A Response to Dave Carter's Post on Oil Company Profits and Taxes
Dave Carter’s post on oil company profits versus taxes per gallon is accurate, but does not show the threat governments represent to the North American oil industry and consequently to the economy and the nation as a whole. Taxes and profits are paid out of revenues, and as anyone who has ever run a lemonade stand knows taxes and profits keep rolling out as long as revenues keep rolling in. Thus other than representing a burden on consumers there is no existential threat to “Big Oil.” Tangentially, there is the issue of indirect taxation, which represents a societal hazard in that the taxing authority gets to hide its greed behind our real need for energy, but this too does not represent an existential threat to oil companies. We, as consumers, may not like paying high and indirect taxes, but these are still only a chunk of an assured and continuing revenue stream, so are no threat.
The real danger to all industry, and more specifically the oil industry, is the direct and indirect regulatory regimes that government establishes. North American oil producers have over the last thirty to forty years been turned from their historical role as energy producers to polluters and despoilers. On the surface this may not seem radical or threatening, but if we look deeper what we see is that North American oil companies are under increasing pressure as crude oil producers. They are prohibited from drilling in Alaska, The Gulf, and off the west and east coasts. These prohibitions turn them into mere middlemen in the business of buying crude from foreign sources and selling it at retail. Add to this shift away from their vertically integrated business models the fact that new refineries are becoming increasingly difficult to bring on line due to environmental regulations, and what you have is an industry on the brink of life support. The reason is obvious to any industry watcher: These regulatory threats, unlike mere taxation, impede oil company revenues by forcing Big Oil to buy rather than produce crude oil as they also prohibit the replacement of the means of refining that crude.
Set aside for a moment the negative economic impact of government regulation, there is an irony in impeding crude oil production in North America in that its effect is to worsen the overall effects of crude oil production on the world’s environment. Exporting our pollution is the unavoidable impact of moving production from wealthy nations such as the U.S. and Canada that can afford inspection and regulation to nations that cannot or will not inspect and regulate. We are also forcing the industry to move more oil over longer distances, which increases environmental risk. Furthermore, there is a significant increase in environmental risk associated with moving oil drilling and extraction from the relatively shallow waters of the North American continental shelf to the much deeper ocean environs of, for example, the Brazilian off-shore. That this deep-water drilling is now subsidized by the United States in response to bad politics can only be ascribed to myopic stupidity or worse crony capitalism, both of which bode ill for industry in general.
The economic impact of all this government involvement is clear: An ever rising price. Normally, an increasing price would not, in the long-run, be a disaster. But in the case of oil it is difficult to see how it might not be. Economic principles dictate that as prices rise, new production of more costly resources would come on stream and prices would either fall or stabilize in response to the increase in supply. Also, other sources of energy could serve as replacements for expensive oil and gas, nuclear and shale are two examples that come immediately to mind. Both of these alternates, however, represent, whether rightly or wrongly, environmental threats that might preclude their use as substitutes. It is hard to imagine a dark cold future for North America for the simple reason that we, its residents, would not permit such a future in the presence of politically impeded resource production. Still, it is not difficult to imagine a much reduced economic future, based on the false and malign assumption that all energy used is waste. We, North Americans, use more energy than the rest of the world for two reasons 1) we live on a continent that suffers a climate prone to extremes and 2) we out produce the rest of the world. If we waste energy, we waste only a small fraction of the energy we use, the rest fuels our prosperity. It would not be hyperbole to write that this prosperity pays for everything including our elevated environmental standards.
As environmental prohibitions on drilling force North American oil companies to purchase rather than produce crude, they must absorb and pass on to consumers an ever rising raw materials cost, which renders them less competitive internationally when compared against more vertically integrated producers. From a national perspective each passing day serves to raise the opportunity cost of the untapped resources while at the same time increasing the need for the resource. In the short run and under extreme conditions the opportunity cost of the oil we leave in the ground might approach infinity if national security is compromised. There is nothing about such an oil policy that is remotely logical, for even in environmental terms it is a failure.
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Oct '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Romans 1:22 "Claiming to be wise, they instead became utter fools."
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Cas, what a wonderful response. Thank you. I did what I could over on the main feed just now, but desperately need to grab some rest before, since I need to be on the road before sun-up. Your break-down of the myriad ways in which government impedes private sector growth needs to be in a text book.
Oct '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
What a great gin-clear distillation of our energy policy. Good stuff. Especially apt with Obama recently encouraging Brazil to drill.And now Cuba is exploring drilling offshore while Florida sits on it's hands because of misguided environmental policy.
Jun '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Trade off. Collect taxes on profits and let productive capacity stagnate or allow capital investment to increase capacity and stimulate economy.
