Over a Barrel: The Truth About Oil

ABC News' Charles Gibson investigates the source of America's energy addiction.

July 17, 2009, 4:32 PM

July 24, 2009 — -- Americans are used to hearing about their oil addiction. The case is usually made with numbers. The 400 million gallons of gasoline consumed each day. The 13 million barrels of oil imported every 24 hours. The fact that, with 4 percent of the world's population, they consume a quarter of its oil.

Apart from the statistics, however, Americans' understanding of their oil addiction is woefully incomplete. Many people know what a gallon of gasoline costs, but what about where the gasoline comes from? Or why the price goes up or down? Or the role refineries play? Or what difference the wars in Iraq have made?

To answer basic yet elusive questions about Americans' relationship with oil, ABC News' Charles Gibson traveled across the country recently, observing several key links in the production chain. Gibson visited Cushing, Okla., where most of the pipelines that crisscross the United States meet. He stopped at a loading rack in Linden, N.J., where truckers fill up with gasoline for distribution to stations across the region. He took a helicopter to a rig in the Gulf of Mexico, where robots extract crude oil buried thousands of feet beneath the ocean floor.

The country's addiction to oil, it turns out, has hidden costs, costs that don't figure into the price at the pump. To get at those costs, Gibson moved along the production pipeline in reverse, starting with gas stations and ending with crude oil at its source.

Don Paglia runs a Citgo-owned gasoline loading rack in Linden, N.J. The surprising part about his business, he said, is that trucks headed for various gas stations -- Exxon, Conoco, Shell, wherever -- all fill up at the same rack.

"It doesn't really matter," Paglia said. "We will sell it to anyone. ... It is just gas. Gas is the same no matter where you go."

So what makes Exxon Exxon? What makes Mobil Mobil? And what makes Shell Shell?

"It is just gas," Paglia said. "It's produced out of the earth. We refine that product. When you walk in, gas is gas."

Mark Cooper, head of research at the Consumer Federation of America, pointed out that there is a difference between brands of gasoline. And like everything connected with oil, it has to do with dollars and cents.

"A lot of advertising dollars," Cooper said. "I mean, it's a classic case of spending money on TV to convince the public that there's a difference."

Oil company ads, in other words, are an expensive competition for market share.

Some brands do add small amounts of detergent additives, but all gas is essentially the same because federal laws don't allow much variation.

It is an industry that made $180 billion in profits last year -- one gallon at a time. Our addiction has made oil the biggest business in the world.

Oil Addiction: The Refinery

Refineries are gigantic operations where crude oil becomes gasoline, and heating oil, and jet fuel and other products. Production volume at refineries can affect gasoline prices. Yet the last new refinery built in the United States went up 30 years ago.

"I think there have been issues around permits and people not wanting industry in their backyard," said Roland Kell, manager of Chevron's Pascagoula, Miss., oil refinery, one of the nation's largest.

But the not-in-my-backyard syndrome may not be the whole story. In the mid-1990s, more gasoline was being refined than was being used. Profits at the refinery level were at an all-time low.

Internal oil company memos from the time show the industry was well aware of the problem. A Texaco memo warned that "Supply significantly exceeds demand ...," which had led to "very poor refinery financial results."

"So [the companies] merged, and they shrunk; they closed refineries, they said for economic reasons," Cooper said.

There are 149 refineries in the United States, 26 fewer than there were in 1995. And the top 10 oil companies control close to 80 percent of the country's refining capacity.

But oil industry leaders say that was a necessary business decision in a competitive market.

"The smaller, less-efficient refineries really couldn't compete in that environment. They did shut down, so we had a lot of falloff in the industry," said Rayolda Dougher, a spokesperson for the American Petroleum Institute. "And you are right. If you had overcapacity and you are not able to sell your product at a profit, you are going to have to cut back that capacity. But look over time and look at the record, and you will see that the capacity has grown."

Refineries have, indeed, undergone construction efforts to expand capacity, but while the amount of gasoline U.S. refineries can make has gone up 14 percent, the demand for gasoline has gone up 15 percent.

"They make more money keeping the market tight," Cooper said. "They have gained power over price by controlling the price at the refinery gate."

Repeated government investigations have found "no evidence of illegal collusion" or price control by oil companies (although several investigations expressed concerns about concentration of ownership in refineries). Chevron's Kell said refiners do not manipulate supply.

"I can certainly assure you that is something we don't do," Kell said. "The majority of the factor that drives gasoline is crude oil price, and that's something that's certainly out of the control of manufacturing."

In the end, Americans use virtually every drop of gasoline made here. There is such a tenuous balance between supply and demand that any disruption at the refinery can quickly be felt at the pump.

Imported oil accounts for 70 percent of the U.S. supply, and much of that comes from half a world away.

