It is amazing how much misleading information there is about the oil industry in the United States, in no small part due to shows like Doug Wright's on KSL, which perpetuate the myths.
To set the record straight, here are few of the myths followed by the correct information.
Myth: The oil companies are making obscene profits.
Fact: The oil companies' profit margins are poor. They make about what a government contractor on a cost plus fixed fee (no risk) contract makes: 9-10 percent. As an example, Exxon Mobil's profit margin is 10 percent, Chevron's 8.1 percent and BP's 7.6 percent. These are the three largest U.S. producers.
In comparison, Microsoft makes 27.5 percent, Apple 14.6 percent, News Corp. 12 percent, Zions Bank 12.6 percent, Merck 18 percent and Intel 18.2 percent. The oil companies' profits are large only because they are large. They are not particularly profitable. The oil companies' profits are not yet sufficient to convince them to replace the aging refinery infrastructure of this country. Because of environmental restrictions, it takes more than seven years to site a new refinery. Both Exxon Mobil and Chevron conduct very little new exploration in the U.S. because of worries about environmental liability and the major delays caused by the green lobby.
From 1986-99 the price of oil, adjusted for inflation, was the lowest it had been since World War II. More than 600,000 people in the industry lost their jobs. Because of low margins, almost no upgrades or replacements were made to the refining infrastructure and very little on-shore exploration. Even at $100 per barrel, the price of oil adjusted for inflation is not as high as 1981.
Myth: The oil companies control the price of oil and gasoline.
Fact: All of the public oil companies in the U.S. have combined worldwide oil reserves of 34 billion barrels of oil or 3.4 percent of the world's supply. Saudi Arabia alone has more than 25 percent and Venezuela 15 percent. The U.S. could become de facto energy independent except that most of our remaining large reserves in Alaska, off the coast of California and off the coast of Florida (an estimated 60 billion barrels of oil) are locked up by the green lobby. The price of oil and gasoline is controlled by the New York Commodities Exchange and includes buyers and sellers from all over the world.
Myth: The oil companies are delaying oil shale development.
Fact: Even at current prices, oil shale development is problematic. The major problem is the environmental lobby, which would fight oil shale development in Utah, Wyoming and Colorado with all the funding it could get. Before any large project can proceed, millions of dollars must be spent on an environmental assessment of the biology, archaeology, air quality, etc., and then there is no guarantee that the environmental lobby would not kill the deal as it has in Alaska, Utah and elsewhere.Exxon lost $2 billion on its Colorado oil shale plant in the early 1980s when the price of oil collapsed, and that was before all of the environmental regulations passed by the Clinton administration. Any meaningful oil shale development would cost $10 billion to $20 billion and take 10 years. In the meantime the price of oil could collapse, particularly if we get a major worldwide recession.
Don J. Colton is the president of Pioneer Oil and Gas.