Politicians Tell Big Oil How to Make Billions

Robert Murphy

7/5/2008 12:01:00 AM - Robert Murphy

When it comes to vilifying big evil corporations, the accusations made about oil companies never disappoint.  The latest controversy centers on whether the government should allow more drilling for oil and natural gas on federal lands.  A widely cited report (pdf) from the congressional Committee of Natural Resources gives all manner of statistics showing that oil companies aren’t using the land they already have under lease, and so don’t deserve any more favors.  But a quick analysis shows that these claims are ludicrous.

According to the report,

Between 1999 and 2007, the number of drilling permits issued for development of public lands increased by more than 361%, yet gasoline prices have also risen dramatically[,]contradicting the argument that more drilling means lower gasoline prices. There is simply no correlation between the two.

This is a bit like challenging the notion that doctors help reduce sickness, since hospitals have 361% more doctors than the average building, and yet hospitals have many more sick people too!  Adopting the logic of the above quote, we could declare that there is simply no correlation between health and doctors.

In the case of drilling, what happened is that the skyrocketing price caused oil companies to apply for more permits on the land currently permissible for development.  Tracts that were unprofitable to explore at $30 per barrel became lucrative prospects at $100+.  That is why the number of drilling permits skyrocketed along with the price of oil and gasoline.

What is especially ironic about the leftist refusal to believe in the law of demand—that more product can only be sold at lower prices, other things equal—is that critics of the Bush Administration had no problem with the concept when it came to the Strategic Petroleum Reserve.  During that debate, even members of Congress grasped the point that putting more barrels on the market tends to lower oil prices.

Let us return to the document:

Even if increased domestic drilling activity could affect the price of gasoline, there is yet no justification to open additional federal lands…

Combined, oil and gas companies hold leases to nearly 68 million acres of federal land and waters that they are not producing oil and gas… Oil and gas companies would not buy leases to this land without believing oil and gas can be produced there, yet these same companies are not producing oil or gas from these areas already under their control.

If we extrapolate from today’s production rates on federal land and waters, we can estimate that the 68 million acres of leased but currently inactive federal land and waters could produce an additional 4.8 million barrels of oil and 44.7 billion cubic feet of natural gas each day.

And there you have it, folks.  Not only are the oil companies evil, but they’re also unbelievably stupid.  Let’s do some quick calculations to find out just how much money these Congressional titans of industry believe the oil companies are leaving on the table.  At a price per barrel of about $140, and 4.8 million bbls/day times 363 days per year (I’m allowing Big Oil Christmas and Labor Day vacations), then that is over $243 billion (with a B) in extra annual revenues that they are ignoring.

It’s true, my figure calculated above wouldn’t all be profit; it presumably would take a lot of extra wage and other payments to move that amount of oil.  Still, $243 billion in extra sales per year seems like it’s worth looking into.

Obviously, the true situation is that not every acre of federal land has the same amount of oil or natural gas beneath it.  Oil companies don’t know beforehand where the profitable finds will be, so they lease large amounts of land and then explore.  At any snapshot in time, of course there will be a sizable fraction of leased land that is not in development.  (In fact, the way those statistics are calculated, even if the oil company is building a well on leased land, at that point it is still classified as “not producing.”)

Critics of the Bush Administration’s approach to foreign policy often remind hawkish policy makers that they must understand the mind of the enemy if there is any hope in winning a war.  Rather than simply seeing mindless evil, war planners should instead try to understand the motives of those they oppose.

By the very same token, I urge leftist critics of Big Oil to put aside their hatred for a moment and actually learn how the industry works.  If policies are enacted with no understanding of the oil market, gasoline prices will rise even further, and we’ll be treated to yet another round of the blame game.