How much are Dems costing us at the pump?

[EvilMonkey]

http://www.americanthinker.com/blog/2008/0...mocrats_co.html

 

May 22, 2008

How much have the Democrats cost you at the pump?

Marc Sheppard

Senator Chuck Schumer claims that coercing Saudi Arabia to increase oil production by 1 million barrels a day would drop the per barrel price by $25, saving Americans 62 cent per gallon at the gas pump. Yet, somehow, that same amount of oil coming from Alaska's Arctic National Wildlife Refuge would only ease oil prices by a penny.

 

In a Senate floor speech he gave on May 13th, the New York Democrat insisted that:

 

"If Saudi Arabia were to increase its production by 1 million barrels per day that translates to a reduction of 20 percent to 25 percent in the world price of crude oil, and crude oil prices could fall by more than $25 dollar per barrel from its current level of $126 per barrel. In turn, that would lower the price of gasoline between 13 percent and 17 percent, or by more than 62 cents off the expected summer regular-grade price - offering much needed relief to struggling families. "

 

Schumer repeated these words almost verbatim when grilling oil company executives during yesterday's Senate Judiciary Committee hearings.

 

Yet Schumer's daily magic number of 1 million barrels is the exact increase experts believe we would today be pumping through the Alyeska pipeline had Bill Clinton not vetoed ANWR drilling back in 1995. And even the most rabid anti-domestic-drilling Democrats don't take issue with that figure.

 

So then, the increase he demands of "Bush's friends," the Saudis - which he claims would reduce prices by up to 25 percent -- is the exact amount he argued earlier this month would only "reduce the price of oil by a penny" were it coming from ANWR - eco-sacred breeding ground of the Porcupine Caribou.

 

It doesn't take a Ph.D in economics to know that both figures can't be right.

 

Nor one in Poli-Sci to know why they're so starkly different nonetheless.

[Texsox]

I didn't see where they accounted for the higher cost of drilling and transporting ANWR oil. It's all about volume and infrastructure. Pumping any additional product, if the cost of that oil is 1.5X the other stuff would not reduce the cost.

[EvilMonkey]

I think somewhere in there is the real amount, between his .01 cent and .62 cents. So which is it, a million barrels a day saves a penny or .62 cents? Even factoring in initial costs, it can't eat up all the difference. So which number is he exagerating?

[StrangeSox]

You also have to factor in the quality of the oil and the refining costs. The stuff from Saudi Arabia is some of the best for refining and its extremely easy to get to. You also don't have to transport it several thousand miles through a pipeline. There's an awful lot of factors that the author glosses over or is simply ignorant of. Perhaps he should go back an get that PhD in economics or oil production.

Edited May 23, 2008 by StrangeSox

[Texsox]

I think somewhere in there is the real amount, between his .01 cent and .62 cents. So which is it, a million barrels a day saves a penny or .62 cents? Even factoring in initial costs, it can't eat up all the difference. So which number is he exagerating?

 

If it costs $150 for the ANWR oil, it would be worse. I have never seen an estimate that had ANWR oil for less. It was always about reducing the dependency on foreign oil, but at an economic and environmental cost.

 

BTW-- Landshark tonight, I think it must be a Budweiser product ~~ and~~ I sent an email to your work.

[Balta1701]

You also have to factor in the quality of the oil and the refining costs. The stuff from Saudi Arabia is some of the best for refining and its extremely easy to get to. You also don't have to transport it several thousand miles through a pipeline. There's an awful lot of factors that the author glosses over or is simply ignorant of.

Actually, part of the problem is that the stuff SA has left really isn't the wonderful, Light sweet stuff that we've drunk for so long. Their extra capacity seems, from experience, to be mostly the bad, high sulfur stuff, because every time they say they'll actually increase production, that's the stuff that they release.

[Balta1701]

If it costs $150 for the ANWR oil, it would be worse. I have never seen an estimate that had ANWR oil for less. It was always about reducing the dependency on foreign oil, but at an economic and environmental cost.

 

BTW-- Landshark tonight, I think it must be a Budweiser product ~~ and~~ I sent an email to your work.

No, the oil up there would not cost nearly that much to produce and extract.

 

Here's the one issue that isn't being noted...well, actually 2...it's a market. And a monopolistic one at that. So, what's stopping OPEC from cutting their production by 100,000 barrels per day as ANWR ramps up? And secondly, what's to stop the energy demand of the rest of the world from just pushing upwards again to consume every last drop we put out?

