of "The Oil Factor," published in February by Warner Books. Leeb, whose wife Donna contributed to the book, argues that the emergence of India and China as major consumers of fossil fuels is placing incredible pressure on a petroleum industry struggling to boost production. Indeed, just last year China moved past Japan to become the second largest consumer of oil in the world, behind the U.S. As demand increases, the price of oil will skyrocket, says Leeb, reaching the staggering mark of $100 a barrel within a decade.
OK, we know: $100 a barrel sounds unreasonable, even a tad nutso. But when challenged on the outlandishness of his prediction, Leeb counters that only in the past few years the price of oil has already tripled. "If you go back to the end of 1998, oil was trading near single digits," he says. "So we've had a threefold increase in oil prices in a relatively short period of time, and I'm basically just projecting an ongoing trend."
The result, he says, will be a major shock to the global economy, and investors had better get ready, now. "I don't think there's anything more important now for investors to be paying attention to than the price of oil," says Leeb, who's also manager of the New York-based Mega Trends Fund (MEGAX) and editor of the "Complete Investor" newsletter.
SmartMoney.com asked Leeb how investors can protect their assets if his predictions bear out, and what the U.S. government can do to protect the American economy from the massive escalation in oil prices he's forecasting.
SmartMoney: Is the recent spike in the price of crude oil a long-term, fundamental shift in the industry, or is this just a short-term blip?
Stephen Leeb: You could say both in the sense that the price of crude oil does bounce around a lot. And I wouldn't be surprised to see it go down a little bit over the next couple of months. But it's part of a major long-term shift. Oil prices and natural-gas prices are in major long-term uptrends, and Wall Street and America doesn't realize it yet. But we are seeing something that is a major change.
SM: In "The Oil Factor," you forecast $100-a-barrel crude-oil prices in the future. That seems like an extravagant number, given that prices now are historically high and they're not even one-third of that.
SL: If you go back to the end of 1998, oil was trading near single digits. So we've had a threefold increase in oil prices in a relatively short period of time, and I'm basically just projecting an ongoing trend. I think we'll get another threefold increase, and it may happen in five or six years, or three or four years. The overall point I'm trying to make is that oil prices are in a dramatic uptrend and are likely to remain in an uptrend for the foreseeable future.
SM: What's the global economic fallout of such high prices?
SL: I think that if it happens in a gradual way, it will be very inflationary. If it happens in a very short timeframe, like this year, because of say a terrorist strike in Saudi Arabia or some other horrible event, it would be recessionary-slash-depressionary. It would have a horribly negative impact on the world economy. Either way, oil is going to turn the global economy on its head. Whether it's short-term or long-term, I don’t think there's anything more important now for investors to be paying attention to than the price of oil.
SM: How can investors prepare for the shifting trends in the petroleum industry?
SL: Investors have to roll back the clock to the 1970s. That's the closest historical comparison you can find to what's going to follow in the next 10 or 15 years. The 1970s was a very inflationary decade, in large part because you had a very sharp rise in oil prices. It was also a decade in which the S&P 500's real total return was the worst ever, even worse than the 1930s. It was a catastrophic decade if you invested in the equivalent of index funds. But it was also a decade in which investors like Warren Buffett and Peter Lynch got very wealthy. If you invested in real assets, whether in oil companies or gold companies or commodities, you did very well. In the next 10 to 15 years, there are going to be a lot more losers than winners. The usual rules just won't apply. If you invest in a collection of stocks that are hedged and leveraged to inflation, I think you have a chance of coming out very well indeed.
SM: What's changed in recent years that shifted the way we should view the petroleum industry?
SL: Two major changes have happened at once. One is that our ability to increase oil production has become much more difficult. We're no longer able to increase oil production sufficiently to keep up with rising demand. We can produce a lot of oil, but our ability to increase oil production has become limited. At the same time, the world's need for oil has been increasing rapidly. In particular, China and India right now have become emerging economies. With their emergence, 2.3 billion people between them produces wide-eyed increases in the demand for oil.
SM: Do the reserve reductions at Royal Dutch/Shell (RD, SC) lead you to believe that total known reserves are less than the industry thinks there are?
SL: I don't think it's a trend that's industrywide, but I think it's a sharp reminder that certainly reserves that companies have on their books are not understated and that companies are having a very difficult time replacing reserves. These reserve write-downs have come with oil prices very high, and that's exactly what you would not expect when oil prices are high. Because when oil prices are high, oil companies are able to consider harder-to-get reserves as reserves. It reinforces the fact that oil is becoming an ever scarcer commodity. Probably a more relevant statistic is that finding and development costs across all oil companies have been rising dramatically at double-digit rates.
SM: What should the U.S. government be doing to prepare for such a dramatic shift?
SL: It's utterly urgent that the U.S. government respond. The government has to embark on an absolutely massive effort to develop alternative energies. The most feasible alternative right now is wind. Scientific study after scientific study has shown that wind is the cheapest way to generate electricity. Forgetting about environmental considerations, wind right now is cheaper than natural gas and coal for generating electricity. Putting into place a wind infrastructure in this economy would take maybe a half a trillion dollars, but it is doable, and it would take half our electric grid away from fossil fuels. Those fossil fuels in turn could be used for other energy uses, such as powering cars. That would buy us enough time to develop more far-reaching alternatives, such as solar and hydrogen, which aren't on the horizon for the next 20 to 30 years. Wind is here and now. It's absolutely desperate that we start doing something about this.
SM: You think General Electric (GE) is a good wind-power play.
SL: It has the largest wind assets of any company in America. They bought the Enron wind assets for a song when Enron was going bankrupt. If we do build a wind infrastructure, wind could become a multihundred-billion dollar industry, and GE would have a very big role to play in that.
SM: Oil expert Daniel Yergin has argued that fears of an oil shortage have cropped up in the past, only to fade as new technologies and new resources drive production.
SM: He's right. In 1973 we had a fear of an oil crisis in the wake of the Arab oil embargo. In 1979, the Iranian revolution led to very high oil prices and fear of an oil crisis. In 1990, the first Persian Gulf war drove up prices. This time, it's different. This time, we have very limited excess capacity. In all those previous incidents, the crisis came about because of political factors. Now, there's no war. It's fundamentals. As to technology, just bear in mind that the U.S. is the most technologically advanced country on the planet, and U.S. production has been declining for 34 years. It peaked in 1970, despite all our technology. If it's not there, it's not there, and no matter what technology there is, you're not going to find it.
SM: Iraq has a lot of extra, untapped capacity. Won't that alleviate the situation somewhat?
SL: There is a potential to develop more oil production in Iraq. That's not going to be something that's going to happen overnight, and it is something that the world desperately needs. But it's not going to satisfy all the excess demand that we have for oil. Even if everything goes well in Iraq, it's still not going to be nearly enough to change the dynamics of this situation.
SM: Do you think that with declining supply, the opening up of the Arctic National Wildlife Refuge to drilling is fated to happen?
SL: It's going to put more pressure on it, but the key thing is that, even if it was environmentally neutral and it was a no-brainer to open it up, it still wouldn't make any difference. The amount of incremental oil you'd get there would be equivalent to putting a Band-Aid on a hemorrhage. You're talking about a small fraction of 1% of a year's production. Virtually nothing.

