Although it would be assumed Japan’s economy would suffer whenever oil prices spike, the opposite seems to be occuring. According to Asia Times Online, Japan, despite being resource poor and having to import a majority of it’s oil, profits from price of oil increases.

Part of that benefit comes from it’s automotive exports from companies like Toyota, which saw it’s sales of cars increase once again in the US. As US fuel efficiency awareness increase, Toyota’s sales increase. Especially in their sales of hybrid vehicles such as the Toyota Prius. “Of the approximately 5.47 million autos Japanese makers sold in the US in 2005, roughly a third were shipped from Japan.”

---

More Hybrid Car information can be found at http://hybridreview.blogspot.com
Follow me on Twitter

This is quite timely coming on the heels of my previous essay. I talked about the press picking up and running with the comments of Oil Watchdog’s Judy Dugan as if she were actually a credible source of information. Here’s a perfect example:

Consumers boil over oil profits

For years, oil companies have been cast as villains. That perception didn’t change Friday when the two largest U.S. oil companies reported record profits — again.

Let me first say that I certainly understand why consumers are upset. I remember when I was younger and commuting a long distance, every increase in gas prices really hurt. If oil companies were reporting record profits at the same time I was paying record amounts for gasoline, I would have been angry as well.

Last year, Exxon Mobil reaped more money than any U.S. corporation has ever made, while consumers were sliding into a recession, said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights in Santa Monica. At the same time, oil companies have lobbied against any control of the market that has pushed crude oil to $90 and up, she said.

“Their product is so important to our economy that energy costs alone are driving inflation and raising consumer debt,” Dugan said.

I am really curious as to how Dugan thinks the market can be controlled. When OPEC controls 40% of it, and the ExxonMobil’s of the world control less than 10%, it is really hard to grasp how Dugan thinks the oil companies are controlling this market. What does she think governments should do? But, it has become obvious to me that you don’t have to grasp the issues in order to be a self-proclaimed watchdog.

Dennis Clancy of Thousand Oaks has been unhappy with oil companies. “I’ve always had a problem with gas prices over $3,” he said while filling up at a Shell station in Camarillo. “It shouldn’t cost over $50 to fill up a midsize car.”

He wants to see more proof about how the oil companies’ profits are utilized, as well as less dependency on foreign oil.

Do you really want to see less dependency on foreign oil? Then embrace higher prices, which will get Americans to drive less and buy more fuel efficient cars. Downsize that midsize car. Don’t put yourself in the position where you demand a lot of gasoline, and then get made at the oil companies when the price goes up. Take matters into your own hands and reduce your own dependence, if you expect the country as a whole to reduce dependence.

Oil companies blame energy markets for high crude prices, but they profit immensely from these markets and oppose controlling them, Dugan said.

“The government has to get some control over these unregulated electronic energy trading markets,” she said.

Oil companies are spending billions of dollars buying back their own stock instead of investing in renewable energy or their own refineries, which, Dugan says, is the very definition of greed without regard for corporate responsibility.

More hysterics and fabrications from Dugan. Are oil companies buying back stock? Sure, I would be as well if I felt my stock was undervalued. But that doesn’t mean they aren’t investing back into their business. Oil companies have spent far more money expanding refineries and upgrading to meet ever tighter environmental regulations (like ultra-low sulfur product specs). Dugan’s comments are the very definition of reporting without regard for journalistic integrity.

“I’m still almost speechless at the amount of profit they made,” Dugan said. “Americans should be furious.”

We can all wish. Fortunately, there was some sanity injected near the end of the article:

The oil companies have always been “the bad guy,” but perhaps they don’t deserve the label, said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. “People don’t understand the world has changed for oil companies,” he said.

It’s becoming more expensive and difficult to find oil fields, and oil companies are trying to explore in nations where real danger or politics are involved, Kyser said. Consumers feel the pain at the pump and don’t think about the kind of infrastructure that oil companies have to build to access the oil, or the political risks.

“In a way, they’re becoming a declining industry,” Kyser said, adding that seems contrary to the companies’ financial growth. But, he said, he believes that their position as the world’s major players has changed. “It’s a whole different ball game. They don’t have the clout they used to have,” Kyser said. “They can’t go into a country and sign contracts and expect stability anymore.”

While oil companies have been accused of price gouging, Kyser said, he believes they’re simply trying to protect themselves for tough times ahead. “Everyone acts like it’s blue skies for them, but if you look over the history of the industry, they’ve had some very lean times,” he said.