[EvilMonkey]

If it costs $150 for the ANWR oil, it would be worse. I have never seen an estimate that had ANWR oil for less. It was always about reducing the dependency on foreign oil, but at an economic and environmental cost.

 

BTW-- Landshark tonight, I think it must be a Budweiser product ~~ and~~ I sent an email to your work.

Got the email, had sent you a reply.

[Texsox]

Got the email, had sent you a reply.

 

replied again, thanks.

 

Balta, good points. The answer always seems to come back alternatives. And that is the one beneft to higher prices, we're finally willing to make changes.

[Balta1701]

replied again, thanks.

 

Balta, good points. The answer always seems to come back alternatives. And that is the one beneft to higher prices, we're finally willing to make changes.

And that is what I keep saying.

 

The longer we sit around with a pro-production and pro-consumption energy policy, the more we're going to pay. If you'd drilled in ANWR 10 years ago, you'd just be starting to get oil out now, it would be on the order of 100k barrels a day, and all it would be doing would be pushing the price down a little bit or pushing consumption worldwide up a bit

[StrangeSox]

No, the oil up there would not cost nearly that much to produce and extract.

 

Here's the one issue that isn't being noted...well, actually 2...it's a market. And a monopolistic one at that. So, what's stopping OPEC from cutting their production by 100,000 barrels per day as ANWR ramps up? And secondly, what's to stop the energy demand of the rest of the world from just pushing upwards again to consume every last drop we put out?

 

If they cut their production based on ANWR output, then the total supply to the market remains the same as before and the price remains the same as before. Except now, they are selling 100,000 barrels less per day. It would be like Coca-Cola deciding to cut their production because Pepsi is producing more.

[EvilMonkey]

If you'd drilled in ANWR 10 years ago, you'd just be starting to get oil out now, it would be on the order of 100k barrels a day, and all it would be doing would be pushing the price down a little bit or pushing consumption worldwide up a bit

The stories I read, and the one referenced above say 1 million per day, not 100,000 per day.

[StrangeSox]

The stories I read, and the one referenced above say 1 million per day, not 100,000 per day.

 

At any amount, I was just saying that the economics of OPEC cutting production because someone else comes into the game don't seem to make much sense. They'd just be voluntarily giving up some of the market.

[Texsox]

At any amount, I was just saying that the economics of OPEC cutting production because someone else comes into the game don't seem to make much sense. They'd just be voluntarily giving up some of the market.

They have a finite amount of oil in the ground and will eventually sell all they pump. Market share is not an issue, plus they work in agreement with other OPEC nations to determine who pumps how much.

 

In other words, if you had 100 diamonds available to sell, would you flood the market, driving down prices and sell all 100 to gain market share? Or get together with other diamond sellers and tightly control who sells when to maximize the profits on those 100 diamonds?

[StrangeSox]

Found this:

http://pubs.usgs.gov/fs/fs-0028-01/fs-0028-01.htm

Figure 6. Summary of the USGS estimates of economically recoverable oil that may occur beneath the Federal part of the Arctic National Wildlife Refuge 1002 Area. The three curves are based on estimates of technically recoverable oil volumes at the mean (expected) value, and at the 95 percent (F95) and 5 percent (F05) probabilities. Each curve relates market price/cost to the volume of oil estimated to be profitably recoverable. Included are the costs of finding, developing, producing, and transporting oil to lower 48 West Coast market based on a 12 percent after-tax return on investment all calculated in constant 1996 dollars. The chart is read as follows: At a market price of $24 per barrel, there is a 95 percent probability of at least 2.0 BB of economically recoverable oil and a 5-percent probability of at least 9.4 BB. The mean or expected value is at least 5.2 BB of economically recoverable oil at $24 per barrel.

 

So the recoverable cost of ANWR oil is $24/ barrel in 1998 dollars, which is ~$31/ barrel today. Anyone know the cost of Saudi oil?

[Texsox]

What was the price of Saudi Oil in the same time frame? About half the ANWR projection.

 

[StrangeSox]

What was the price of Saudi Oil in the same time frame? About half the ANWR projection.

 

 

Is that the production cost or the market price? It isn't costing the Saudis $135 to produce a barrel of oil today.

