What if Private Companies Didn’t Keep All of the Profit from Taking Our Resources?

It isn’t news that cheap, easy to access oil is becoming harder to find, and that most new oil reserves will be more expensive and difficult to access (the oil sands for example). Left to the market, the price we pay for something is set by supply and demand. So to put it another way, our demand for oil has increased to the point that it has become profitable to extract oil from expensive and difficult to reach spots.

So, to use an example, if it costs $50 a barrel to extract oil from the tar sands, the oil companies will not extract oil from the tar sands until oil reaches more than $50 a barrel. So if we are charged $60 a barrel they can make $10 a barrel profit and be happy. The thing is, most of the oil is still being extracted where it is easy to access and costs maybe $20 a barrel to extract. From these places the oil company makes $40 a barrel profit. As consumers, we always have to pay the price of the most expensive oil extraction. This results in the skyrocketing profits of the oil companies.

If all oil was easily accessible, it would cost them $20 a barrel to extract it. Demand might have pushed the price up over $30 a barrel but then someone would have extracted more oil to create more supply and the price would drop back to $30. For most oil fields this would still be the case except that if the price was lower than $60 a barrel no one would extract oil from where it was expensive to extract. This would cause the price to rise because of the scarcity of easy to access oil, until demand made it economical to extract it from the expensive place once again. None of this changes the cost of extracting it from the inexpensive locations however, and so the profits from these locations is phenomenal.

If you think about it, this is always the case with supply and demand. It is most acute in the case of natural resources like oil, mines and forests where the difficulty in obtaining the resource is the direct cost. It may not always be as extreme as the case of oil, but there are always more expensive places and less expensive places of getting these resources and as consumers we always pay the most expensive price.

What if, instead of running resource industries with the goal of making a profit for shareholders, these industries were owned and run by national or international bodies who ran them to give the most benefit to consumers. If that were the case, oil would not cost $60 a barrel just because that is what the most expensive extraction process cost. The price would be an average of the cost of extracting at all locations. So if half was easy to access and half was difficult the cost to consumers of a barrel of oil would be $20+ $50= $70/2= $35 a barrel instead of the $60 we are paying now.

This price would be $45 a barrel if the national body wished to make $10 profit per barrel like the oil company does (at its most expensive locations). This is dramatically cheaper than $60 a barrel even with a profit, and this profit would go to help the people of the country like tax dollars do. We could even continue to charge the $60 a barrel and use the excess money to greatly reduce our income tax rates.

It is interesting that most of the oil producing nations of the world do manage to capture the bulk of this excess profit by having state owned oil companies. Canada is one of the few countries to hand over virtually all of our inherited wealth to private multinational corporations. Putting aside the fact that Canada has no overall energy strategy, and that the science is quite clear that civilization will have great difficulty surviving to the end of this century if we continue to burn oil at anywhere near the current rate, it seems rather sad that we are giving away most of the money being made as the world wraps up the carbon economy phase of our history.