Dec '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Great post, Cas. This is one of those "should be required reading for every American" pieces. It makes me wonder what the stats are for Ricochet. Hm?
On the trade off issue (Robert Kelly), the Left is incapable of dealing with the truth of trade-offs. The utopianism of the Left holds sacred the idea of a free lunch. Solar panels and windmills will save us, for example.
Feb '11
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
The "progressive" movement is conducting a full-scale war against energy: not only oil, but all practical forms of electricity generation. Even wind and solar projects are attacked when they move from theory to reality and it turns out that like everything else in the world they have disadvantages. A large Mohave Desert solar project, for example, is now being delayed because of concerns about endangered tortoises.
The emergence of a large and affluent middle class was made possible by widely-distributed and reasonably inexpensive energy, especially electricity. With the suppression of America's energy resources, there will still be a small and very wealthy upper class, comprised largely of political elites and their allies, but mass affluence will no longer exist.
Icebreakers, Lizards, and Gasoline Prices
Sep '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
I read your post several times and do not disagree with much. The first “oil crisis” was under Carter and here we are 3 decades later with no coherent energy policy. Why? One answer is the Dems wear the black hats and GOP the White and it is the black hats’ fault. That could be the answer, but I think the answer may be that it has been in the political interest of both parties not to have one.
Feb '11
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Liberal Jim.."here we are 3 decades later with no coherent energy policy"
Yet we have no coherent software-industry policy, and we have a thriving software industry. We have no coherent freight-railroad policy, and we have a thriving freight-rail industry.
Maybe our energy problems are caused not by too little "policy" but by too much attempted policy, coherent or otherwise.
If the U.S. had established a national software industry policy to deal with the "threat" of Japanese 5th-generation computing (about which there was once much hype) then our software & computer hardware industries would look a lot less vibrant than they actually do. If we had continued the regulatory policies affecting freight rail, then our railroad industry would look like it did prior to the Staggers Act.
Jun '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
The solution is simple. The USA becomes a third world country and we citizens, sit in our hovels, which used to be homes, swatting flies off our faces. The rest of the world having for 150 years depended on the USA for order and survival, erupts into thousands of reginal wars. The planet becomes totally polluted by gangster energy cartels battling each other for dominance and destroying each others super tankers, spilling millions upon millions of barrels of oil with no one to clean it up. Eventually a movement forms, starting slowly but turning into a tidal wave of anger and resentment as humans 10 generations from now find a few manuscripts that haven't been burned for heat, but untouched, tell the story of a time in the distant past when humans ruled the planet and thrived with warm and cool air, food, medicine, and light, even at night. A revolution begins and the "greens", if they are lucky, are allowed to go somewhere in a tiny corner of the planet and die. Or all mankind disappears from the Earth, but the planet lives on, along with a hundred billion others in the Universe and nobody around to care.
Sep '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
david foster: Liberal Jim.."here we are 3 decades later with no coherent energy policy"
Yet we have no coherent software-industry policy, and we have a thriving software industry. We have no coherent freight-railroad policy, and we have a thriving freight-rail industry.
Maybe our energy problems are caused not by too little "policy" but by too much attempted policy, coherent or otherwise.
If the U.S. had established a national software industry policy to deal with the "threat" of Japanese 5th-generation computing (about which there was once much hype) then our software & computer hardware industries would look a lot less vibrant than they actually do. If we had continued the regulatory policies affecting freight rail, then our railroad industry would look like it did prior to the Staggers Act. · Apr 30 at 8:10am
We have a copyright policy that impacts software, a transportation policy that impacts rails etc. They are more or less logical and therefore are even at times thought of as non-existent. In the case of oil a good deal of the resources are under public land and therefore the policy will be more involved, but no less necessary.
Feb '11
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Good point about copyright being a policy that impact software: note that "minimalist" policies like this are quite different from highly-intrusive policies that attempt to pick winning technologies and companies.
What specific policies did you have in mind that impact rail?
Feb '11
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
"These regulatory threats, unlike mere taxation, impede oil company revenues by forcing Big Oil to buy rather than produce crude oil as they also prohibit the replacement of the means of refining that crude."
The money in oil comes from refining oil, not from exploration and exploitation of crude oil. Exploration and exploitation are risky and expensive.
"Also, other sources of energy could serve as replacements for expensive oil and gas, nuclear and shale are two examples that come immediately to mind."
First, shale is a type of rock in which the crude oil and natural gas are embeded. There is also natural gas that is easily available that is also filled with nitrogen. Removing the nitrogen is expensive, so higher prices makes that natural gas economically viable. The problem is that the infrastructure required for cryogenically removing the nitrogen is expensive and has to be paid for. If the price is going to drop once again, the investment is wiped out. So there is risk.