[jackie hayes]

Found this:

http://pubs.usgs.gov/fs/fs-0028-01/fs-0028-01.htm

 

 

So the recoverable cost of ANWR oil is $24/ barrel in 1998 dollars, which is ~$31/ barrel today. Anyone know the cost of Saudi oil?

Sort of... What the report is saying is that at a price of $24/barrel, it will be profitable to recover X barrels (5.2 bil, in the average scenario) total from ANWR. Because you're taking out the easy oil first, extraction becomes more costly as you take more out (marginal cost increases). So it's not a constant cost of $24/barrel. $24/barrel is the marginal cost, the cost to extract one more barrel, after 5.2 bb have already been extracted (in the mean scenario, at least).

 

Anyway, the takehome lesson from looking at the graph is that basically everything will be extracted at current prices. The Saudis almost certainly have lower costs, but the current price is so far above extraction costs that the difference doesn't matter much to the reasoning.

[StrangeSox]

Sort of... What the report is saying is that at a price of $24/barrel, it will be profitable to recover X barrels (5.2 bil, in the average scenario) total from ANWR. Because you're taking out the easy oil first, extraction becomes more costly as you take more out (marginal cost increases). So it's not a constant cost of $24/barrel. $24/barrel is the marginal cost, the cost to extract one more barrel, after 5.2 bb have already been extracted (in the mean scenario, at least).

 

Anyway, the takehome lesson from looking at the graph is that basically everything will be extracted at current prices. The Saudis almost certainly have lower costs, but the current price is so far above extraction costs that the difference doesn't matter much to the reasoning.

 

It does matter as to the price impact of 1 bbl of ANWR oil or 1 bbl of Saudi oil.

[jackie hayes]

It does matter as to the price impact of 1 bbl of ANWR oil or 1 bbl of Saudi oil.

I don't see how. Explain?

[Balta1701]

The stories I read, and the one referenced above say 1 million per day, not 100,000 per day.

The reason I put in only a couple hundred thousand barrels per day is that even if we'd started drilling when President Bush took office, we probably still would not be at the 1 million BPD level for several more years. The 1 million BPD level is hit somewhere in the area of 7-10 years after drilling commences in the area, according to standard production estimates. If we started drilling there today, it'd be 2015-2020 before we reached those levels.

 

Via the EIA:

[southsider2k5]

The reason I put in only a couple hundred thousand barrels per day is that even if we'd started drilling when President Bush took office, we probably still would not be at the 1 million BPD level for several more years. The 1 million BPD level is hit somewhere in the area of 7-10 years after drilling commences in the area, according to standard production estimates. If we started drilling there today, it'd be 2015-2020 before we reached those levels.

 

Via the EIA:

 

the whole premise of the article is this...

 

had Bill Clinton not vetoed ANWR drilling back in 1995.

 

Its very fair to look at full production numbers.

[Balta1701]

I don't see how. Explain?

If you increase production of Saudi oil by 1 m bpd or you increase domestic production by 1 m bpd, then in theory the results on the price should be the same. But that makes lots of assumptions, like assuming there won't be a corresponding increase in demand or that the monopoly in the system won't cut production to keep the price high.

[jackie hayes]

If you increase production of Saudi oil by 1 m bpd or you increase domestic production by 1 m bpd, then in theory the results on the price should be the same. But that makes lots of assumptions, like assuming there won't be a corresponding increase in demand or that the monopoly in the system won't cut production to keep the price high.

Right, that's how I'm thinking about it. I don't see any way for the cost to enter into the discussion, at least when the price is so far above cost.

 

As for the other assumptions, I see no way adding a supplier will change demand itself, although it may obviously change the amount demanded. The second possibility looks downright likely to me -- maybe they would not cut production to fully offset the new source, but given the growth in world oil demand, I don't see why they wouldn't partially offset it.

[southsider2k5]

If you increase production of Saudi oil by 1 m bpd or you increase domestic production by 1 m bpd, then in theory the results on the price should be the same. But that makes lots of assumptions, like assuming there won't be a corresponding increase in demand or that the monopoly in the system won't cut production to keep the price high.

 

Which sounds really good in hindsight, but ignores the history of price targets that OPEC used to have. Hell their targets were in the range of where we are trading, minus $100. It makes much more sense that if prices had never gotten up that high in the first place, they would have stayed perfectly happy with crude oil in the range of the price targets, or a little higher.