Previously, I wrote an essay describing exactly why California’s Prop 87 will raise gasoline prices for Californians:
Yesterday, the Yes on 87 campaign put out a strange press release. It read in part:
LOS ANGELES, Aug. 24 /PRNewswire/ — The following memo was sent to the CEO’s of ExxonMobil, Shell, Chevron, and other oil companies opposing Prop. 87:
TO: CEOs of ExxonMobil, Shell, Chevron, and other oil companies opposing Prop. 87 FROM: Chad Griffin, Campaign Manager, Yes on 87 RE: Staffing Changes at No on 87The full page New York Times ad run yesterday by your national political operation — the American Petroleum Institute — highlighted a messaging problem within your California campaign against Proposition 87. The ad stated: “… the global price of crude oil is the single most important factor in what you pay for fuel at the pump.” (Please see the full text of this ad, which I have attached.) As a professional, I feel compelled to inform you that your California agents are taking your money and taking you for a ride. The oil companies’ top flack in California, Chamber CEO Alan Zaremberg, has been saying Proposition 87 will increase gas prices at the pump. But according to the API “the global price of crude oil is the single most important factor in what you pay for fuel at the pump,” not local fees like the ones already charged in Alaska, Louisiana and Texas. Zaremberg is clearly off message and is clearly disregarding the oil industry’s talking points.
Bizarre. Do you see the problem? Chad Griffin, the campaign manager for Yes on 87, apparently thinks “the single most important factor” is synonymous with “the only factor.” After all, what exactly is he saying here? He is suggesting that Zaremberg is wrong in suggesting that Proposition 87 will increase gas prices, since the price of crude is the single most important factor in the price. Hey, I have an idea for California based on Mr. Griffin’s faulty logic. Why don’t they just increase gasoline taxes by $0.50 a gallon? Since gasoline taxes are not the “the single most important factor”, then raising gas taxes won’t affect the price of gasoline. At least it won’t if I apply Mr. Griffin’s twisted logic. Of course I should probably point out that placing an additional fee on a barrel of oil DOES increase the cost of crude.
Mr. Griffin, I am a professional myself. I know a lot about how gasoline is priced. I feel compelled to inform you that you are taking Californians and their money for a ride. Prop 87 will definitely raise gasoline prices. And you know the worst thing for consumers? Prop 87 proponents will have no accountability at all for this. If you are wrong (and you are), and Prop 87 increases gasoline prices, then how will you rectify that with the citizens of California? After all, a big emphasis of your campaign is that gasoline prices are too high. What is the accountability of the Prop 87 proponents if this measure pushes gasoline prices even higher? I think you realize that you won’t be held accountable. In fact, when prices go up as a result of this measure, my guess is that oil companies will once again be blamed. You will probably be the first to point the finger in their direction.
Remember, citizens of California, when the gap between gas prices in California and the rest of the country widens next year, this is who you can hold accountable. From the press release above:
Yes on 87, Californians for Clean Alternative Energy, a coalition of consumer advocates, public health and environmental organizations, scientists and business leaders.
Major funding by Steve Bing and Vinod Khosla.
P.O. Box 67205 Los Angeles, CA 90067
phone: 323.782.1045 fax: 323.782.1035
Disclaimer: While I work for an oil company, my company is not listed among those contributing money to the campaign against Prop 87. I have heard no information that my company is opposing this measure, so I definitely don’t pretend to speak on behalf of them. These opinions are solely mine.
Considering that oil is traded on a global market, while an extraction tax would discourage oil extraction, it should not increase the price of gas anymore in california then it does in any other part of the world.
An extraction tax CAN change local pump prices. Consider a region which exports oil. If global price is $75/bbl at some faraway delivery hub and shipping cost to that hub is $1/bbl then a producer comes out the same selling locally at $74 as selling far away for $75. So the local price will settle at $74/bbl.
If an extraction tax causes production to drop and the region to become an importer, the math reverses. The price will now be set by oil buyers who pay $75 for oil at the faraway delivery hub plus another $1 to bring it in. The local oil price will thus jump to $76/bbl.
CA is already a large oil importer, so an extraction tax will not cause a change in status. But the price action described above is not perfect, local price does not jump the entire amount precisely at the moment a region switches from exporter to importer. Most of the jump happens then, but a number of small effects cause part of the price jump to “phase in” as the ratio of imported barrels rises. It is thus possible for an extraction tax to raise gas prices even in a region that already imports oil. The effect is small, though, and diminishes as import market share rises.
