Wednesday, June 11, 2008
Be very afraid
First off, welcome aboard SW. It's always nice to gather with other like-minded progressive liberals.
Ahh, the good 'ol "windfall profit tax" on the oil industry reared its ugly head again in the Senate. Besides the fact that this is just hideously socialist, it is also just poor policy. Where to begin? For starters, how about some statistics. First, the combined proven oil reserves of the "Big 5" (Exxon, Chevron, ConocoPhillips, BP, Royal DutchShell) are less than 10% of the world's available supply. 10%. Exxon, BP, and Chevron rank 14th, 17th, and 19th, respectively. How much control do you think Exxon has over oil prices when they are sitting on just a few percent of the world's reserves?
Second, despite their large profit (in absolute dollars), Exxon's net profit margin is only 10%. Yes, they had a $40 B profit, but it is critical to keep scale in mind: they made $400 B in revenues but had $360 B in expenses. These are big top-line numbers, and even a small swing in operating costs could wipe those profits out in an instant. GE made $22 B in profit last year (with a 13% profit margin, BTW). Are they making "too much"? Walmart had $380 B in revenue last year - are they making too much? Bank of America had $21 B in profit in '06, how about them? Google, Intel, and Microsoft have profit margins of 18-27%, perhaps we ought to take their profits away to drop them down to 10% too. You can see that the decision to put a "windfall profit tax" on the oil companies would not only be capricious, it would set a dangerous precedent.
It would also take away ANY chance that the US oil companies (who, by the way, are #3 in world oil production, despite not even being in the top 10 in oil reserves) might invest in extracting additional oil from more difficult sources, to increase our supply. And instead of taxing them, how about opening up the Bakken oil fields in the Dakotas, or the Colorado oil shale, or ANWR, all of which combined could eliminate our dependence on foreign oil (or at least from OPEC and Venezuela, the two worst offenders). Then, just as with coal, we could be energy independent. The greenies are hypocrites for opposing this: the fact is, oil will be drilled and removed from somewhere. If drilling really destroys the environment, why is it ok to make other countries ruin their ecosystems on our behalf, rather than just doing it here?
Bottom line: taxing the US oil companies, who have NO control on world oil prices, is the worst kind of politics. And what is scary is that this is just the beginning. If Obama gets in, and more Dems win seats in Congress, expect not only this to happen, but all corporate tax rates to go up, and personal tax rates as well (increase in Soc. Sec. ceiling; tax brackets; capital gains rates; etc.)
Ahh, the good 'ol "windfall profit tax" on the oil industry reared its ugly head again in the Senate. Besides the fact that this is just hideously socialist, it is also just poor policy. Where to begin? For starters, how about some statistics. First, the combined proven oil reserves of the "Big 5" (Exxon, Chevron, ConocoPhillips, BP, Royal DutchShell) are less than 10% of the world's available supply. 10%. Exxon, BP, and Chevron rank 14th, 17th, and 19th, respectively. How much control do you think Exxon has over oil prices when they are sitting on just a few percent of the world's reserves?
Second, despite their large profit (in absolute dollars), Exxon's net profit margin is only 10%. Yes, they had a $40 B profit, but it is critical to keep scale in mind: they made $400 B in revenues but had $360 B in expenses. These are big top-line numbers, and even a small swing in operating costs could wipe those profits out in an instant. GE made $22 B in profit last year (with a 13% profit margin, BTW). Are they making "too much"? Walmart had $380 B in revenue last year - are they making too much? Bank of America had $21 B in profit in '06, how about them? Google, Intel, and Microsoft have profit margins of 18-27%, perhaps we ought to take their profits away to drop them down to 10% too. You can see that the decision to put a "windfall profit tax" on the oil companies would not only be capricious, it would set a dangerous precedent.
It would also take away ANY chance that the US oil companies (who, by the way, are #3 in world oil production, despite not even being in the top 10 in oil reserves) might invest in extracting additional oil from more difficult sources, to increase our supply. And instead of taxing them, how about opening up the Bakken oil fields in the Dakotas, or the Colorado oil shale, or ANWR, all of which combined could eliminate our dependence on foreign oil (or at least from OPEC and Venezuela, the two worst offenders). Then, just as with coal, we could be energy independent. The greenies are hypocrites for opposing this: the fact is, oil will be drilled and removed from somewhere. If drilling really destroys the environment, why is it ok to make other countries ruin their ecosystems on our behalf, rather than just doing it here?