As for the deep drilling, I think it is great that it is US technology from a few firms out of Houston who are doing this. Also glad it's being implemented in Brazil.
Jun '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Hang On, the point is not that price increases are bad. When price increases render profitable resources that would otherwise remain unexploited they are good. If it were a matter of simple market mechanisms the world would be far better off. What we get instead is religious environmentalism interfering with production. I fear that shale oil will never be brought into production not because it will be unprofitable to produce, but that it will be legislated out of production by government policy or worse still environmental regulation.
As to your point about exploration, I agree, it is unprofitable for the majors to do. But that is where independents come in. These small agile and versatile exploration/oil companies are responsible for almost all exploration. If new fields cannot be exploited because of environmental policy than there is no reason to explore and the independents die.
As to the profitability of refining, the point is moot, in that fully integrated oil companies can kick profits around through their internal pricing mechanisms. What is not debatable is that an assured supply of crude is preferable to the vagaries of the market. This is why Canada is so valuable to the US.
May '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Every drop of crude that is produced by an Exxon or a ConocoPhillips is sold on market. There really hasn't been an integrated vertical of upstream and downstream for decades. In other words Exxon must buy, at market price, anything they produce from their own leases or PSA's. This is why nations like Britain, which produce as much as they consume, thanks to North Sea crude production are as susceptible to market forces controlling consumer prices as we are.
The profit is in upstream, and 94% of the reserves in the world are owned by governments of the nations where they exist. Big oil, is controlled by governments in total, be they here or overseas. CP Alaska Inc had a net profit of $2.2 billion in 2008, might have been higher if the State of Alaska hadn't, read Palin, assessed a windfall profit tax on them that resulted in CP paying the state $3.4 billion in order to net that $2.2 billion.
Feb '11
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Points all taken.
"What is not debatable is that an assured supply of crude is preferable to the vagaries of the market. This is why Canada is so valuable to the US."
You don't have to sell me on the value of Canada as far as energy. Working on a half dozen projects in Alberta at the moment while living here in US.
Dec '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
It should be noted that even supposed short term overregulation (like the gulf moratorium) have long term repercussions. Most if not all of the available deep water rigs in the gulf have migrated to Brazil.
When this madness stops, they won't be available, and we'll be five years from any significant increase in production from deep water wells.
Sep '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
As I understand the EIA numbers, the US produces well over 5 million barrels of crude oil per day (not to include natural gas liquids) which would make the US the third largest producer of crude in the world, behind only Russia and Saudi Arabia. Texas alone produces over 1 million bbls/d. I don't disagree with your points regarding taxation and energy policy (at least directionally), but I must disagree that US oil companies have been relegated solely to buying foreign oil. US oil companies produce a ton of oil, the only thing is that we consume 3 tons. So it is certainly true that we buy more oil than we produce but we do produce a considerable amount.
Additionally I think your post deals with regulatory impacts but does not hit on the normal economic factors which IMHO are paramount. US oil companies have become global producers of oil in large part because it is cheaper to produce in countries other than the US. That is partly due to a hostile environment of regulation etc., but geology is important also.
Aug '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
Thanks, Cas.
Sep '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
david foster: Good point about copyright being a policy that impact software: note that "minimalist" policies like this are quite different from highly-intrusive policies that attempt to pick winning technologies and companies.
What specific policies did you have in mind that impact rail? · Apr 30 at 9:01am
Eminent domain, FTC regs. Have you noticed the law requires cars to stop for trains. Common sense does also. Is it your position that a Nuclear Power plant should be subject to the same amount of regulation that an office full of software engineers? That coal fired power plants and oil refineries should have no pollution controls? To me it seems clear the energy sector requires more gov interference than many and has caused financial disruption. Why is there no even semi-logical approach? Many would ask you to believe it is the Dems fault. I don't buy it.
Jun '10
Re: A Response to Dave Carter's Post on Oil Company Profits and Taxes
liberal jim, it is not the regulation per se that is the problem for everyone learns to live with regulation. It is the uncertainty. No one is arguing for anarchy. The point is simple, in most fields it chooses to regulate government has no expertise, consequently, it can and does do much damage. Sarbanes Oxley is just the most recent egregious example of damage done to the financial world.
When it comes to oil exploration and extraction, the moratorium on drilling in The Gulf is perhaps the worst and most threatening to the nation. The point was made above that many, if not most, of the drilling rigs have already been moved and will likely not return. The loss in jobs alone is mind boggling. Who gave President Obama the power to do this? Did he run on a platform of stopping drilling in the gulf by starving roughnecks?
You write of nuclear energy, but you do not point out that there is a huge difference between regulating safety and prohibiting construction. Nuclear energy is the cleanest and most efficient way of generating power, and I write this in the full knowledge of recent events.