Wherein Denis Hayes Rescues Us Again

Despite the near daily hum telling us that we’re in big trouble, sometimes we read something that makes us think: wow, we’re in big trouble. An Ernst & Young report released yesterday profiling 40 benchmark oil exploration and production companies in the U.S. found oil production has remained flat at 1.2 billion barrels per year since 2004, after declining from 1.3 billion barrels per year in 2003. The benchmark companies represent 74 percent of U.S. oil reserves, which have also remained flat since 2006 at 16.1 billion barrels. Actually, to break that down a little more, proven reserves from independent oil companies were actually up seven percent over the last year. Proven reserves from the integrated companies - Exxon, Chevron, etc. - were down two percent over the same period. But maybe things aren’t as bad as they seem. Surely the oil companies must have cut production to reflect some other market variable, like bottlenecking through our nation’s inadequate refining capacity. How else do you explain those margins?

Actually, the oil companies are pretty much screwed. Exploration costs - the amount companies spend to find oil - increased 165 percent between 2003 and 2007 to $12.8 billion. Development costs - the amount companies spend to take petroleum out of the ground - grew by 180 percent to $18.4 billion over the same period. Growing demand pushed up revenue 12 percent to $141.5 billion on the year, despite the fact that the price per barrel actually declined slightly from January 1, 2006 to January 1, 2007. Significantly, however, net revenue increased only four percent “due to rising production costs and increases in depletion, depreciation, and amortization.” The cost of finding and extracting oil is growing at an obscene rate, while revenues have been propped up by high demand. As prices rise to reflect market tightness, we can expect income to continue falling as exploration and production costs continue their meteoric rise. Falling demand, at least in the U.S., can’t be far behind.

Someplace, somewhere Denis Hayes is smiling. Actually, it’s right over here. As Hayes takes the latest cap-and-trade bill to die a miserable death in the Senate to task, he also outlines an effective policy proposal that may find some support among U.S. oil exploration and production companies. Hayes argues “the backbone of any comprehensive policy to limit greenhouse gas emissions must cap carbon at the places - coal mines, oil fields, pipelines, ports - where it enters the economy.” The proposals in Lieberman-Warner, as with those about to come into force as part of RGGI and currently in force in the European Union, place a cap on carbon at the points where it enters the atmosphere. Regulating the latter would proved to be nearly impossible. In 2006 there were 336,000 factories in the United States, more than 10,000 coal, natural gas, and petroleum generators, and roughly 150 oil refineries. By comparison, Hayes estimates there are 2,000 points in the U.S. where carbon dioxide enters the economy.

Given that oil production has remained flat since 2004, and is likely declining based on historical trends, it may actually be to the benefit of oil companies to hop on board with Hayes’s proposal. With the number of point sources for carbon dioxide entering the economy likely to fall, oil producers would feel the pinch less in the long-term than if the suddenly saw a policy-influenced demand drop as factories are forced to switch to cleaner power sources or it automakers are forced to internalize the carbon cost of the cars they produce. Furthermore, capping carbon dioxide at its emissions source would serve to regulate the amount of oil or natural gas or coal allowed to enter the economy. This would let these companies internally regulate their production to match their carbon allowances, extending out their shrinking supply while charging a much higher price. Not only would this save on further exploration costs - there’s no need to develop heavy oil or bituminous sands if you know last year’s exploration can stay in the ground for another year or two - but it may even help prop up that flagging net income rate.