[R-G] Foreign oil producers have U.S. over barrel

[Anthony Fenton]

Foreign oil producers have U.S. over barrel
http://www.signonsandiego.com/news/nation/20080824-9999-1n24oil.html

38 percent of gas cost tied to overseas supply
By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

August 24, 2008

     * California getting less of its oil from domestic sources

Every time you fill your gas tank, you're participating in what Texas  
oilman T. Boone Pickens describes as “the largest transfer of wealth  
in the history of mankind.”

On average nationwide, roughly 38 percent of the cost of gasoline is  
tied to foreign-produced petroleum. Every time Americans spend $50 at  
the pump, they're sending about $19 abroad.

 From January through June, the United States spent $172 billion on  
crude-oil imports, compared with $103 billion in the first half of  
2007. Many economists describe that money as a “foreign tax” on the  
U.S. economy, because much of it goes directly into state-owned oil  
monopolies or government coffers.

[Photo: Dubai may be the most visible sign of the effect of  
petrodollars in the Middle East. Although Dubai has relatively little  
oil of its own, Saudi and Russian investments have given it a striking  
skyline.]

“A $10 increase in the price of a barrel of oil is the equivalent of a  
$42 billion tax on the economy,” said Peter Morici, an economist at  
the University of Maryland. “Many of the richest oil-producing  
countries don't spend that money, but keep it instead. That means it  
doesn't come back to us to purchase our goods and services.”

Morici said that if the oil money that was sent abroad remained in the  
United States, it could generate hundreds of thousands of jobs and  
bolster the gross domestic product – perhaps by enough to keep the  
economy from running into recession.

Pickens, who has made billions of dollars over the past 50 years  
selling oil, also promotes the economic benefits of weaning the United  
States from foreign imports, arguing that the drive for domestic  
energy sources, including wind and solar, would put more Americans to  
work.

[Graphic: United States foreign oil sources]

In a visit to Capitol Hill last month, Pickens got a favorable hearing  
from politicians who complained that much of the money the United  
States spends on energy ends up in unfriendly hands.

“Our growing dependence on foreign oil is a threat to our national and  
economic security,” said Sen. Olympia Snowe, R-Maine. “We are  
impoverishing ourselves while enriching regimes that are in many cases  
hostile to America.”

U.S. oil purchases arguably have given Venezuelan President Hugo  
Chávez a greater political platform for his long-running war of words  
with the White House. Oil revenue also has helped Libyan leader  
Moammar Gadhafi remain in power for nearly 40 years. And, according to  
many pundits, the Kremlin's concerns over its oil pipelines may have  
been behind Russia's recent incursion into Georgia.

[Pie Graph: Where the Gas Money Goes]

But much of the oil coming to the United States is from places other  
than the Middle East, North Africa and Russia.

Canada, which accounted for 19 percent of U.S. oil imports during the  
first six months of this year, ranks as the nation's No. 1 foreign  
supplier of crude oil. Until last summer, Mexico, which supplies 10  
percent of U.S. imports, ranked No. 2. It has now been edged aside by  
Saudi Arabia, which provides 12 percent.

Those three nations, together with Venezuela, Nigeria and Iraq, supply  
75 percent of U.S. oil imports. Angola, Brazil, Algeria, Kuwait,  
Ecuador and Colombia, Russia, Chad and Libya – in that order – round  
out the top dozen suppliers.

Once the United States buys oil from those countries, the money is  
used in a variety of ways.

In Canada, more than half the money goes to the federal and provincial  
governments through royalties, taxes and fees.

Last year, Alberta, which produces 80 percent of the oil Canada  
exports to the United States, collected $11 billion in oil royalties.  
Most of the money goes into a trust fund that supports road  
construction, schools and hospitals as well as investments for future  
generations.

Besides paying 29 percent federal and provincial corporate income  
taxes on their profits, Alberta's oil companies paid $40 million in  
pollution fees that fund green technology initiatives.

“If we can develop technologies to solve the problem here, there will  
be a great market beyond our borders,” said Greg Stringham, vice  
president for fiscal policy at the Canadian Association of Petroleum  
Producers.

In Saudi Arabia, some oil profits end up in the Swiss bank accounts of  
the nation's ruling families. But a large portion is invested  
throughout the Arab world, building schools in rural Jordan and  
skyscrapers in the financial centers of Dubai and Abu Dhabi.