"Most of the world's remaining reserves of oil are in the hands of just five countries," said Vijay Vaitheeswaran, a professor in residence at New York University and correspondent for the Economist magazine. "Saudi Arabia, which has a quarter of the world's oil reserves, or its four immediate neighbors: Iran, Iraq, Kuwait and the UAE."

It is in the interest of crude oil suppliers to keep prices low enough that consumers won't wean themselves from the product, he said.

At the Mercy of Oil Imports

"The Saudis do want to have moderate oil prices, because they know that if you kill the goose that lays the golden egg, there goes your own revenues," Vaitheeswaran said.

When oil prices peaked at $147 a barrel last summer, the United States asked Saudi Arabia and other members of the OPEC oil cartel to ramp up production and help bring down the price. U.S. Secretary of Energy Steven Chu said the country is, in effect, at the mercy of foreign oil producers.

"When a country like the United States depends on oil to really run its engine or the industry, we are at the mercy of the suppliers of oil," Chu said. "We are spending hundreds of billions of dollars a year importing oil and, so, we are heading toward a train wreck."

And the United States is spending billions more on military engagements in the Middle East. The war in Iraq alone, by conservative estimates, has already cost close to $700 billion.

Gen. Wesley Clark, the former Supreme Allied Commander Europe of NATO, called oil resource protection one of the key factors driving U.S. foreign policy.

"There is no one who would have any doubt about whether protecting energy sources and access to those sources is one of America's vital interests," Clark said, adding, however, that the Iraq war should not be reduced to U.S. interest in oil?

"No, it wasn't all about oil," Clark said, "but oil was a component of this. ... Indirectly, oil was at the foundation of a lot of this, not just in 2003 but in 1990, '91 ... It's been the thrust of U.S. policy, and before that, it was the thrust of British policy to safeguard access to that region."

Vaitheeswaran, in his assessment of the true costs of oil dependence, said, "We're paying for the geopolitical complications of oil, but we pay it through the Pentagon budget and we pay it through the lives of our soldiers lost overseas.

"These are costs we bear. ... We use more gasoline than we should, because there is an artificial price. ... We don't pay an honest price for the energy we use in America."

Debates about how to break U.S. oil dependence -- and decrease the hidden and not-so-hidden associated costs -- dominated the last presidential election.

"Drill, Baby, Drill" was the familiar mantra at Republican rallies last fall. GOP vice presidential candidate Sarah Palin called for expanded domestic oil drilling.

Part of the argument for expanding drilling is that, because of new technologies, oil companies discovered more domestic oil than ever thought possible.

But the issue is whether it's possible to drill enough to reduce U.S. dependence on imported oil. There are about 3,500 oil platforms in the Gulf of Mexico, but most produce a few hundred barrels of crude a day.

Chevron, the San Ramon, Calif.-based company that spearheaded the historic deepwater discovery in the Gulf, has a new hi-tech drilling platform, 160 miles offshore. Two shifts of 46 men each work on the platform, two weeks at a time, to keep the rig afloat and level, using huge chains securing each side.

'Brill, Baby, Drill' Makes No Sense to Pickens

Seven thousand feet below the platform, underwater robots operate to extract oil another 25,000 feet down. In all, the oil is being brought up 32,000 feet, pumped up to the oil rig, and down to underwater pipelines that lead to shore.

They're able to pump 65,000 barrels of oil a day, which, at today's price, brings Chevron $1.5 billion a year from this one rig alone.

"The next 10 years, we could be in 14, 15,000 feet of water," said Rick Bullock, who runs offshore operations for Chevron. "To a certain extent, the sky's the limit."

It is true that, because of technology, the United States is getting oil from areas unreachable a few years ago. But the country has fewer proven reserves than a decade ago. There are no more gushing geysers like in the heyday of U.S. oil.

T. Boone Pickens made billions off the oil industry in his 50-year career. But the lifelong Republican now says, no matter what his party says, that Americans can't rely on what they have, regardless of how much technology may improve.

"I have been asked this question, what would I expect to get if we drilled, and I said that 2 million barrels a day," Pickens said. "I would be pleasantly surprised if we could do that off those areas, 2 million barrels. Remember, we are importing 13 million barrels a day."

As for the notion that "Drill, Baby, Drill" could break U.S. dependence on foreign oil, "you haven't got a prayer," Pickens said. " ... I thought, who in the hell is telling them that that makes sense? Because it doesn't make sense."

The truth, it turns out, is that oil can come from 32,000 feet underwater, get sent through thousands of miles of pipelines, be turned into gasoline in multi-billion dollar refineries, get shipped again around the country and then put in your tank ... for about $2.50 a gallon.

The artificially low prices let Americans to continue their addiction ... and continue to ignore the hidden costs.

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