CA already imports 70% or so of its oil, so I can’t imagine Prop 87 will have a measurable impact on local pump prices. Certainly much less than a penny per gallon.
Considering that oil is traded on a global market, while an extraction tax would discourage oil extraction, it should not increase the price of gas anymore in california then it does in any other part of the world.
Yet if that argument was correct, the price of gas in California today should be the same as it is everywhere else, since oil is traded on a global market.
What the initiative will do is to make oil produced in California less economic for producers, and more costly for refiners. This will improve the economics for importing oil into California. Even if it costs an additional $2-3/barrel, it will be cheaper for refiners than paying the $4+ extraction tax. The initiative will also decrease investments into California oil production, since the return on investment will be lower.
Yet if that argument was correct, the price of gas in California today should be the same as it is everywhere else, since oil is traded on a global market.
Oil is traded globally, CA gasoline at the pump is not. Stae retail taxes act directly on the pump price and are not affected by global trade.
What the initiative will do is to make oil produced in California less economic for producers
Yes.
and more costly for refiners
No. A refiner will still pay the world price. A producer will either accept lower margins or shut down. He has not other choice.
….it will be cheaper for refiners than paying the $4+ extraction tax.
The refiner doesn’t pay the tax, the producer does. If the CA market was closed to imports the producer would pass the tax on to the refiner (who would pass it on to the retailer, then to the consumer). But the CA market is not closed, so the producer cannot pass on the tax.
No. A refiner will still pay the world price. A producer will either accept lower margins or shut down. He has not other choice.
It’s not as simple as that. The most marginal producers will probably shut down. That will constrict supply, which will drive prices higher. This is how it will cost refiners more money. In the longer term, there will be less investment into new production. Once again, this will constrict supply.
The refiner doesn’t pay the tax, the producer does.
The refiner will ultimately bear part of the costs. The more serious long-term issue though is that it will discourage investments into oil production, as I explained in the previous essay.
The most marginal producers will probably shut down. That will constrict supply, which will drive prices higher.
Yes*. But the marginal barrels are removed from the global market, so it’s the globabl price that goes up. This is the original point ‘anonymous’ raised.
The barrels of production Katrina removed from the market caused gas prices to rise for everyone in the world, not just those who lived in Louisiana and Alabama.
(*As a practical matter, no CA producer has marginal costs of $66 so a $4 tax will cause zero barrels of production to disappear in a world of $70 oil. But if Prop 87 did cause CA production to fall the effect would be global, not local to CA).
The barrels of production Katrina removed from the market caused gas prices to rise for everyone in the world, not just those who lived in Louisiana and Alabama.
That’s because those barrels end up all over the country. It was also a massive amount, so barrels were diverted from other parts of the country. That’s why prices went up for everyone.
California will be a different matter. As supply is constricted, prices will rise until demand is constrained or it becomes economic to import barrels. But the price increases in California will happen before barrels are imported. And unless a massive number of barrels are imported, it is unlikely to substantially affect world oil prices. California will feel the primary price increase, and any effect on global market will decrease as you move away from California.
You see that right now with gasoline inventories. In regions with low inventories, prices will be higher. This will encourage imports into that region, but it will never drive prices up to the level where the gasoline is imported, because transportation costs must be factored in. So the importing region will always be at a slight price disadvantage, all other things being equal.
Man, I really wish I knew what Vinod Khosla said to you in private. It looks to me like he’s raping the citizens of california without their knowledge. The man is certainly a liar, that much is for certain. The only issue up for debate is if he actually thinks he’s helping other people.
I think Khosla honestly thinks he is doing the right thing for society, and wants to profit a little at the same time.
I ran across another discussion on this today. At the following forum:
Surfline Forums
I ran across this excellent post:
OK….. here’s how it is in California.
There is no severance tax in California (that’s a state tax on every barrel produced per well in the state) because
A. The crude produced in California is, almost uniformly, a poor quality crude. When the world price of West Texas Intermediate or Brent Crude hits $75/barrel…… you’ll be lucky to get $40-45/barrel for Kern River Crude.
B. Most wells in California (90%+) produce VERY little oil per day – often 10 barrels per day or less. In addition 97%+ of what’s produced from almost every well in the state is WATER. That has to be disposed of….. leading to…..
