Joseph Kennedy Jr. at NYT: Crude Oil 'Extraction' Costs Average $11 a Barrel

It would appear that if you're an op-ed columnist at the New York Times, you can make up just about any outrageous claim and not get called on it by anyone responsible (if there is such a thing) at the Old Gray Lady.

The column in question, Joseph P. Kennedy II's "The High Cost of Gambling on Oil," goes back two weeks to April 10, but deserves a closer look for two reasons. First Kennedy, who wants to see "pure" speculation by those who are not actual industry participants completely banned (confirmed in the item's browser window title), claimed that oil "extraction" costs "average $11 a barrel worldwide." Second, Kennedy's concluding bio gives the impression that he is an energy industry mogul and not in fact the head of "a non-profit organization that primarily aids the poor in the United States and throughout the world ..." First, here is Kennedy's extraction cost claim (bolds are mine throughout this post):

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Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.

Because of speculation, today’s oil prices of about $100 a barrel have become disconnected from the costs of extraction, which average $11 a barrel worldwide.

Jospeh Hamilton at Econbrowser reacted thusly on April 18, and set the record straight regarding speculation:

Here I have a modest suggestion. If Representative Kennedy knows a way to go out and produce another barrel of oil somewhere in the world for $11 a barrel, he would do a world of good if he would actually go out and do it himself, as opposed to simply asserting confidently in the pages of the New York Times that it can be done. People with far more modest fortunes than Kennedy inherited are out there using their resources to try to bring more of the physical product out of the ground.

And many, many more would be attempting the feat if it were remotely possible to produce a new barrel of oil for anywhere close to $11.

... Let me close by pointing those interested in this issue to a recent survey of academic studies of the role of speculation by Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva. The authors conclude: "We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets."

In layman's terms, speculation isn't distorting markets.

CNNMoney's Steve Hargreaves looked at the costs of extraction (a term used interchangeably with "production," which may not be technically correct) and found that average costs were much higher -- 4-1/2 years ago. Also, unlike Kennedy, Hargreaves, employing awkward language, tagged who's really responsible for much of the extra cost added after extraction occurs:

The world's cheapest oil to extract comes from Saudi Arabia and costs $2 a barrel. But that oil, over 8 million barrels a day, is pumped mostly by the Saudi national oil company and is largely off-limits to Western oil firms.

For Western firms, it can cost as little as $5 to $7 a barrel to pump the most easily accessible oil from places like Venezuela or Azerbaijan, said Fadel Gheit, a senior energy analyst at Oppenheimer.

The costs don't stop there. On top of the $5-$7 production costs, there's also the the money it took to build the pumping facility. At several billion dollars a pop, capital costs typically add another $5 to $7 a barrel.

And that's the cost of producing oil in the cheapest regions of the world. Factor in expensive fields like the deep water Gulf of Mexico, the tar sands of Canada or water-laden output of Texas, and the average production and capital cost is somewhere in the low teens to mid $20s, said Gheit.

Still not bad, considering the selling price.

Enter government.

Gheit said taxes and royalty payments can range from 40 percent of profits in places like the United States to 90 percent or more in places like Russia or Libya.

Of course, taxes and royalties aren't a percentage of "profits." Profits are only what's left after paying all relevant costs. Estimating and updating the factors Hargreaves cites using today's numbers, governments' take on a barrel of oil costing $20 to produce and with a market price of about $100 is between $32 and $72 a barrel (40% and 90% of the $80 difference, respectively) -- and of course, we haven't even gotten to the costs of conversion to a useful form, transportation, distribution, and so many others.

No one need shed any tears for Exxon, but for perspective, we should remember that its after-tax profit as a percentage of sale worldwide have varied between 6.1% and 9.4% in the past four reported calendar years. Even if the company decided never to make another dollar of profit but to stay in business anyway (which in the real world it wouldn't), prices at the pump might be 24 to 38 cents lower (multiplying the just noted percentages times $4 a gallon).

The bio at the end of Kennedy's op-ed describes him as "a former United States representative from Massachusetts, is the founder, chairman and president of Citizens Energy Corporation." Besides the obvious failure to tag him as a Democrat, if you didn't know any better, you might think that the guy runs a public utility. Uh, not exactly:

Beginning in 1979 with oil-trading ventures in Latin America and Africa, Citizens Energy has used revenues from commercial enterprises to channel millions of dollars into charitable programs in the U.S. and abroad. Whether heating the homes of the elderly and the poor, lowering the cost of prescription drugs for millions of Americans, or starting solar heating projects in Jamaica and Venezuela, Citizens creates social ventures as innovative as the businesses that finance them.

There's not enough space in this post for evaluating the effectiveness of what Citizens has and hasn't done, or whether Kennedy earns his $596,988 Citizens Energy salary (as of 2010). The point is that it isn't a public utility, and therefore that the Times should have insisted on accurately tagging the enterprise using briefer language similar to Wikipedia's, namely: "a non-profit organization that primarily aids the poor in the United States and throughout the world by organizing projects to provide discounted and free home heating services and supplies."

Cross-posted at BizzyBlog.com.