I don’t know if you’ve noticed this, but while I was out and about today I saw that gas prices are edging back up again. What were numbers in the $1.50 range a month or so ago are now creeping back up into the mid-$1.80’s at some stations I witnessed along U. S. 50.
In the meantime, the buzz around our nation’s capital has centered on the tax difficulties encountered by several of President Obama’s nominees and the fate of the so-called stimulus package in the Senate.
But a few months ago you’ll likely recall that gas was north of $4 a gallon and Exxon/Mobil was making what many termed obscene profits because of the price spike in crude oil futures. Last May, a bill (S.2971) was introduced which would, in part install a “temporary fee on excess oil profit”:
(a) In General- In addition to any other tax imposed under this title, there is hereby imposed on any applicable taxpayer an excise fee in an amount equal to 50 percent of the excess profit of such taxpayer for any taxable year beginning during 2008.
(b) Applicable Taxpayer- For purposes of this chapter, the term `applicable taxpayer’ means, with respect to operations in the United States–
(1) any integrated oil company (as defined in section 291(b)(4)), and
(2) any other producer or refiner of crude oil with gross receipts from the sale of such crude oil or refined oil products for the taxable year exceeding $1,000,000,000.
The reason I bring this up now is because forecasting the effects of legislation sometimes takes awhile, and this week a study was released showing the possible consequences of such a tax on our domestic energy industry.
Some of the negative effects included:
- an estimated average decline in domestic crude oil production of approximately 21-26% from baseline levels… over the 2010–2030 period. The loss in domestic crude oil production would result in imports of crude oil increasing by 13-18% over baseline levels…
- a decline in domestic natural gas production of between 1.6-2.4 Tcf (9-13% from baseline levels) by the period 2020-2030. This loss in domestic production would in part be offset by greater reliance on foreign imports with imports increasing between 0.5-1.2 Tcf (14-55% over baseline levels) during the period 2020-2030.
- By 2030, the proposed legislation is estimated to cause a net loss of between 370-490 thousand total jobs from baseline levels. Regions around the U.S. would be disproportionately affected.
- By 2030, GDP, a commonly used measure of total economic activity, is estimated to decline below the baseline by approximately 0.5-0.9 % or $140-240 billion.
These would be just some of the predicted effects over the next twenty years should this idea be resurrected in the 111th Congress as a desperate bid to pay down our deficit spending.
Obviously I realize that this is representative of the energy industry’s view of the subject and undoubtedly they have their own self-interest in mind. But why shouldn’t they? It’s obvious by looking at some of President Obama’s selections for high government office that they don’t want to pay taxes either!
Yes, I know that last sentence was a partisan cheap shot, but there’s a larger point to be made here as well.
Even the most laissez-faire capitalist has to admit that the idea of others making profit is maddening at times. No one liked to pay $4 or more for a gallon of gas; however, that was reflective of the predicted cost of oil companies and their retail outlets for doing future business. By buying gallons out of their storage tank, you were paying for the future gallons to replace that supply you were putting into your own gas tank for your use. In any business, at least some of what you pay for an item on the shelf has to reflect its replacement cost.
I have the strongest of objections to ANYONE telling me how much money I can make, so I think it’s wrong to penalize someone for making what they arbitrarily consider too much profit. It brings the insidious progressive nature of individual taxation to the business world, and corporate taxes in America are already too high!
So don’t discount the conclusions drawn by this study as simple Big Oil propaganda. There are real-world effects which occur when government draws up new revenue sources and this is yet another illustration of what can happen to a viable sector of the economy.
As we’ve found in Maryland over the last 13 months, the predictions by government can be woefully wrong when they have a stake in the outcome. They just happen to have the force of law behind them.
All that the energy companies can do is react to the conditions they’re given to work with and give fair warning when they predict their business climate will turn much more adverse. That’s why this study was commissioned, and why it’s worth considering as our energy prices swing upward again.
If you are going to be a mouthpiece for the American Petroleum Institute, you should make that clear up front, especially since they are the ones that produced your so called study while they hide behind the friendly sounding energytomorrow.org.
Your contention that $4 per gallon gasoline was based on simple supply and demand has been proven wrong by many sources confirming widespread speculation in the oil markets.
And if the oil companies are so concerned with maintaining a free flow of products to U.S. customers, then why are they delaying and canceling exploration projects, as well as threatening to close refineries if the price does not go back up to a more profitable level.
Energy prices have become more volatile due to the fluctuations in the futures contracts. These fluctuations are magnified near month end as the front month contract rolls over. Traders who are short the market must cover their positions, which causes an increase in the demand for futures, not oil or gas. As the month continues, the price will gradually decline until the contract positions again become an issue. It is much like the triple witching that you hear about with options on the stock market. Stock prices are determined more by options contracts than by fundamentals.
You can also complain about the unions that are threatening to strike at some refineries in the south. Capacity utilization at refineries is also more important to gas prices than the supply of oil.
This is an example of using another medium to make a larger point, and you fell for it.
You’re focusing on the oil industry aspect of the article, but not the idea of a windfall profits tax. And you also talk about the widespread speculation in the oil markets, which reinforces my point of basic economics. Why do you think the futures were bid up so high – isn’t that a future prediction of supply and demand? The speculators were obviously anticipating that supplies would continue to be outstripped by demand, thus the price went higher. But then they guessed incorrectly because demand softened.
You also seem to think that oil companies should operate as charitable entities and not be profitable. Since a nice little percentage of my 401.k is based on Exxon/Mobil stock I’d like them to prosper too. In fact, some of these “speculators” you speak so ill of are those same entities who are attempting to fund the retirements of a number of Americans.
So are you telling me that only the government is allowed to prosper?
The run up in futures prices had nothing to do with the supply and demand of oil. It had to do with the limited supply of futures contracts. At the peak, futures were being traded on 27 barrels of oil for every 1 barrel of oil that actually existed.
I didn’t say they shouldn’t make money, but they were spoiled for awhile, and now that times are tough, their true colors are showing. They couldn’t care less about an abundant supply of oil and gas that would stabilize the price now that the speculators have run for the hills. Their is so much oil out there that it is sitting in tankers because their is no place left to store it. Gas prices are going up because of the limited capacity of refineries, and those companies are canceling expansions and threatening to close facilities because profit margins are too narrow.
You are the only one talking about a windfall profits tax that was proposed almost a year ago and hasn’t been promoted since. Your “study” is API propaganda.
Let me correct your next-to-last sentence:
“You are the only one talking about a windfall profits tax that was proposed almost a year ago and hasn’t been promoted
sinceyet.” Just wait, it will come back.If the oil companies are threatening to close facilities because profit margins are too narrow, isn’t that being prudent in business? It makes them no different than Starbucks. Nor have all of the speculators truly run for the hills, they’re simply trading in a more realistic price range. As with all markets, some made a killing while others got killed.
Yet oil companies are still looking for supplies. My friend Jane from API sent me this yesterday. She’s actually quite a nice lady, don’t let the fact she works for the “greedy” oil industry fool you.
Perhaps the study I used is indeed propaganda based on computer modeling. However, if you believe that then wouldn’t all the computer models which predict global warming if we don’t retreat from the use of fossil fuels also be propaganda?
I know I’ve thrown in a number of specious arguments but I’m still hammering home the larger point which you still really haven’t addressed.