Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, July 31, 2008

Off Shore Drilling and Other Accounting Gimmicks

Most of the people who check in on this blog are probably aware of two facts: Increasing US oil production will not even register a blip on the world price of oil. I've heard but can't remember the source that our total production makes up about 3% of the global total (can one of the other citizens find a source? I looked and can't find one). If we were to start drilling all around the coast, everywhere we think there is any oil at all, it would only increase our total production by a small percentage (say 5% to 10%). Assuming for the moment these numbers are roughly accurate, that doing all the off shore drilling we could would only increase world production by about 0.15% to 0.3%. If you think that will drop the price of gasoline, you need to stop drinking it and start putting in your car where it belongs.

Also, the big oil companies already have about 70 million acres of leased coastline already open to drilling that they aren't drilling in now, even with prices at record levels. So if opening up more land won't dramatically increase world production and the oil companies don't want to drill in the land they already have available, why did they pay John McCain $1 Million to push it in his campaign?

I think the answer lies with how oil companies do their books. They frequently use something called "fair value accounting" a new and controversial way of assessing the value of your assets. In this method, they don't need to drill on these coastlines to get the benefit to their bottom lines. What's more they can report the value of these drilling rights based on their own best estimates of their values. The rules guiding these estimates are pretty fuzzy (thus the controversy among accountants). They can inflate their companies' net worth by citing their drilling rights on new stretches of coastline even if they have no intention of actually drilling there in the foreseeable future.

John McCain's offshore drilling plan will do absolutely nothing except artificially increase the stock prices of companies like Exxon.

The depth of this fraud is mind blowing. And most people buy it. All of us who are smart enough to see through this scheme need to explain this to the people who are really suffering from these high gas prices.


sanrioscenario said...

Listen, anybody who's against offshore drilling clearly hasn't thought of the countless problems that it would solve. For example,
Problem: pollutants increase nationwide. Your kid has asthma attacks on a daily basis. On "bad air days" he can’t go outside.
Solution: You're going to need some cheap fuel to drive him back and forth to the hospital. Try drilling in the Alaskan Wildlife Refuge. Also, you should gut the clean air regulations. Actually, you have enough to worry about. Let us do it for you.
See more reasons why offshore drilling will save the world:

Dr. Strangelove said...

Despite its source (the American Enterprise Institute), this article has an interesting and informative critique on "fair value" or "mark-to-market" accounting practices. Originally pushed on corporations by angry investors' rights groups and industry regulators to try to provide for more transparent accounting, it ended up doing just the opposite when it comes to placing a value on an asset (like unexploited coastal oil rights) for which there is little or no market activity.

Question: what is wrong with offshore drilling, or drilling in ANWR? As I understand it, the issue is risk to the environment, rather than direct environmental impacts. If that is correct, it seems to me that if we retrofitted older drilling platforms with safer technology, we could add more platforms without increasing overall risk. (Basically, reducing risk 10% overall means we can add about 10% more drilling rigs. That calculation is not quite right in detail, but you get the idea.)

Boomers2 said...

I do get the idea and thanks for pointing it out. Another thing I didn't know.

The Law Talking Guy said...

That's very interesting about the accounting. I took a more cynical view. The last thing oil companies want is a reduction in consumption, such as would happen with renewing the renewable energy tax credits that Republicans including McCain have bottled up in the Senate. That would hurt prices. What they want is the ability to keep the price where it is for the long term. So they come up with a gimmick that will do nothing to affect oil prices for 5-10 years, and even then will probably just retard the rate of growth a little. Meanwhile, Big )Oil and its bought-and-paid-for candidate McCain pretend that there is all this oil ready to gush into our gas tanks and dramatically reduce prices if only Congress would act now. For shame.

History Buff said...

I heard today on NPR that world oil prices are dropping because the oil companies have realized that the consumer demand for high priced oil is dropping, seems they are starting to price themselves out of the market.

Raised By Republicans said...

"I heard today on NPR that world oil prices are dropping because the oil companies have realized that the consumer demand for high priced oil is dropping, seems they are starting to price themselves out of the market."

So we should expect Big Oil to back off the offshore drilling push then? If I'm right that this is about stock prices more than the global price of oil, then they won't.

If History Buff is implying that this will all just blow over, then I think he will be proven to be mistaken.

The Law Talking Guy said...