Growing world Oil Demand

Annual world oil demand is projected to continue growing by an average of about 2.2 percent in 2004 and 2005 after posting a 2.0 percent gain in 2003. Assuming these growth rates, oil demand in 2005 would be about 3.5 million barrels per day above the 2003 level. U.S. petroleum demand in 2003 grew an estimated 1.6 percent to just over 20 million barrels per day. In 2004, total demand is expected to climb to 20.3 million barrels per day, up 1.4 percent, as increases in transportation- and industrial-related use offset some reductions in heavy fuel oil demand. An additional 2.5-percent growth in domestic demand is anticipated for 2005, bringing the annual average consumption rate to 20.9 million barrels per day.

US Petroleum: Consumed & Imported

America currently imports more than fifty-five percent (55%) of the oil that it uses. This was not always the case. America's Energy Dependence is growing.

The reason for the growth in America's Energy Dependence is our own failure to discover and produce more domestic oil. One must now drill many more wells to discover the same amount of oil. This has resulted in the reduction of the total American proven reserves, that is, the volume of oil considered discovered in America. America currently has about 37 billion barrels of proven oil reserves. Today, many oil wells are drilled that are dry and produce no oil and when one does produce oil it is not usually in as great quantities, greatly increasing the cost of the entire exploration effort. This motivates oil companies to drill in foreign countries where larger fields can still be discovered.
The good news is that there is plenty of oil left to be discovered in America. What is required to discover this oil is simply the arrival of new technology which will reduce