Bottom line: taxing the US oil companies, who have NO control on world oil prices, is the worst kind of politics. And what is scary is that this is just the beginning. If Obama gets in, and more Dems win seats in Congress, expect not only this to happen, but all corporate tax rates to go up, and personal tax rates as well (increase in Soc. Sec. ceiling; tax brackets; capital gains rates; etc.)
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9 comments:
And now we see yet another downside to buying foreign oil rather than producing our own: we've given them enough money that Abu Dhabi is buying a 75% stake in Chrysler building.
Excellent post.
Two points I would add:
1) From Larry Kudlow's blog:
"Recent polling data from Gallup show the percentage of voters blaming oil companies for skyrocketing gasoline prices has dropped from 34 percent to 20 percent over the past year. At the same time, support for more drilling in U.S. coastal and wilderness areas has increased to 57 percent from 41 percent."
The American people are not as hopelessly lost on the issue as we might think. A pro-supply side argument (drill drill drill) could be effective. Too bad McCain seems unwilling to go there.
2) ExxonMobil is sitting on a ginormous cash stake. They're not doing the rational thing and reinvesting chunks of it in new extraction. Why? Do they think oil prices are preparing to crash, and the cash is more valuable to shareholders as a dividend? Or, as SHK points out, are they holding a "nationalization reserve", waiting to see how much they'll need to fork over to Uncle Sam and what the future risk/reward curve on new investment looks like?
If it's the latter, the government's mere discussion of a windfall profits tax is impeding our economic recovery and artifically inflating gas prices. Of course, we knew that already.
One of my favorite charts is here (slide 16). It is a slide from the CSO of BP (I saw a talk from him a few weeks ago) based on IEA data, and it shows the amount of known oil available vs. cost. Approximately 1 trillion barrels have already been recovered in our history, at a price up to $20 (USD 2004). It then shows about 8-10 other possible sources of oil, about 4.5 trillion barrels of capacity, with prices ranging from $10-60 per barrel. So if we would have energy policies that would allow us to tap these things, there is no shortage of oil available, especially if we accept prices of $50-60 per barrel.
SHK--
Can you define some of the terms on that slide and save me the wiki time?
What are "Opec ME" and "EOR"?
It is staggering, based on those slides, that we could quadruple our coal output and have the same R/P ratios that exist currently for oil.
At that level, we could produce enough coal for 2x our current power generation needs, which means we could get off of oil and natural gas for power generation and still have enough coal-based energy to run our entire auto energy needs off coal (via electric plug-in, perhaps).
At the same time, coal is an energy source that we have in abundance in the USA. And it would even get us past the need to build nuclear plants (which I have always assumed would be a necessity) as a bridge to when the technology exists for renewable sources to be used exclusively.
Interesting. Gonna have to look into the cost of clean coal.
This seems to make waaay too much sense to actually be feasable and accepted...
EOR means "enhanced oil recovery" and are more expensive techniques to squeeze every last drop of oil out of a field. I don't know about ME but I assume maybe Middle East?
We have at least 150 years of coal and more likely 300-1000 years of coal reserves in US. A portion of that could certainly be used for coal-to-liquid to obtain diesel, in which case if we switch to diesel engines (which are 30-40% more efficient than gas engines) we could back way off of foreign oil.
Right now almost 100% of our transportation fuel comes from oil. As for electricity, ~half is from coal, 20% from nuclear, 20% from natural gas, a tiny amount from oil and the rest from renewables (wind, geothermal are main ones). I think more nuclear is key, this would also allow us to divert some coal use to transportation to reduce foreign oil.
As we've discussed before, I'm more than open to nuclear energy. No atmospheric impact and no need to pay off the Saudis.
At the same time, if our coal reserves are that high, and "clean coal" technologies exist such that we wouldn't totally mess up the enviornment, why bother with nuclear? Have the coal-generated electricity handle autos (with hybrid plug-in/diesel generator engines) and our power supply needs. If we can buy 20-40 years of oil-free power with such a solution, and we can't get to the next-next-generation of power supply by then, we're hopeless anyway.
Nuclear does offer two setbacks that need to be considered (but are not necessarily deal-breakers): the terrorist target angle, and the diplomatic angle.
I'd think we could handle the security.
On the other hand, the diplomatic angle is thorny. It might not pass the smell test for us to argue that other nations (e.g., Iran) shouldn't have access to nuclear materials (they say for civilian purposes, we say bombs) if we're rapidly ramping up our own nuclear power capacity. I understand it's allowable (in that civilian nuclear energy isn't included in the NPT), but still, it will be used as evidence of hypocrisy for enemies of the US.
Article in WSJ today about areas for fossil fuel exploration in US.