Come Again?

It seems that the Democrats have crafted a plan to “make America energy-independent of foreign oil within a decade:”

Democrats are working on drilling bill

WASHINGTON — Oil and natural gas producers might soon be able to drill in the eastern Gulf of Mexico as well as along the Atlantic coast from Virginia to Georgia under an energy plan being crafted by House Democrats.

While details are still being worked out, the plan would raise taxes on the oil companies; force producers that benefited from botched lease agreements with the government to pay royalties; require electric utilities to generate 15 percent of their power from renewable sources; and provide loan guarantees to automakers to help produce more fuel-efficient cars.

Pelosi insisted the plan would “make America energy-independent of foreign oil within a decade.”

Really? How? Is increasing taxes on the oil companies going to increase supplies? Is forcing renegotiation of the leases going to reduce demand? How is the electric utilities provision going to affect either since we don’t produce much electricity from oil? (Note that I am not necessarily against all of these provisions, they just aren’t going to help close our supply/demand imbalance).

The drilling itself should bring a little oil online (not nearly enough to make us energy independent), but I suspect the conditions are going to be Draconian enough that oil companies won’t be lining up to take part in the lease auctions. No, I suspect this is just a bit of political smokescreen as Pelosi is starting to feel the pressure from the “drill here, drill now” crowd. She wants to offer up a bill that won’t actually result in any drilling, but will allow her to claim that she supported drilling.

I still believe the compromise I suggested previously is the right one. Open up some drilling, and earmark the money for programs designed to reduce our fossil fuel consumption. And by ‘programs’, I mean actual programs and not some pandering line about taxing oil companies to promote energy independence.

After all, let’s face facts. There was enormous pressure to drill when gasoline cracked $4/gal. It is only going to increase as gas creeps higher and higher in the coming years. Right now the Democrats have some leverage in which to get a compromise that will help stem the demand side of the equation. But that leverage will disappear as the cries to drill grow louder and louder.

20 thoughts on “Come Again?”

  1. Robert,

    You should not get so upset over the political discourse. It is close to the election and everything both parties do (that may make the headlines) will be dictated by election politics. The whole fervor for “drilling” was not based on real economic or scientific analysis either, why should the response be any different?

    Does the typical voter know that (according to Baker Hughes) 1987 of the 3523 rigs drilling for petroleum in the entire world (56%) are operating in the United States? Of course not. You can’t sell policy to the electorate with specifics. That is why we see so much focus on “energy independence” and “drilling”. Two words which are without meaning… because unless the government is going to start up a national oil company, the Congress is not voting on “drilling”, they are voting on how much land should be leased. Those leases will have to compete for capital with all the other exploration prospects around the world. In addition, even if the US produced all the oil it consumed (so called “energy independence”) it still would not be insulated from price shocks because the price of oil would still be set on the global market.

    I would note that Republicans don’t have a problem with “raising taxes” on producers of renewable energy. That is precisely what is going to happen at the end of this year due to the Republicans obstruction of bills which would have extended the current tax credits to producers of wind and solar electricity. Did they do this out of sound policy? No, they did it so they could attempt to brand the Democrats as “the do-nothing party” on energy policy.

    I would also note that I haven’t heard any justification of the preferential tax treatment producers of oil and gas currently receive. Shouldn’t preferential treatment need a better justification than “it’s the way things currently are”?

  2. and provide loan guarantees to automakers to help produce more fuel-efficient cars.
    If you’re an inefficient auto company that bet the future on SUVs ang gas-guzzlers, you get a bail-out. If you figured out by now how to sell hybrids for a profit, you get nothing.

    Bend over, taxpayers, Uncle Sam and the CEOs are here (again)!

  3. If you figured out how to sell hybrids for a profit, you get profit, and cash on hand to spend to grow your business. I wouldn’t want to trade that for a bail-out.

  4. This was an entirely predictable response. The Democrats find themselves on the unpopular side of this issue so to defuse it, they slink off to the “star chamber” and bring forth a plan that contains some components (like slapping the oil companies with windfall profits taxes) that they know the Republicans won’t go for but the public will. They’ll rush to get a vote on the bill before the election, then either blame the Republicans for “voting against” the energy plan or blame Bush for vetoing it. Politically, it’s brilliant – as energy policy, not so much.

