Stuck on the windfall profit tax

Interesting post.

What's your take on the tire inflation thing? A local blog has written that it would save more oil than we could pump from ANWR by 2020. (link)

Justin,

If oil companies have so many tax breaks, then why do companies like Exxon and Chevron have effective tax rates over 40%?

Mark

The problem is, Oil companies are global conglomerates with operations all over the world. How difficult would it be to avoid any tax on profits by not booking profits in the US?

Did Drudge link here? How come all the right-wingers showed up?

Can we even set up the means to pump anything from ANWR by 2020? I thought it took longer than that, and if so, I could save more oil than we could pump from ANWR by 2020 myself by walking to the grocery store next week.

Not to diminish how much proper tire inflation matters (i harp on it all the time).

A very good piece Justin, inc. "shared patrimony"

I think the thing to watch, stepping back a bit, are the ... "optimistic" things we tell ourselves about alternatives, and then how much we still need that oil.

"Alternative energies" have been "alternative" for 40 years now.

That makes me worry that the last country with its own oil wins.

You're right, it is hard. Sounds like it would be easier to get rid of some of those special incentives and tax breaks for the oil industry.

Justin Fox - I appreciate that the free-marketeer in you forces you to argue against a wind-fall profits tax because it would discourage exploration but if exploration were a priority then the oil companies would not be handing out their profits to shareholders and chief executives with such abandon. The real issue of the WFPT is not the effect that it would have on exploration - the real issue is that the industry has used every tax break, every below-market lease agreement, every subverted environmental regulation to line their own pockets. But it is too difficult, apparently, to audit each and every advantage given to them so, for the sake of efficiency we decide that we should just take a slice off of the enormous top of their creamy profits.

And while we are at it we can send them a bill for the use of the military to open new oil fields for them. We can send them the bill for all of the security forces that are protecting their assets and employees. And then we can take the advice of commentor Curmudgeon and get rid of all of the handouts that they extract from the taxpayers.

See, free market thinking does not apply to these companies because they have already socialized so much of their costs, risks and liabilities onto the American taxpayer that they would not recognize a free market if they forced our government to invade one.

It is a sad commentary on the state of discussion in this country when 2 thoughtful comments raising valid issues can result in the cycnical & ill-informed comment from TomT that "all the right-wingers" are showing up.

Cannot one just analyze the economics without political bias? The original rational for the windfall profits tax was that oil companies are greedy, they are making lots of profit, and in order to level the playing field for the consumers of "overpriced" oil, the successful producers were penalized with a tax.

Anyone who thinks that oil companies are making excess profits, or are returning more to shareholders than they should (presumably at peril of underinvesting in new reserves) is welcome to buy stock in any oil company and reap the rewards of all these "excess profits". Indeed, it would be the rational thing to do, if one really believed the rhetoric.

Instead this is merely a campaign to penalize a sector of the US economy that is seeing substantial benefits today, but that faces gigantic risks in making investment decisions for tomorrow. Why would an oil-company be investment-prone considering 1) the history of what happened to those that invested aggressively following the 1979/80 oil peak (many were bust by the mid- to late-1980s); 2) the propensity of politicians to target successful entities for additional taxes or regulatory issues, etc.; 3) the risk that government may apply carbon taxes that would ultimately raise the cost of using petroleum products (and thus lower the price at which production can be profitable); 4) the risk that government will continue to subsidize follies that are not economically justified (corn-based ethanol being the most blatant example); 5) the increasing risk of nationalization as exemplied by actions in Venezuela and Russia, amongst others?

The best-managed oil companies rightly take a long-term view of investment decisions, and their track recorde overall has been solid.

Rhetorical question: What price per barrel of oil should be factored into the business and return analysis of new projects, considering that a new project might only begin to produce in 5 years, or more? Just one look at the history of oil prices over the last 40 years illustrates how difficult a decision these investments can be. If one invests heavily in a project that looks profitable at $60/barrel, and the price of oil is down to $45 in 7 years, one has stranded investment. And if anyone is so confident that the price of oil will be comfortably above $60 in 7 years, then that person should invest, very aggressively, in new projects. Just don't forget to factor into the analysis that some incompetent Democratic candidate for the presidency in 2020 might have a great new idea for a tax on oil properties that were developed before 2018 by some greedy entity...

In closing, send all the hate-spam you wish, but none of it will change the laws of economics. And, no, I don't work for an oil company, or in the oil industry at all, but I can do thoughtful analysis of a situation.

The main comment I must make about your post FreemarketMan is that you seem to base you statements on the mythical "free market" that is "un-intelligent" (or unaware). This is not the case. In the US, the oil industry expends time and money to change the conditions of the market. Through politics the market is directly shaped by the desires of the oil companies themselves.

This makes your request to "...analyze the economics without political bias" highly nonsensical. Oil companies are political, and they take political actions to change the market to maximize profit.

Oil companies are, as far as the timeline of global dynamics, only in this for the short term. I like my government to be prepared for the future well beyond the currently living generations. I do not like the "tool" of windfall taxes, but if that's what is necessary to set up the needed infrastructure to get beyond the current oil economy then it must be at least considered.

FreMarketMan - That certainly is the free market case but SpotWeld is is entirely correct that your beloved 'free market' is more myth than reality. Just take your Gigantic Risk #4 "...4) the risk that government will continue to subsidize follies that are not economically justified ..."

The entire rationale for the WFPT is not that mean old gummint wants to 'punish the successful', it is that the oil companies reap billions in tax breaks, subsidies, handouts and other benefits from tax payers. It would be like your neighbor asking you to lend him money - which you give - and then a week later you find out that he is pulling in tens of billions of dollars in profit while charging you historically high prices for a commodity that you must use. I see nothing wrong with the government getting that 'investment' back.

I would also like to see the oil companies use the leases they already own instead of sitting on them to drive up the price. If they were not interested in developing those fields then they should have simply not invested in them - free market right?

Finally, your little zinger about 'incompetent Democratic candidate' is at odds with your fake outrage over TomT's comment. You have to trust me on this one: being called a 'right-winger' is probably the nicest thing that anybody could say about your side nowadays. Try to grow a thicker skin.