C. Oil Production in California is VERY expensive – you need a lot of infrastructure (pumps, tank batteries, steam/water injectors, etc) and a lot of labor to maintain it. This means that the lifting costs (ie. what it costs to get the oil out of the ground) eat up nearly all of the revenue generated. Lots of wells make either no money or lose money – the only reason they are kept going is that it’s more expensive to plug them than keep them running at a loss. The ONLY reason most people produce oil in California is economies of scale – there’s enormous pools of the stuff, so better producing wells make up for lesser ones.
D. The oil biz in California contributes a huge proportion of state revenue…. it’s near 30% if I recall correctly.
So what’s the prop 87 tax gonna do?
1. It will add to the cost of every barrel produced. Supporters say that, by law, the companies will be prohibited from passing it on to consumers. Yeah right. It will get passed on, believe me.
2. It’s gonna make oil production that much more expensive, and marginal wells will become less profitable….. meaning they are gonna shut in. Fewer wells producing means less oil produced domestically, meaning we have to import more. Even with high oil prices a lot of wells in California are skirting the edge of being revenue generators.
3. Less oil produced in state means fewer jobs, and less revenue for the state for education, gov’t services, etc.
4. Shortages in revenue are gonna have to made up elsewhere – either by repealing prop 13 and property taxes go up, or state income taxes go up. Any way you cut it – it will make California more expensive to do business in and they will leave the state.
5. The idea of “soaking big oil” is all well and good – but big oil isn’t here anymore. Exxon produces about 0 barrels in state. ChevronTexaco owns a few big fields. Occidental Petroleum (the only California-based oil company left in state – now that ARCO, Union, etc. are no mor or left long ago) is the biggest producer here by far. After that you are looking at small companies that are very sensitive to costs because they run at a thinner margin than big oil will. Change that cost/benefit ratio and you’ll cause a good number of those small producers to shut down and leave.
6. If you drive the oil companies out – there’s no incentive for them to maintain refineries here…… you think gas is expensive now!
7. All of this money that would be generated would fund projects where there is NO GUARANTEE that anything will come of it. There is NO TIMEFRAME in which those receiving funds have to produce results. So in 10-20 years we’ll have nothing to show for it but higher than normal gas prices, electricity prices (yes – electricity comes from burning oil & gas), and decreased state revenues meaning we’ll all be paying more in taxes than we are now.
Why not leave the “fuel alternative” research to the market? With oil prices this high there is lots of research happening on it’s own. Research where there is LOTS of pressure to come up with something, and those who do will reap the financial rewards of their work.
I’m obviously getting nowhere here, but I’ll try one last time before throwing in the towel.
California will be a different matter. As supply is constricted, prices will rise until demand is constrained or it becomes economic to import barrels. But the price increases in California will happen before barrels are imported.
CA prices ALREADY rose to the point where barrels are imported. This happened decades ago. Ever since the price of CA oil has equaled the world price (for oil of equal quality). Prop 87 can’t raise the CA price because then it would exceed the world price.
If a CA refiner imports 70k bpd at $75/bbl and buys 30k bpd from CA wells, how much will he pay for the CA oil? $75 of course, he’d be dumb to pay more and the CA wells would be idiots to sell for less. Doesn’t matter that one CA well pays $10/bbl to pump oil and it costs another $50 — they both get $75/bbl.
If Prop 87 adds $4/bbl to CA production costs, can our CA wells now charge $79/bbl? Of course not, the refiner won’t pay more than the world price. What if a 1k bpd well has costs of $72/bbl, which rise to $76 after Prop 87? Clearly that well will shut down. Does the refiner now only process 99k bpd, squeezing CA gasoline supplies and driving CA pump prices up? No, the refiner simply imports an extra 1k bpd.
The extra 1k bpd draw on world oil supplies WILL drive the world price up, perhaps to $75.10. But that price goes up for everyone, not just CA consumers.
If Prop 87 adds $4/bbl to CA production costs, can our CA wells now charge $79/bbl? Of course not, the refiner won’t pay more than the world price.
I finally realized why we are talking past each other. You are assuming there is some fixed “world price.” There is a price for crude oil that trades on the NYMEX, but crude oil prices range all over the map. See:
World Crude Oil Prices
Even within the U.S., crude oil prices vary, today, but as much as $30 a barrel. That is the problem with your argument. As the poster above indicated, Kern River Crude may sell for $45 a barrel when WTI is selling at $75. In an ideal world where everyone was paying exactly the same price for crude, your argument may have merit, but not given the reality of the situation.