  5. Just remember, Crist (Gov.-FL) and McCain both promised that oil drilling off of Florida would not happen unless vetted environmental concerns and if not visible from the shoreline…in other words, it ain’t going to happen. Jeb Bush (former Gov.)pushed through legislation putting Florida off-limits forever, and bragged about it.
    Like I always say, when the rendering plant is proposed for your neighborhood, you turn into a greenie-weenie. And when a subsidy is proposed for your industry, you become a socialist.
    Be a real patriot, and plant oil palm trees.

  6. So Benny, have you made the switch to a “grease-car” yet? That was on your 2008 to-do list, right?

    My daily driver died in May. I got a ’93 300D. So far (touch wood) quite happy with my “blend”. Of course, I’m not saving as much money as I did when I started about a month ago…

  7. Congress is not just voting on how much land should be leased, but also on which land should be leased.

    California has four billion barrel oil fields straddling the shoreline, and several hundred million barrel fields discovered over a brief period in the Santa Barbara Channel with 1960’s technology. ANWR is surrounded by billion barrel fields to the west, and hundred million barrel fields to the north and northeast.

    Industry exploration efforts in the North American side of the Atlantic has, apart from offshore Canada, been disappointing. I have not read many encouraging reports on prospectivity off the west coast of Florida.

    Odd then that if Pelosi really wants “energy independence”, she decided to promote exploration in what appear to be the least promising of the new areas proposed.

  8. Well, this is the way problems are politically “solved” in the US (and other countries, too, for that matter). More than anything else, becoming “energy independent” requires a POWER DOWN strategy. The reason current “energy independent” plans can never work is that everyone is trying to scrape together energy from here and there to somehow prop up industrial civilization and maintain personal consumption and personal motorization. “Power down” is still a dirty word. Until “power down” is perfumed o’er and made to look attractive to Joe Sixpack, no true progress will be realized toward energy independence.

  9. I read Heinberg’s book and I still don’t understand what “power down” is. Sounds an awful lot like just giving up on technological civilization, how’s that different from a crash and dieoff?

  10. Optimist:
    I confess I am still driving my 1990 Isuzu Trooper, a four-cylinder that still gets bad mileage.
    I have been vacillating on a daily basis between buying a Chinese cheapie 150cc scooter, or a veggie-mobile. Evidently, Los Angeles is a veggie-mobile hotbed, and so sauntering into a restaurant and leaving with their grease is no longer so doable.
    I advise people elsewhere outside Los Angeles to try it. The use of fine filters with straight vegetable oil seems vey workable.
    My second bright idea was to collect palm oil from city trees. It can be done, but not easily enough to make sense.
    However, believe it or not, it may make sense for Southwestern cities to plant oil plams, and collect the seeds to make palm oil. Your urban forest becomes a money-maker.
    The palm trees planted in Los Angeles are not oil palms (though they still yield oil), and of course, many other kinds of trees are planted, so driving around and looking for palm trees dropping seeds really does not make sense.
    It would make sense if every tree was an oil palm. Thanks to selective breeding, new oil palm trees have remarkable yields.
    Driving around L.A., so many streets are devoid of any trees at all. What an opportunity.By the way, oil dumping again today. Do we see $80 Do we see $60?
    The speculative price of oil is the market price. Your guess is as good as mine. But with huge commodity, hedge and sovereign funds liquidating positions, look out below. Every dollar down is another speculator forced to liquidate–the snowball.

  11. Benny,
    I got lucky – a guy I know owns a restaurant: Bingo! More oil than I could use.

    And a cheepie scooter is not exactly the same as a dated-but-solid German luxury mobile.

    Do we see $80 Do we see $60?
    I doubt it. But, as RR reminds us, in the short term anything is possible.

    But with huge commodity, hedge and sovereign funds liquidating positions, look out below.
    They are? OTOH, Southwest airlines should be buying soon…

    Every dollar down is another speculator forced to liquidate–the snowball.
    Forced to liquidate? Why? The way I see it oil is moving from the “sell” column to the “buy” column. We’ll see.

