Even as pump prices fall, 'massive new investments in oil and natural gas' are more needed than ever.

Historically and for decades, energy policy hasn't led events; it has followed. It typically doesn't initiate; it reacts. Energy realities have changed dramatically since the oil embargo days of the mid-1970s and their accompanying long gasoline lines.

Unfortunately, much of our nation's energy policy is still focused on that long ago, very different era. What is it about us as a nation that allows us to seek safe refuge in a less relevant past, while turning our back on global energy realities that are unlike anything we have encountered before?

It is time that we as a nation square our energy corners and grapple with the real energy challenges facing us. To most outside observers, the oil and natural gas business looks breathtakingly simple: a street corner service station with an omnipresent, highly visible price sign to attract customers. However, the facts speak otherwise. Ours is the world's largest, most complex industry - one that is global in scope and supplies roughly two-thirds of the world's energy. Most energy experts forecast that oil and natural gas' contribution in meeting future, global energy demand will remain in that range for decades to come.

Forty years ago, world oil reserves were largely the domain of public, investor-owned oil and natural gas companies, based principally in the United States, and referred to as international oil companies. Oil reserves in the ground are viewed by some as the equivalent of inventory in other industries, providing an important measure of a company's ability to service its present and future customers. Most people assume that international oil companies and their industry are little changed from decades ago.

However, today, world oil reserves are almost 80 percent owned by the national oil companies of foreign governments - many formed during the past 30 years. Only 6 percent of worldwide oil reserves are now held by investor-owned, international oil companies.

To compete, these investor-owned oil companies elected to scale up within this new world - principally through mergers and acquisitions - by creating ever-larger efficiencies, greater technological and project management prowess, and substantially broader competitive access to capital markets to meet the advantaged competition arising in such places as Saudi Arabia, Russia, Venezuela, China and India.

Some observers, still unaware of this necessary evolution, view the industry in exaggerated, adversarial and negative terms for taking a logical path forward. Energy policy proposals are too often focused on marginalizing and constraining investor-owned oil and natural gas companies. Instead of working with these companies, too many in government argue for needlessly burdensome regulations and punitive taxes.

Approaches that penalize investor-owned oil and gas companies are counterproductive for the American consumer and for our nation's national and energy security. Given global energy demand pressures, these are the very companies that must go out and compete globally for the oil and natural gas our nation's economy must have to help meet its energy needs. If these companies are rendered non-competitive through punitive public policy measures, who else can we rely upon to meet our nation's energy needs?

The federal government already tried in the 1970s and ‘80s and failed. So, left standing are the national oil companies owned by foreign governments. How does putting them in the driver's seat here at home enhance our nation's energy or national security? How is the U.S. consumer better assured that his or her energy related needs are going to be met at competitive prices under this scenario? U.S. oil and natural gas companies are large because they must compete in a huge, highly competitive global marketplace. They must rely increasingly on efficiencies and state-of-the-art technology to find, produce and transport oil and natural gas. This is the value proposition they must possess to be sought after as valued partners in the production of oil and natural gas by the national oil companies and others.

Price Volatility
A dominant concern over the past several years has been the volatility of energy prices. It has been caused by a number of factors, principal among them the very small amount of spare crude oil production in the world - about 1.5 million barrels per day in a world market with demand exceeding 85 million barrels per day. Other significant factors can include geopolitical risk, seasonality, operational outages in refineries and pipelines, and the financial speculation brought about, in part, by the rush of massive amounts of new money into futures markets.

The price of oil is determined by world markets, and its price is very transparent. At present, the prices of crude oil and gasoline are falling like a rock due to improved outlooks. Gasoline has declined 53 cents per gallon nationally since August. And the cost of crude oil - the most important component in the price of gasoline - has declined 36 cents a gallon.

In fact, the declining prices prove once again that markets work. The gasoline market has softened, with increased supply and reduced demand. There is more supply because of record refinery production of gasoline so far this year, accompanied by record gasoline imports. Demand is down because we are now out of the summer driving season, and winter gasoline is less expensive to refine. Approximately 55 percent of the cost of gasoline is attributable directly to the cost of crude oil. Another 18 percent, on average, is government taxes.

Neither the world nor the United States is running out of crude oil. According to the U.S. government, the world possesses 1.3 trillion barrels of known oil reserves. Current known U.S. oil reserves alone are sufficient to run 60 million cars and heat 25 million homes for 60 years.

The industry's technological advancements have ensured that additions to reserves have always exceeded consumption. Voluminous new sources of oil, like Canada's oil sands and, potentially, U.S. shale; as well as the commercialization of gas-to-liquid processes and new technology will ensure sufficient supplies of future oil for decades to come.

Most experts agree that sustaining even modest economic growth worldwide for the next several decades will require massive new investments in oil and natural gas. World energy markets are inherently global, and no single country can exempt itself from the interdependencies of that market. Although there is no ironclad assurance that cooperation in expanding oil and gas supplies globally over the next several decades will succeed, it is certain that the cost of failing to do so would be enormous.

This leads to another important subject: U.S. oil and natural gas industry earnings and reinvestment. This is a topic on which there is considerable misunderstanding and misinformation. Because our members are among the world's largest public companies, it would follow that their revenues would be large. But so, too, are their operating costs and reinvestment demands in providing consumers with the energy they need now and in the future.

The industry's earnings are very much in line with those of other major U.S. industries - and often they are lower. In the second quarter of 2006, earnings for the public oil and natural gas companies were 9.9 cents per dollar of sales, compared to an average of 8.1 cents per dollar of sales for all U.S. manufacturing industries. And, for the six-year period of 2000 through 2005, the oil and gas industry earned 5.9 cents per dollar of sales compared to an average of 5.2 cents for all U.S. manufacturing industries.

Many Beneficiaries
It is also important to understand that those benefiting from oil and natural gas industry earnings include numerous private and government pension plans, including 401(k) plans, as well as many thousands of individual American investors. Presently, pension plans own 41 percent of all oil and natural gas company stock.

What do oil and natural gas companies do with these earnings? Reinvest them massively. Between 1992 and 2005, according to the accounting firm of Ernst & Young, our industry reinvested more than $1 trillion in long-term energy projects. This historic reinvestment level exceeded the total net income of all U.S. oil and gas companies over the same period. To succeed in reliably delivering affordable supplies of fuel to customers in the future, our industry must invest huge sums - in both good and bad economic times - oftentimes working 10 or more years before a project is operational.

Today's oil and natural gas industry earnings are invested in new technology, new production, and environmental and product quality improvements to meet tomorrow's energy needs. E+P

Red Cavaney is president and CEO of the American Petroleum Institute. This column is excerpted from comments he made Sept. 21 to the Commonwealth Club of California. For more information, visit www.api.org.