This is more or less the way I see it as well. The risks have gone up dramatically for oil companies, as those operating in Venezuela found out last year. If oil prices were to unexpectedly crash, I suspect the climate would become friendlier as governments wouldn’t want to assume the risks for projects.

That’s why Venezuela invited oil companies in to start with: Prices were low, the risks were high, and the projects were expensive. So, oil companies were invited in, and contracts were signed. Then, as soon as prices shot up, Venezuela cancelled contracts and seized control. This is the world oil companies must operate in now; it’s very high risk. The Judy Dugan’s of the world would like to see oil companies take the risks, but not be rewarded when markets bid up the price of oil.

It seems I have been wrong about Hugo Chavez. I had thought the man didn’t have a clue about the oil business. While companies like ConocoPhillips were pulling in $15.5 billion profits*, they were investing $15.3 billion back into the business. Chavez, on the other hand, was siphoning off the profits of the national oil company of Venezuela, PDVSA, and spreading them among the public in support of his socialist platform. (Shame on those who complain about food shortages). Some, like me, probably thought “A few years of this, and he won’t have any oil profits to spread among the public.” How little I understood of his master plan.

You see, at first glance it does seem like his strategy is backfiring, as PDVSA is reportedly “facing growing operational problems” because of its failure to focus on its core business. It seemed like Chavez was running the business into the ground, as if Oil Watchdog had suddenly started to run the show. But that was before I read a story yesterday that revealed the man’s brilliant strategy:

Citgo cuts hundreds of Louisiana contractors-sources

HOUSTON, Jan 17 (Reuters) – Citgo Petroleum Corp cut more than 500 contract maintenance workers in late December at its Louisiana refinery as part of a program to increase returns to corporate parent Venezuelan state oil company PDVSA, according to sources familiar with the company’s refinery operations.

PDVSA is a key revenue generator financing Venezuelan President Hugo Chavez’s social development programs, but has drawn criticism for ignoring operational problems that have reduced oil and refined product output in Venezuela.

“Citgo wants to send 100 percent of what it makes to Venezuela,” said a source. “They’re only spending what’s needed to meet legal and regulatory obligations.”

It’s sheer genius. The profits from the oil company operations can be used to pay for social programs, and then the savings from job cuts in the refinery can be used to fund the oil company operations. Oh sure, there are naysayers, even internally:

Without the contractors, preventative maintenance at the refinery may fall off, the sources said.

“I don’t see how effective a maintenance program can be if you’re just chasing urgent jobs,” said a source.

PDVSA sources have told Reuters of similar problems at the company’s Venezuela-based refineries, lamenting the fact the company is carrying out “corrective maintenance” rather than “preventative maintenance.”

I say to these people “Don’t be so pessimistic!” After all, it is “preventative maintenance.” It’s like wearing your seat belt or motorcycle helmet: No accident, no problem. Besides, things don’t go wrong at refineries.

No, I was wrong about Chavez. He is clearly a misunderstood genius in the spirit of Vincent van Gogh. Stand back and let the man create a masterpiece.

Note: I do own ConocoPhillips stock, and I still don’t care for Hugo Chavez. It’s going to take more than a few maintenance cuts to impress me. After all, does he really need all of those operators and engineers scurrying about?

I have a few essays in the queue (including a nifty biodiesel story), but I thought I would comment on an article in today’s Deseret News out of Salt Lake City. The article was entitled “Will U.S. Slap Tax on Big Oil Profits?”. (1) A few excerpts from the article, followed by my comments:

Republican Sen. Arlen Specter said Sunday that the U.S. Congress should consider taxing the “windfall profits” reaped by oil companies as a result of surging crude oil prices.

I understand the frustration with high gas prices even as oil companies rake in record profits. But what is Specter trying to accomplish? Does the good senator believe this will magically bring the price of oil down? Will it cause OPEC to open the taps, flooding more oil into the market? Or is the real purpose to punish oil companies for making money, so he can boast about it during his reelection bid? Would he stipulate that the money be allocated to somehow reducing our demand for oil, which is the real issue?

Specter, of Pennsylvania, earlier this month introduced legislation to strengthen antitrust enforcement of the oil and natural gas industry to counter the consolidation of production and refining operations. Sen. Byron Dorgan, D-N.D., is proposing a 50 percent excise tax on profits from oil sold at more than $40 a barrel.