I think Khosla honestly thinks he is doing the right thing for society, and wants to profit a little at the same time.
Maybe he does, and maybe he is, and maybe he’s also lying through his teeth.
Prop 87 will increase the cost of oil (and derivatives) and discourage investment in new production. Whether it’s a local or national effect (i.e. whether doggydog or RR is correct), the basic impact is the same.
The result will be more expensive gas, less oil production, and a greater tax capture by the State of California. Thus, less driving, less GHG, cost of gas more closely approximating real cost, and more money for the State. One could argue that these are all good things in the long term (except maybe the last; that depends on what they spend it on).
I suspect that Khosla knows this, and desires this outcome. He probably thinks he’s doing the world a favor, and he may be right. He’s also doing himself a favor, by making ethanol relatively more competitive with gas. Of course, this interpretation would mean that everything he says about the bill is premeditated bullshit, but that would surprise me not at all. This is, after all, politics.
My suspicion is that the impact on gasoline prices and oil production will be negligible, and that this is really just a transfer of funds from oil companies, who’d mostly use it to buy back their own shares rather than investing any more than they already are.
I don’t think that the cost of much oil production in California is close to current prices, so little to none will become uneconomic through the added $4 per barrel.
Even if a little does, it can be replaced through imports, and the extra price differential required to induce a reallocation of oil and pay for transport cost is surely a tiny fraction of the price of the imported oil.
I’d easily see why the net effect on world oil prices would be zero, and even if that effect was a few cents per barrel, and local supply in California went down by a few percent, I’d be surprised if California gasoline prices went up by more than a few hundreds of a cent per gallon.
i was listening the the radio today KDFC when i heard an ad run by the anti prop 87 campaign. it sounded fairly convincing until the moment i heard at the end that it’s being funded in part by chevron and then i realized that it’s all bullshit. i did an online search and realized they were twisting all of the facts. vote for prop 87 everyone. voting against it will only profit the big oil companies.
To begin this comment, I need to get something out of the way. Science shows global warming is almost totally due to sun effects. Ice core data shows this, but so does satellite TSI and temperature data (it is holding constant, not increasing), tree ring studies of ancient growth etc. CO2 hype has gotten out of hand. CO2 is a false argument to warming and should not be leveraged by politicians to elicit efficiency improvements. As Abraham Lincoln said, “You can fool all of the people some of the time, you can fool some of the people all the time, but you can’t fool all of the people all of the time. The CO2 argument is a totally false one, it will likely come crashing down on politicians if they try and leverage it to obtain efficiency improvements. Laws based on falsehoods will not and must not prevail.
Regardless of your profession, there is no solution to the oil crisis without significant conservation. It’s better to talk directly to the issues on how to save and get oil. Oil saving ideas like streamlined bullet trucks that can more than double fuel efficiency and make trucks safer, same with cars only they can be 4-5 times more fuel efficient, less air travel made possible with a new high speed electric train system along our super highways etc. These are all possible with existing science and technology. Then, the U.S. can eventually eliminate oil imports. From the coal saved upgrading coal power we can make up to 3 million bbl/day of oil and not mine an additional ton annually. It will take years of transportation and power improvements to get there, but we will do it. But those who push for only more oil production ignoring conservation in their discourse are not even 1/2 right. That is not sustainable and we can no longer just go down that road. Those days are over.
Finally, this “big-energy” treadmill we are on can’t continue, and we may as well face it and get on with the solutions. But CO2 has nothing to do with anything, so start talking about solutions, not CO2.
The bottom line is that the oil companies can increase the cost after 87 or decrease it. They are beholden to noone and don’t give a damn about Californians or America.
Arguing that Californian oil prices will go up when 87 is passed is just like when people said the cost of goods would go up if Sarbanes Oxley was passed. Correlation is not causation. Making oil companies more accountable for their externalities is just good business sense.
“But CO2 has nothing to do with anything, so start talking about solutions, not CO2.”
You would not be trying to argue against it if it wasn’t worth arguing about, right? Think of all the people who kept smoking cigarettes because they believed the tobacco companies. Do you go around saying lung cancer has nothing to do with anything, and smokers should use low-tar instead (now proven to be just as harmful)?
What evidence do you have to refute CO2 as the cause of warming? None. And then you quote Abraham Lincoln as if he would somehow agree with your tortured logic and vaccuous reasoning.
I’ll tell you what has nothing to do with anything, comments like yours.