Drill Baby Drill – Why Bother? Part II – Changing the ownership of American Oil

American oil in a word is – OURS.  We Americans give up our ownership of this valuable part of America because the federal government, custodians of American land and trustees of our collective interests, have used a system of selling these rights to private companies – the oil and gas companies.  This is not a slam against Washington or the oil and gas companies, since for years this has been quite successful.  But the world has changed, and it’s time for us to change; especially how our rights are sold and/or transferred.

 Here is how I understand the current system works; and this is subject to correction.  The federal government through The Department of Interior leases land to gas and oil companies both onshore and submersed lands on the Continental Shelf.  These are lands owned by Americans that the federal government is responsible to getting the greatest rate of return for its citizens.

 Through a series of very detailed and meticulous calculations, the Department of Interior determines the value of various lands for lease and offers them, based upon an estimated amount of oil and gas beneath the surface.  These leases are sold at auction.  Oil companies bid for these leases that include a cost for the lease and a royalty for any oil or gas produced from the leases.  And the money goes to the federal government.

 Under this system the land is still owned by the United States, but the mineral rights (i.e. the oil and gas) now belong the owner of the lease – the oil company –  and the minerals taken can be sold any where at any price the market will bear.  And while this may increase the royalties to the federal government, it does nothing for the average American since international pricing, beyond the control of the average American, controls the price paid for gasoline whether drawn from a U.S. well or a well anywhere else in the world.

 Since all commodities, including gas and oil, are now governed by international pricing Americans lose control over the resulting price for their own asset.  This system, in essence, sells American oil back to Americans at multiple times markup – a pricing system that has been dictated for years by theMiddle East.  It’s as if I owned an apple tree in my backyard and leased it to someone else to use as they wished.  When the apples are ready I cannot take what once was mine, I now have to bid for “my apples” against anyone else who wants them.

 Of course things are not always quite this simplistic.  This simple analogy may presuppose that every oil field produces a “gusher”.  Quite the contrary, some are dry wells, yet the costs do not go away.  The costs of drilling for a live well versus a dry hole are the same and the owner of the lease is responsible either way.  Millions upon millions are spent drilling with “hopes” of hitting oil and it is the oil companies that assume this risk and ultimate reward if successful or cost if unsuccessful.

 The oil companies are not the villains in this scenario.  They are not to be partners of the government; they are private companies whose purpose is to attain the greatest return for their shareholders.  This includes producing oil at the highest level of profit for their owners.  This is American capitalism and it is good since it entices risk taking with the assurance of the reward.

 In this day and age though, the risk facingAmerica, its way of life and control of its destiny is being jeopardized; not by the oil companies, but by the system.  From an American perspective, the original owners of the assets, this is not a good way to sell its assets since the greatest return to Americans is not achieved.

 Further complicating this issue is the fact that as of 2003, oil and gas companies held 54,435 onshore (land) leases, but were only exploring on 40% that is 11.5 million of the 41.5 million acres of land under lease.  Total land available is 650 million.  In 2009, this exploring percentage dropped to 28%.  Offshore (deep water) oil leases in 2003 totaled 7,606, but only 25% were under exploration.  In 2009, this exploration percentage declined to 21%.  The total available acreage owned by theUnited States, that is underwater acreage, is 700 million.  So in 2009 oil and gas companies held leases on 39.5 million acres and were exploring on only 12.8 million acres – and we have 700 million available!

 Why such low exploration numbers? With gas prices so high, why not just drill for more?  Wouldn’t one make more money?  No – because it’s simple economics.  Drilling for more develops more supply and assuming no changes in world demand, creates a lower price.  Why would one do this?  If a company can obtain more profit per barrel without assuming the cost and financial risk of producing more supply, then the strategy is set – regardless of what the masses want. 

 This is why, with oil demand lower in theUnited States, demand worldwide continues to grow and Americans lose their control over pricing via supply and demand.  This is why drilling more will not make any real difference in the price we pay for gasoline at the pump. A great strategy for the oil companies and their owners.  Not so great forAmerica.  That is, unless we maintain ownership and control of the oil while still in the ground.  Without a change in the current system, the call for “Drill Baby Drill” will do nothing but deplete our natural resources without achieving our goal of lower fuel prices.

 So what are we to do?  Should nationalize the oil industry in theU.S.?   Hardly!  This is not our way of life or a signal we want to give to our business community or the world.  The idea is to change the system; keep the oil ourselves.  It’s not like we are taking anything away from the oil companies since they don’t ever own it until we turn over ownership through these leases.  Instead we find someone (hopefully our oil companies) to get OUR oil from the ocean floor to the surface for US! 

 No more assumption of dry well costs for the producer asAmericawould assume that risk.  And lower risk should translate to lower returns – that too is simple economics and the basis of capitalism.  A different business model for the oil and gas companies and a new business model forAmerica; both needing some time to adapt.

 While it may not be an incentive for the oil companies to drill and produce as much as possible, it is forAmerica.  For cheaper gasoline prices make for a stronger economy and a stronger nation as consumers have more disposable income to spend on other items.  It’s consumer spending which is the source of any economic engine.  Controlling energy prices, especially gasoline prices, helps us control the onset and length of our economic recessions as well – you know the trigger I spoke of in the previous article.

 The danger here is producing lower gas prices that drive up domestic demand – also a feature of capitalism and supply and demand.  This is not good since burning any fossil fuel is not the best environmentally and uses up our finite resources.

 Instead keeping our consumption in check and selling the balance to the world – you know likeChinais the way to go.  In this way our exports go up and some of the many dollarsChinahas taken from us comes home.  This is where we need the oil companies and their expertise – to sell excess capacity for profit and gain. 

 Take that OPEC!  Or should I say, say hello to the new OPEC –not in theMiddle East, but in the West.

 The details of this plan?  Stay tuned for Part III of Drill Baby Drill – The Silver Bullet.

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