Dubai may be the most visible sign of the effect of petrodollars in  
the Middle East. Although Dubai has relatively little oil of its own,  
Saudi and Russian investments have given it a skyline that dwarfs  
Manhattan's, as well as an array of man-made islands designed to be a  
playground for the rich.

“Dubai rivals Hong Kong and Singapore as a global financial center,”  
said Luigi Falconi, a former oil executive whose recent novel, “The  
Duke of Dubai,” is partly based on his experiences there.

Similar developments are happening on a lesser scale throughout the  
region.

“The oil centers in Saudi Arabia, Qatar and Bahrain have been  
investing in economic growth in places without much oil, such as  
Egypt, Morocco and Jordan,” said Parag Khanna, director of the global  
governance initiative at the New America Foundation.

But the investments have done little to stir widespread economic  
growth. Across the region, the jobless rate for young workers tops 25  
percent – twice the global average.

In a number of other relatively poor oil-producing countries, the  
profits from oil are used to subsidize domestic gasoline.

When gasoline was selling for more than $4.60 a gallon in San Diego in  
June, for instance, it was selling for $2.75 in Tijuana, thanks to  
government-mandated subsidies from Mexico's state-owned oil monopoly,  
Pemex. Gasoline subsidies total $20 billion a year, prompting some  
Mexican legislators to push for higher gas prices so they can use the  
oil profits to fund better social services.

In oil-rich Venezuela, the biggest oil center in the Western  
Hemisphere, gasoline costs 11 cents per gallon, and there's still  
enough money left over to provide the poor with free health care and  
subsidized groceries.

Not all the oil money stays overseas. Much of it comes back to the  
United States in the form of investments.

Between 2004 and 2006, oil-producing nations invested an average of  
$100 billion a year in Treasury bonds and other U.S. securities,  
according to a recent study by Bank of America. Those investments,  
combined with non-oil investments from China and Japan, helped fund  
such big-ticket items as the Iraq war and the U.S. mortgage boom.

More recently, as the U.S. economy has veered toward recession, the  
pace of investment has slowed. In 2007, for example, the oil-producing  
countries had a net investment of more than $80 billion in U.S.  
securities, a 20 percent drop from the previous year. Even so, the  
investments accounted for 7 percent of total U.S. capital inflows.

“A lot of the petrodollars get recycled,” said Dan Seiver, a finance  
professor at San Diego State University. “The central banks overseas  
that accumulate petrodollars end up buying our Treasury and  
(government-sponsored entities, such as Fannie Mae and Freddie Mac)  
paper. If they didn't do that, our interest rates would be a lot  
higher.”

But Morici said that with all the foreign investments in U.S.  
securities, the United States has “lost control of the money supply,”  
resulting in rising inflation.

Besides snapping up U.S. securities, sovereign wealth funds – or  
government-backed investment funds – from such countries as Kuwait,  
Abu Dhabi, Saudi Arabia and Russia have invested heavily in U.S.  
financial institutions such as Merrill Lynch and Citigroup.

Sometimes, the investments go too far for U.S. sensibilities.

In 2006, when the port of Dubai bought a British shipping company that  
manages six U.S. ports in 2006, it touched off a firestorm on Capitol  
Hill.

“Dubai cannot be trusted,” said Rep. Duncan Hunter, R-Alpine, warning  
that it and the other emirates on the Persian Gulf had close ties to  
terrorism. Many experts on the region disagreed, saying that Dubai was  
one of the bulwarks against terrorism in the region.

To avoid controversy, Dubai subsequently spun off the U.S. port  
operations. But some analysts say the criticism cost the United States  
a huge aircraft deal a year later, when Dubai chose to buy planes from  
Europe's Airbus instead of Boeing.

“We say we want the petrodollars to come back to the U.S., and then we  
kick the Arabs in the butt when they try to buy something,” Falconi  
said.

Joseph Quinlan, chief market strategist for Bank of America, said the  
reinvestment of petrodollars – including the investments in U.S.  
securities – provides a needed influx of money into the U.S. economy.

“The debt-stretched United States needs to attract more than $2  
billion a day to cover its savings gap,” Quinlan said. “Against this  
backdrop, every dollar counts.”

Dean Calbreath: (619) 293-1891; dean.calbreath at uniontrib.com