Kudlow’s Money Politics

The Real Deal on Oil

The Washington Times has a very good article today (’Big Oil reinvests big profits to tap costlier reserves’) illustrating how oil companies are using their big profits to reinvest heavily in oil exploration and development.

It is a very important story in light of BP’s shutdown of its pipeline in Prudhoe Bay, Alaska. This story has unleashed the tired chorus of big oil bashing attacks that greedy oil firms are making profits, but not reinvesting to expand production. Liberals like to believe that confiscating Lee Raymond’s bank account and charging Big Oil a windfall profits tax will somehow solve our energy problem.

Well, guess what? A new independent report from Ernst and Young contradicts all this nonsense.

The study reveals that while oil companies posted big profits of $336 billion between 1995 and 2005, they spent even more on new investment, to the tune of approximately $550 billion for exploration and development.

Furthermore, oil companies continued borrowing heavily and investing during the lean years, when crude plunge to $10 barrel in 1998. And they continue to invest in today’s boom times. All of this investment occurs despite huge regulatory and environmental obstacles.

Meanwhile, Cambridge Energy Research Associates found that the cost of lifting oil has risen dramatically. Since 2002, the average cost of finding, developing, and producing oil worldwide has jumped 35% to $9.13 a barrel. And the cost to produce Canadian oil sands nearly doubled to $25 a barrel now, compared to $14.50 four years ago. Moreover, skilled workers and engineers are increasingly scarce and average wage gains for oil industry employees are now running about 10 percent above last year.

The Wall Street Journal also has a similarly revealing editorial today (’The Prudhoe Principle’) that exposes the absurdity of Sen. John Kerry and other opponents of opening up drilling ANWR who argue that opening up ANWR really wouldn’t make much of a difference in our oil supply.

’Opponents of opening the Arctic National Wildlife Refuge (ANWR) to oil drilling have long argued that the supply wouldn’t make a difference to prices. Well, that claim took a spill yesterday with BP’s announcement that it is shutting down its operations at Prudhoe Bay due to a damaged pipeline that could take months to patch.

U.S. crude soared $2.25 on the news, taking oil to nearly $77 a barrel, with experts predicting another five- or 10-cent a gallon price increase at the retail gasoline pump — possibly to a new high. This market reaction came as some surprise to various newspaper scribes and politicians, given that Prudhoe Bay “only” supplies about 400,000 barrels a day, or less than 2% of daily U.S. oil consumption.

These are the same folks who’ve delighted in informing Americans in recent years that opening up nearby ANWR to drilling would “only” result in an extra one million barrels a day. This argument — that ANWR isn’t worth the effort — might have some currency if oil were plentiful and gas prices were still “only” $1.50 a gallon. But with the margin between global oil supply and demand so thin, any supply counts. ANWR is exactly the sort of home-grown oil cushion that would help smooth out supply disruptions from the likes of Katrina or the BP leak, if “only” Congress could get a clue’

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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