Let’s think about that for a moment. A lot of oil is expensive to extract, and only becomes economically viable as oil prices climb higher and higher. As oil prices climb, the incentive to pump more oil increases. If more oil can actually be pumped, it should eventually result in an oversupply situation, and prices will come back down. (This is why the oil industry is cyclical). If more oil can’t be pumped, then prices won’t come down.

However, neither situation is helped by slapping a tax on oil over $40 a barrel. In fact, such moves decrease the reward for marginal producers, which may lead them to shut in production. Since foreign producers won’t be paying that tax, what do you think is going to happen? U.S. production will decrease further, imports will increase, and oil prices will remain high. If high oil prices are the objective, then this is a way to accomplish that objective.

“Windfall profits, eliminating the antitrust exemption, considering the excessive concentration of power are all items we ought to be addressing,” Specter said Sunday on CNN’s “Late Edition” program. “Anybody up for election this year ought to be working very hard, taking it very seriously.”

Oh, I bet they are. That’s why they ignore the real reasons for rising oil prices, and aren’t doing anything to address those issues. They are posturing and pandering, trying to make sure they get themselves reelected. The founding fathers would be rolling over in their graves if they saw the level of mediocrity that permeates our government today. Nobody has the guts to stand up and tell the truth.

Sen. Carl Levin, D-Mich., said President Bush should call oil company executives to the White House and tell them he’ll support a new tax on their profits unless they lower prices.

“I’ll bet that the price of gasoline would come down within a matter of days,” Levin said on the CNN program. “We need a windfall profits tax because these profits have been absolutely obscene.”

Wow! Is Levin this uninformed? Does he think oil company executives set the price of oil? Does he not understand that oil is a global commodity, and if China or India are willing to pay more for oil than we are, then that is going to drive the prices up? That’s sort of like asking a company to lower the value of their stock, because you want to buy some, but think it’s too expensive. It’s the price it is because that’s what buyers and sellers in the open market have agreed upon for a value. Oil company executives do not set the price of oil. This only happens in politician’s dreams.

Bush, in California over the weekend to promote his initiative on alternative fuels, said a lack of refining capacity in the United States and the thirst for oil in emerging economies such as China and India are contributing to increased energy costs. He said he recognized the price of gasoline is hurting consumers and warned that the price is likely to go higher.

Like him or hate him, Bush is correct about this. I bet even the good senators would agree with this. So, let’s pose a question. A lack of refining capacity is a problem that is putting a lot of pressure on gasoline prices. Expanding refineries takes lots of capital. If we extract more money from the oil companies in the form of punitive taxes, are they likely to spend more money or less money on capital projects? Now, is this likely to make the refining bottleneck better, or worse? Again, if your goal is to have gas shortages and drive the prices even higher, then they are on the right track. Like I have said before, we tried this already and it didn’t work. (2) From a 1990 Congressional Research Service report:

“The windfall profits tax reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil.”

This report should be required reading for legislators who think a windfall profits tax is a good idea.

Specter has focused his attention on oil industry consolidation and competition. “We have allowed too many companies to get together to reduce competition,” he said.

There were more than 2,600 mergers in the oil industry in the 1990s, according to James Wells, director of natural resources and the environment for the Government Accountability Office. A study by the GAO, Congress’ research arm, found that concentration of market power may have added as much as 7 cents to the price of fuel, he said.

As much as 7 cents? I think Senator Specter has identified the culprit. Gasoline prices are “as much as” 7 cents higher than they would be had they stopped those mergers. This is clearly the source of spiraling gas prices. If it was “as much as” 7 cents, I wonder what the lower estimate was. It really sounds like Specter is on a wild goose chase.

While politicians pander, I am still waiting for someone in government to have the guts to suggest that a potential solution to this problem is to encourage Americans, somehow, to conserve. I am waiting for someone to explain that cheap oil is not an American birthright, and as long as China and India compete for the same oil, there will be no more “cheap” oil. Of course more expensive oil will enforce conservation eventually. Maybe the politicians are much smarter than I think, and this is part of the plan. If we adopt the policies they are advocating, oil prices will spiral out of control, gas will no longer be affordable, and we will finally start conserving. Maybe there is a method to their apparent madness.

References

1. “Will U.S. Slap Tax on Big Oil Profits?”, Deseret News, April 24, 2006.

2. Glassman, James K., “Windfall Profits” Tax on Oil Companies, Capitalism Magazine, September 26, 2005.