  12. Optimist – speculators are forced to liquidate all the time, on the way up and on the way down.

    Oil futures positions are margined daily. If you suffer a loss, you have to pony up the cash. Speculators often can’t handle the margin calls, so they have to bomb out of their positions to avoid going into default. Even if you bet on the right long-term trend, we always must remember that markets can stay irrational longer than we can stay solvent.

  13. Dunno goats. I think that there are two things going on that need separate address: taxation of petroleum at a rate and for the purpose of rapidly developing technologies and industries to free us of international dependence, and, whether it is a Democratic or Republican “agenda/poison-pill” item.

    On the first, I say it thus: the TAX on oil should become a multiplier, not a per-gallon arrangement. This indexes the oil-tax directly in proportion to the absurdity of being “over the barrel” in the international oil market. The higher the price, the more taxes are collected.

    Next, the excess above $25/bbl should be earmarked exclusively and inalienably for renewable energy research, specifically targeted at replacing the nation’s dependence on international oilstock. Its real simple: if it costs $5.00 today to install quality PV or Wind “per installed watt”, then the $55 billion of extra taxes generated from our $660 B in oil purchases … will pay for 11 GWe(peak) or more. That, integrated over time, will deliver one HELL of a lot of power both to the grid, and by way of opportunity, to “new chemistry” that will learn to economically produce liquid replacement fuels for all our cars and trucks, equipment, trains and ships. Maybe even jets!

    BACK TO the question of the whole construct being an evil dead-on-arrival Democratic canard, or a you-got-to-be-kidding me Republican counterpunch … who cares! Tax the frickin’ oil to the point where demand drops, and to the point where enough money is raised to seriously spur the “new technology” needed to capture the wind, sun, geo and tides, and turn them collectively into vast amounts of electricity, organic fluids and chemicals, and so forth.

    Just don’t get into the business of trying to milk a few megajoules-per-palmtree out of Los Angeles. Its inane: the “energy issue” needs to be solved on the “significant percentage of our present consumption” level, not on what comparatively is like a teaspoon of supply versus an olympic swimming pool of demand.


  14. “The higher the price, the more taxes are collected. “

    Isn’t this already the case, i.e., income taxes? When price goes up quickly enough (more quickly than costs), the feds will receive a price related tax revenue increase. If costs eventually follow such that margins drop, should the industry still be taxed on the basis of “high” price?

    “Next, the excess above $25/bbl should be earmarked exclusively and inalienably for renewable energy research”

    Are you saying incremental oil industry income due to prices in excess of $25 should be seized by the US government? Or that taxes from incremental profits due to price above $25 should be earmarked?

  15. “POWER DOWN” is not energy independence, any more than a famine is “food independence”.

    OK, let’s go with the food metaphor. For the United States of America to say that it can’t get by on less energy is like a grossly overweight man with huge rolls of fat saying he can’t stop eating so much or he’ll die.

  16. ArmChair261…

    I apologize – apparently I wasn’t clear enough.

    Today, source-stock is not taxed, but product is. Hence on gasoline there is $ tax-per-gallon for motor fuel, a different $0.dd for diesel, a different $0.aa for aviation fuel. Ultimately, since 80% to 90% of “a barrel” is used for these fuels, it becomes an aggregate $0.zz tax per barrel. But it is NOT a “T.TTT%” tax on the PRICE fo the barrel. Just a simple incremental tax like a postage stamp on an envelope.

    This is the tax I would change, were I king. The tax should be instead a SOURCE tax, levied at the wellhead or tanker-quay. If the “spot” price of oil of some grade is $100.00 a barrel, then with a 10% prorate-tax, it goes up to $111.11 a barrel. Done. If it drops to $50, the barrel becomes $55.56 … if it goes up to $300, the levy is $33.33 a barrel.

    The point also was that the TAX MONEY so derived (I wasn’t talking about taxing the oil industry, or the producers systematically – answering your second question), would have its excess above some sutaining “other use level” earmarked for renewable energy research.

    Again, my apologies. I thought it was a clear enough proposition, but clearly it was not.


