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juillet 11, 2011

11 juillet 2011

Why I Love "Big Oil"

www.huffingtonpost.ca/michel-kellygagnon, p. Web

The Disney-Pixar film Cars 2 has recently been released and my four-year-old son and I went to see it a few days ago. Like the previous installment, it is very well done.

Loosely inspired by the James Bond concession spy, Cars 2 is the story of Mater, a rusted tow truck as the unlikely hero. The plot centers on the attempts of an oil tycoon to secure greater profits by eliminating a bio-fuel alternative to traditional petroleum. John Lasseter, the movie's producer, recently gave an interview to the Wall Street Journal where he confirmed that the "über villain" in his movie was "big oil."

The idea of big oil companies as evil wrong-doers that will destroy anything standing in their way to make profits is pretty widespread and, yet, completely wrong. In fact, producing oil is not just about pumping, drilling and selling, it is one of the most amazing ventures that mankind has undertaken in contemporary history.

Let me recount how oil first became such a useful resource. After the discovery of a process by which oil became kerosene to light up homes, there was a rush to the oil fields. Some got rich, however most failed. It was only when John D. Rockefeller began to construct high quality wells, hired the most efficient and productive personnel, bought off poorly run operations and made them profitable that the industry finally took off. Moreover, he began to explore for new sources of oil, found new ways to reduce costs and discovered new by-products of petroleum like lubricating oil, paraffin wax, Vaseline, paint, varnish and most importantly, gasoline.

Because of such inventiveness and superior efficiency, Rockefeller managed to reduce his costs. But, despite his "dominant" position, he didn't indulge in "price gouging." On the contrary, prices for refined oil dropped from 30 cents per gallon in 1869 to 8 cents in 1885.

Such thrusts to innovate and create value are still needed today. Oil corporations must invest billions of dollars in exploration, new equipment, research and development. They must constantly find ways to become more efficient and more productive or face the risk of losing markets shares to their competitors. Furthermore, and contrary to clichés, they do not take an inordinate amount of profits. It has recently been estimated that the average profit margin for the five largest oil companies in the United States was of 6.65 per cent between 2006 and 2010. This is quite low compared to, for example, Apple's 22 per cent and Coca-Cola's 33 per cent.

As a result of all these innovations since the beginning of the oil industry, some say the price of retail gasoline, adjusted for inflation, has been on a downward trend in spite of numerous ups and downs. We should thus marvel at the inventiveness of this industry because without its constant thrust to innovate and become more efficient, we could not have benefitted from the amazing advantages of motor transportation.

We have cars that move us around, trucks that carry the goods we produce, tractors that harvest fields, boats that supply us with goods from all around the world.

Filmmakers understandably need a villain to create an interesting storyline. But they displayed a remarkable lack of imagination -- and perhaps a genuine misunderstanding of how the world really works -- by choosing one of the most innovative industries in the world.

Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal.

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