Rhinocrisy

Some Democrat Senators are trying to get a windfall profits tax put in place on oil companies, and alarm bells are ringing. Especially since some Republican senators are apparently discontented as well, recognizing that high gasoline prices are going to be a significant electoral issue this year. Chris Dodd (D-Connecticut) tried to put an amendment onto the latest megalithic spending bill winding its way through Congress^* taxing profits 50% on oil revenues over $40/barrel. Punishing bloated capitalists^† is an easy way to earn yourself points when consumers are suffering. The bill currently in play is sponsored by Byron Dorgan of North Dakota, who has tried to get such a bill passed before, post-Katrina, and includes exemptions for money reinvested in further exploration. Even Arlen Specter says it’s “worth considering” a windfall tax amongst “a number of options”.^‡

A windfall profit tax is fine by me, although I do think if people are suddenly going to start taking anti-capitalist positions because of obvious market failure, they should at least have the decency to stay that way.^§ And lest you have any doubts about how this is being played, there’s little or no talk about oil shortage or how global demand is going to grow; that sort of talk would lead to talk of “conservation”, which during an election year is verboten. Senate Democrats (e.g. Harry Reid) are talking about removing the gas tax to ease the burden on consumers. Removing the gas tax. Anything to allow Americans to continue gassing up without worry. This is bad medicine: treat the symptoms, not the disease.

Anyhow, all this talk of a windfall profit tax is bringing up the last time there was a windfall profits tax, in the early 1980s. Like the unfortunately named House Majority Leader, John Boehner (R-Ohio):

“The windfall profits [tax], when it was tried in the ’80s, failed miserably because it led to less discovery. It led to less production and was a failure,” Boehner said. “There is no reason for us . . . to go there again.”

There’s also a whole slew of papers and talking points reiterating the above line, like this Heritage Foundation article. These make basically two claims: first, that a windfall profits tax would not generate much revenue, since the one in the 1980s didn’t, and second, that the tax sets an unnecessary burden on domestic producers and would depress production.

The former claim is perhaps true, since the 80s tax made a paltry $40 billion net, as opposed to the projected $369 billion. This is because the price of oil crashed in the 80s as a result of extremely good conservation measures, and eventually OPEC ramping up production again; after 1986, the price of oil dropped below the floor set for the windfall profit tax; after this point there was no more windfall to tax, and even before then declining prices made the tax untenable. If such a situation were to repeat itself, we’d have little cause for complaint - if the revenue vanishes because of a collapse in the price of oil, well and good. This, however, should be no reason not to pass the tax by itself.

The latter claim usually cites a Congressional Research Service study from 1990; in light of recent events the author (Salvatore Lazzari) published an update, available here. His argument is this: since the price of oil is determined on a global market, a windfall profits tax imposed on domestic producers means that the effective price per barrel of oil is reduced by the amount of the tax, per barrel. We may then compute, based on what we think is the price elasticity of supply for oil, the effective reduction in oil output this must have precipitated. Based on that, the study concludes that there was (depending on what the price elasticity actually was) somewhere between a 3 and 6% reduction in domestic production in the 1980s.

I’ll make the caveat that my economics is for shit, here; the study’s calculations are reasonable, although one might debate the price elasticity figures employed. In the original study, the lower-bound was 0.5, while in the 2006 update the author acknowledges that lower figures might be correct. I’m not qualified to debate this matter.

But what I do take issue with is the study’s assumption that the full value of the tax should be deducted from the price per barrel. Lee Raymond is adequate evidence of this: capitalists eat profit. Not all of the profit is reinvested, and so we needn’t assume that in the absence of a windfall productivity would suffer. It would just mean some rich people would be a little less filthy fucking rich than they otherwise would have been. This is a key assumption made by proponents of the tax and one that the study fails to acknowledge.

All of that said, I think this tax is a waste of time. And as a political dodge, it’s worse than ineffective, since it distracts from actual measures that would promote real reductions in the price of oil. Giving rebates from tax revenues to customers would certainly be a popular measure, but it’s, first, not going to have any impact on the price of oil, and second, couldn’t possibly provide substantial relief from high gasoline prices - probably 1 or 2% at most. And since we’re unlikely to see drastic increases in output from any major producers (all of whom are running basically at capacity), we’re not going to see a drop in gasoline prices unless we force conservation. Anything that detracts from that is pointless.

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^* Which apparently has gotten George Bush’s knickers all in a twist. After spending us $8 trillion into debt, he and the Senate Republic leadership have suddenly decided they are fiscal conservatives again and want to cut the porky bill from $105.6 billion down to a lean $92.2 billion. Ah, election year!

