Articles about Regulations.
There has been a lot of press coverage recently about how many, including some politicians, are calling for the re-implementation of the windfall profits tax. In one story recently printed in the Houston Chronicle, a representative of the Sierra Club was quoted as saying that they were certain that this being an election year, “action in Congress is going to be sudden and faster than many think,” meaning that there would be some sort of legislation to penalize “big oil” for making so much money. This effort to bring back a tax on domestically produced crude is short sighted and would be counterproductive in the efforts to bring down the cost of energy. The crude market is a global market. Gone are the days when the United States produced all or even most of the crude we use; in fact, the United States produces only 33 percent of the oil we consume. There is nothing that any individual domestic producer can do to bring down the price of oil other than to discover, and bring to market, new supplies; and short of a huge new find, that price impact would be minimal.
If the windfall profits tax were brought back, who ultimately would be penalized by it? If you increase the taxes on the suppliers of any good or service, what happens? The cost to the consumer invariably increases to off-set the cost of the tax. It's doubtful that any American consumer would be willing to pay more at the gasoline pump just for the satisfaction of knowing that the oil companies are being subjected to the additional overhead burden of managing the costs of such a tax.
Ultimately the only producers that will feel the impact of the tax are those that don't own refining assets, meaning they can't immediately pass along their increased costs to the consumers of refined products. These would primarily be the smaller producers, those that operate many of the marginal fields and wells that don't provide significant profit. Many of these properties have been sold off by the majors as their high internal cost structures made the fields uneconomic to continue to own and produce. The smaller companies with their lower overhead burdens have been able to keep these wells flowing and still realize a small profit. However, any additional costs, such as increased production taxes, will make many of these properties uneconomic and lead to their being abandoned. Additionally, in taking money from producers, they will have less dollars and incentive to seek out additional domestic reserves, meaning there will be less supply in the future to replace what is being produced now. An increase in production taxes will create a loss of domestic production, forcing increased imports, increasing prices and making us even more dependent on potentially hostile suppliers.
The bottom line on crude and fuel prices in the United States is that we are now price takers, not price setters. As long as we import two thirds of our oil needs, we are going to be subject to the winds of global prices. Although, the argument could be made that even if we produced 100 percent of our needs, we would still be subject to those same winds as commodity sellers will always seek out the highest price. It wouldn't matter if the crude was produced in Oklahoma—if China was willing to pay more for oil than folks in the United States, the oil would go to China. Crude oil markets are the ultimate expression of the global economy.
This election year mentality of politicians pandering to angry consumers is counterproductive. “Punishing” the big oil companies will have a negative effect at the pump for U.S. consumers and will do little in the way of advancing our efforts to become less dependent on others to meet our critical energy needs. There is no viable near-term political solution for the issue of higher fuel costs.
So, Why is This Even Being Considered?
Given that the impact of instituting a windfall profits tax would be to increase the cost of gasoline and other crude supplied energy sources, why is there a growing perception that it's time to bring it back? If you listen to the arguments for its return, it's always broached as a way of taking back the money that we, the consumer, have overpaid to the oil companies. The problem is that we will see none of it, so obviously it's not a tax that is meant to aid the consumer, and in fact, the unspoken justification of increasing taxes is just the opposite. The ultimate goal for many, if not all, of the supporters of the windfall profits tax is to increase the cost of gasoline. The reasoning is that if the price of gasoline can be increased to such a degree as to force significant numbers of Americans to park their cars and find other means of transportation, then the ends justify the means. The environmentalists, like the Sierra Club, see it as a win because if we consume less oil based energy, we will reduce carbon emissions, and in their view, help reduce global warming. Others, like the growing numbers of “Peak Oil” believers (those who think that world oil production has peaked and it's all downhill from here) believe that the sooner we can force ourselves off energy derived from oil, the better. They believe that doing it now on our terms would be better than it being forced on us later by foreign suppliers.
Are There Alternatives?
There is one economic policy decision that can be made that will bring down the cost of crude, and that is to pursue a strong dollar policy. The devaluing dollar has, by many accounts, contributed more than 30% to the rise in crude prices over the last couple of years. However, there is little or no interest on the part of the Fed or the Treasury to manipulate the dollar exchange rate, and given our current economic conditions, many of the tools of such a policy, including increasing interest rates and decreasing deficits, would be counterproductive to the government's current efforts to stave off or ameliorate the impacts of the pending recession.
Ultimately, the only action that politicians can pursue that won't significantly harm consumers is to pass legislation that provides tax cuts and grants to businesses and research institutes that are pursuing innovative new sources of alternative energies or are perfecting existing ones. Additionally, while those alternate solutions are brought forward, allow and even encourage U.S. producers to seek additional domestic sources of oil and gas, such as the East and West Coasts and in Alaska. Doing this, while not significantly reducing prices, will help to somewhat reduce our exposure to potential interruption of foreign sources of energy.