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The Price of Gas

Everyone is so upset about it. The lady next to me on an airplane said "It's not fair!" and I had to ask her what wasn't fair about gas costing $4/gallon. I didn't understand her answer. And I tried. It had to do with corrupt politicians, but corrupt how? What exactly are the politicians doing that makes the price of gas unfair? How exactly is it Obama's fault? Someone said he wanted the US price of gas to go up to European levels. Please inform me if you understand this. It seems to me that we as a nation have been paying off the gas companies in the form of subsidies and lax regulation. They claim the opposite, that the burden of regulation and taxation is destroying them. But then the numbers come through, how much money Exxon makes, or Chevron, Citgo or whoever. These companies are raking in billions, and getting tax breaks to boot. It's not clear exactly how those billions get distributed to humans who can spend them. Except for the CEO, who is not going hungry. Maybe the money America gives to gas companies is why gas prices are as low as they are. Maybe if we stop subsidizing oil, the prices will go up. To the real price. That would be the only way we could stop subsidizing them, is if we'd be willing to pay the cost directly instead of through our system of government. And the only way we'll get our gas for cheaper is if we get it ourselves with less waste, extravagance and middle men. I wouldn't be surprised if Obama has this in mind with his plan to expedite drilling in Alaska and the Atlantic. And I'm certain he wouldn't mind depriving the big oil companies of some profit, but he's not allowed to say or act on that. I am, though, being nobody out here on the web.


( 4 comments — Leave a comment )
May. 14th, 2011 09:00 pm (UTC)
Okay. The "subsidies" that the oil companies have been getting are not exactly true. I don't know if you know accounting, but the "tax breaks" that are so frequently complained about are like this.

If I have an oil reservoir, it has only so much oil in it. When I pump that oil out, it has less in it. Just like when you buy a car, every year it is worth less than it was the year before.

The "tax break" that is under discussion is called the "depletion allowance", and it is nothing more or less than the extension of the GAAP principle of "depreciation" to include the depreciation on oil and gas fields. As such, it really isn't a "tax beak", it's a standard deduction that applies to every other asset class in the nation. Eliminating it would *not* be eliminating a special tax break, but deliberately singling out one class of asset for special taxation.

That's just one of the issues with the general public discourse on oil and gas production. Another issue with the current regime on this subject is the "drilling moratorium". It is not exactly widely known that an oil well, once drilled produces less each year after it is drilled. The first year 100%, the second, 80%, the third 60. That means that just in order to maintain production, every year, you need to drill 20% as many holes as you currently have. So a drilling moratorium means that for every year it is in force, your production will decline by 20%. That's a big hit. Now, the drilling moratorium only applies to offshore deepwater, so it isn't exactly *that* critical, but there's no doubt at all that if that drilling moratorium were not in place, the price of fuel would be lower than it is today.

Further, on drilling and production. The US produces 10% of the oil that is produced in the world. But 50% of the oil drill rigs that are operating in the world are operating in the US. That's partly because of reasonable taxation, and partly because the US has historically had a cinsistent business climate, meaning that it was unlikely that the oil fields would be nationalized upon completion, which they have been in most of the world. Obamas policies have done severe damage to that strength, The drilling moratorium was a capricous act, the shell oil debacle was another. Obama has done sufficient damage to the state of contract law in the US that many drilling companies are looking to other shores. They were willing to drill in the US for 1/5 of the oil per rig because it made business sense in light of the climate to do so. That has changed.

Also... The regulation of the oil industry in the US is among the tightest in the world. "Lax regulation" is a dog that simply will not hunt.
May. 15th, 2011 02:56 am (UTC)
Hmmmm. Thanks for your input.
May. 15th, 2011 02:51 am (UTC)
I don't know but I do know that NYMEX light crude price per barrel went down significantly after news of Bin Laden's death. What does that say about the price of gas in relation to anything else?
May. 15th, 2011 02:57 am (UTC)
I have no idea.
( 4 comments — Leave a comment )



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