Quimby: Demand? Who are you to demand anything? I run this town! You’re just a bunch of low-income nobodies!
Aide [whispering]: Election in November! Election in November!
Quimby: What? Again!? This stupid country.


^† Like Lee Raymond, CEO of ExxonMobil, who just retired with a $400 million golden parachute. At current gold prices, this would be a parachute weighing 20 metric tons.

^‡ Of course, in the same interview he mouths off about how he’s passed legislation outlawing OPEC, which “get[s] together, reduce[s] the supply of oil, and that drives up prices,” a mysterious and ignorant statement considering that (a) the Kingdom of Saudi Arabia, the major OPEC producer, most definitely does NOT connive against the U.S., and (b) OPEC has increased their production quotas repeatedly in past months, and just recently (a few days back) announced they’re going to keep them at 28 Mbd total, almost at full capacity. So take what he says with a grain of salt.

^§ In other words, I’m bitter because I was on the “dispossess the ruling class” wagon way before these ruling-class jerks showed up on it.

Good news: our life of satisfied primal appetites and minimal toil are having a less bad effect on mortality than previously reported.

Which is good, because I plan to store up all the lipids I can over the next few years. According to the Oil Depletion Analysis Center (yes, there is an Oil Depletion Analysis Center, which I suspects employs about .2 full-time equivalent workers, but which has a phone number in Britain and is therefore a reliable source), the world is running shorter and shorter of fatty acids. Or beer. Having read this analysis carefully, I suspect the author might have been using the latter in order to build up his body’s supply of the former — just before writing.

You can always brew more beer but, as far as I know, no one is brewing oil. The other problem is that, according to industry consultants IHS Energy, 90 percent of all known reserves are now in production. This is another indication that there’s little more to come.

So, at some not too distant point the ability to offset Type 1 and Type 2 depletion will be greatly restricted and Type 3 will spiral upwards. At this point supply will really be falling quite quickly, with Type 3 depletion possibly running at over 3mn b/d each year.

Note to self: Don’t drink and draw up press releases.

Alt hippo* wants a lefty blogger campaign directed at the issue of ANWR. I’m game, partly because I find the issue compelling (see this), partly because I’ve been so impressed by the Social Security-focused discussion I’ve been watching Jonathan Schwarz of A Tiny Revolution participate in, and partly because I just find oil resource issues fascinating.

Speaking of which, here is the USGS factsheet on ANWR. You should read it, because it’s the report that everyone will be quoting from when they talk about how much oil is sitting in ANWR. Taking the region as a whole (i.e., including “native lands” and offshore sites, what’s called the “1002 Area”), the 5% confidence figure for technically recoverable oil is 15 billion barrels of oil (bbo). The more realistic figure is the mean confidence estimate, which is 10 bbo. This is a substantial quantity of oil, to be sure. To put it in perspective, Sudan has estimated reserves of ca. 1 bbo. U.S. proven reserves (i.e., that which you are capable of getting out of the ground) are somewhere around 29 bbo. In other words, ANWR can potentially add half again as much to American proven reserves. Although estimates of production are at this point premature, they are of course being made. Gale Norton claims ANWR could produce up to 1.4 million barrels per day. On a good day, the U.S. consumes 20 million barrels of oil.

If the drilling is confined to the “undeformed area” (the region above the Marsh Creek anticline, a boggy and unattractive mess), about 7 bbo are recoverable. Compare to the caribou calving concentration map of former USGS scientist Ian Thomas (who was fired for posting them on his USGS site), and you will find the happy truth: caribou calving will be unaffected by drilling in undeformed areas.

Sounds great, right?

Here’s a wrench in the works: the above numbers are from a USGS survey done in 1998. A previous assessment in 1987 found exactly the opposite results: 75% of reserves were believed to lie in the deformed area, where most of caribou calving occurs. While it’s probably the case that the 1998 study is more reliable than the 1987 one, the point is: exploratory drilling, and probably actual wells, will not be confined to the undeformed area. If drilling is approved in ANWR exploration will cover the entire 1002 area. Makes sense - why trust a flimsy study when you have approval to do exploratory drilling wherever you want?

And it seems likely that drilling would inevitably entail driving some natives off their land for the 4 billion barrels of oil they’re sitting on, but obviously that’s not as important as caribou.

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* Random fact of the day: phylogenetically, the hippo is the closest surviving land relative of whales and dolphins, followed by the cow. See this.