Oil prices aren't really dropping. Sure, they were around $140 about a month ago and are around $125 today, but that's really about stabilizing at a new higher level, because the runup to $140 and beyond was based on expectations of increased sumemr use in the northern hemisphere and that has not quite materialized with slowing world economy and conservation activities. Just supply and demand. Increasing supply 5-10 years from now won't affect prices today - dropping demand today definitely will, and is. That's why it's better that Nancy Pelosi turned the lights out in the house today (saving energy) than allowed a vote on the GOP's offshore oil drilling boondoggle.

And, of course, this doesn't account for environmental cost (and the desruction of vistas/loss of tourism cost) of the Republicans foolhardy proposal.

USWest said...

I posted earlier, and it didn't turn up. So I will try again.

IN all of this, no has mentioned that supply may not be the problem. Refining capacity is the problem. Our refineries are all located along the Gulf Coast, which is hit every year by stronger and stronger hurricanes . . .hurricanes that are getting stronger as climate change progresses. And refineries have be be shut down for maintenance. This creates additional volatility in the market.

ANWR: DR. S. The enivironment is the reason not to drill in ANWAR, that and we don't know how much oil is really there. The infrastructure needed to get the oil in and out, roads in particular, would further harm a delicate environment. Just because tourists aren't interested in visiting ANWR doesn't mean it lacks value. The snow cap is melting. And the snow at the poles is critical to combating the warming around the globe. Haven' you seen Inconvenient Truth?

We now live in times when the Environment should be the reason for NOT destroying the earth in our ever greater desire for fossil Fuels.

As for Fair Value Accounting, isn't this the same crap that WorldCom and ENRON pulled? Wasn't this basically writing down yet to be realized profits? Why is so much of our reality based on fantasy?

Dr. Strangelove said...

USWest: you are saying direct environmental damage (e.g. roads, wear and tear) resulting from drilling is a serious concern with ANWR. Fair enough. Is this also true for offshore drilling? Or is the problem there largely just the risk of spillage? (I don't mean to minimize the dangers of spillage--I am just trying to understand what exactly it is about drilling that should concern us.)

Raised By Republicans said...

Yes, US West, this accounting approach is what got ENRON into trouble. ENRON was following common practice in the energy industry where fair value accounting is most wide spread.

I'm not sure about World Com but it wouldn't surprise me if they used fair value practices too. I'm pretty sure that Parmalat (the company that had an ENRON-like collapse of Italy) used it.

USwest said...

I know it was used. Many companies, especially in the boom did this. I was working for a business research firm at the time. And many companies, like cable cos would use this approach for valuing potential customers. That is why you had, after the ENRON scandal, several restatements of profit by several companies. This type of account, I thought, had been rendered illegal under the new accounting laws that had been passed. But RBR, you have sources that can either correct me or corroborate this beings that you have accountants in your family.

Off shore drilling has a couple of problems. The drilling itself isn't the big problem, it's the infrastructure needed to deal with what the drilling turns up. There is the danger of leaks. That one is for sure. When there are big storms in the gulf, oil is often spilled.

Where there is oil, you need big boats to transport the oil to shore for refining. Therefore you either have to build the ports, or use existing ports that are already too busy. This poses even great threat to spillage. And then there is threat to tourism. People don't want to see the ugly things, although admittedly, the ones off the coast of Santa Barbara aren't that bad and don't seem to be hurting their tourism. There is a pretty decent pro-con article on this in USA today.

Raised By Republicans said...

Well, what the new accounting laws did was change who was legal responsible for "errors" in the books. They also changed the rules about boundaries between consultants and auditors.

But the fair value accounting approach is alive and well. What's more there are stirrings around the world of creating something like a global standard for accounting regulations. The US and EU are particularly influential in this for obvious reasons. There are a number of entrenched interests in both Europe and the US that like fair value accounting and are pushing for it to be at least allowed if not actually prefered in the emerging global standard.

History Buff said...

I wasn't implying anything in particular about the drop in oil prices, I just thought it was funny that the oil companies used a drop in consumer demand as the reason for the drop in oil prices. Personally, I think oil should be expensive, it makes people more conservative when using it.

The Law Talking Guy said...

HB, That's why my solution to the new crazy 2nd amendment is as follows: You can have all the guns you want, but bullets are $10 each.