  17. goatguy, not sure I understand yet… Does the tax apply only to oil produced in the US? Oil produced abroad by US companies? Imported oil produced abroad by foreign companies? And who would be paying this tax? The producers or first purchasers?

    Some rambling initial thoughts…

    First purchasers pay on US produced oil? If I ran a large refinery, and I had a choice between $111.11 oil from Texas and $100 oil from Brent, I’d be buying all the Brent I could. Demand for cheaper foreign oil would rise incrementally, demand for taxed US oil would fall incrementally. There would be a new equilibrium. I’m not sure what it would be, but I think it would act as a counterweight to your tax. Would first purchasers pay a 10% tax on the 10 million barrels of crude they import daily?. Seems like quite a burden on the refiners, particularly those who do not produce any oil themselves. You’d see higher gas prices.

    Producers? As exploration manager, I’d be taking a much harder look at foreign investment rather than US. But then if as an American company I pay the tax for ALL crude I produce globally, then I am at a distinct disadvantage to foreign competitors who don’t pay this tax, when it comes to bidding for large foreign projects. All things being equal, we’d see foreign companies gaining reserves and production at the expense of American companies.

    There would be at least some projects on the margin at the national level that would not be done because they would fall under the hurdle rate.

    Also, as oil prices go up, so do costs. A producer at $150 oil is not necessarily making a higher profit than he was at $130, if prices stay at $150 for a sufficiently long time. The service companies’ take, the demand for talent, rising lease costs, tangible costs like steel for well casing… most costs would increase with increasing demand, as has been observed over the past few years. Your tax would penalize producers, but none of the supporting industries providing goods and services to the oil industry. If first producers are paying the tax, then they would suffer, as high oil prices may have a much smaller effect (or, as recently, a negative effect) on their incomes.

    Taxes at the source might provide a disincentive for consumers to conserve. We’d likely see increased demand for petroleum products.

    The source tax would be treated as a cost of production, as severance taxes are now. It would therefore reduce income and therefore income taxes. What would be the net result?

    Anyway, it would take a long time to figure out how the market might respond to such an intervention. Interesting idea though.

  18. Closing thoughts… [AC261]

    You have a remarkably crenelated mind (a good thing). My proposal is much simpler, in that it would be a level playing field for all.

    West Texas crude, pumped into waiting tanks … gets no tax. When its price is finally determined by the spot (or contract) market, then a 10% (or similarly tolerable) tax is levied UPON TRANSFER to the refinery, or “consumer” (there are a number of minor non-refinery uses for crude oil). In this way it is essentially identical to the Wine Bond taxation method: the wine remains untaxed until it is ‘placed in bond’, which then allows it to be transferred to the consumer.

    Incoming Brent … would be transferred at $100/bbl (paid to Brent) to the quay. From there, it would be taxed at the same percentage ($11.11), so it would cost the same $111.11/bbl to the refinery as the West Texas (assuming they are really equal).

    The consumer is uniformly dealt a disincentive (higher prices), revenues are realized in the tax coffer, and from there research and development is funded.

    The thing that we must most avidly avoid (soon) is the pedantic head-butting of the various competing renewable energy groups. I have had truly absurd arguments with the Heat engine versus Photovoltaic bunch, with the Windies and the HotRocks advocates. They’re ALL viable – let’s just get them ALL working and well funded. Indeed, I think energy investment is as critical to the National Well Being as once the Space Race was.


  19. Not sure if crenelated is good or not! LOL

    OK my closing comments…

    At $11/bbl tax, you’ve just hit US refiners with a $60 billion incremental tax bill (assuming 15 mmbopd crude inputs and $100 oil). For an industry that’s been doing poorly anyway, that would be a pretty big hit. Naturally they’d attempt to pass the costs along to us consumers. To the extent they’re unsuccessful in this attempt (as was the case in recent months), we’d see some real stress on US refiners.

    If I were a major refiner, I’d be thinking that future refinery capacity should maybe be built in some other country. I think we’d eventually see big increases in imported products.

    If I were an investor, I think I’d put more money in foreign refiners, and avoid too much US exposure. More stress on refiners.

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