New at Reason

David Weigel | September 29, 2006

Shikha Dalmia puts on her gloves and digs deep into the reasons why an Indian American mogul is supporting an oil extraction tax.

Comments

|9.29.06 @ 4:00AM|#

As an observer of California oil wells on the central coast, many of them lay dormant when the price of crude oil is low. They all spin when price is high. I suppose the owners do this to maximize the profits on their finite reservers.

What prop 87 proposes is a an escalating tax on oil prices (not profits) as follows:

a) One and one-half percent (1.5%) of the gross value of oil from $10 to $25 per barrel.
(b) Three percent (3.0%) of the gross value of oil from $25.01 to $40 per barrel.
(c) Four and one-half percent (4.5%) of the gross value of oil from $40.01 to $60 per barrel.
(d) Six percent (6.0%) of the gross value of oil from $60.01 per barrel and above.

I can see no other result from this prop other than making the owners recalculate the price at which they find it most profitable to pump oil. With an escalcating sales tax based on market price, the owners will calculate that their profits are maximized by turning on the pumps at a lower price. This will have the exact opposite effect of what prop 87 intends.

|9.29.06 @ 8:09AM|#

jkTT, I think you are mistaken.

The tax is an additional cost which reduces the profit across the board. While it is higher at higher prices, it does not negate the benefit of higher prices.

So, if the price rises > 40$ from >$20, they will still make more money.even under the new regime.

In the end, by imposing additional costs, they have raised the price point when it will be profitable to start pumping oil. Thus they have reduced the total demand-to-hold schedule for oil, which will raise its price and reduce its availability.

Of course, it ain't the legislators who are going to pay the price, they'll continue to extract all the money they want at gunpoint from the poor shmoes who have to earn a living. The shmoes will pay, and oh how they will pay.

|9.29.06 @ 8:11AM|#

Crud, I meant to say raise the demand-to-hold schedule. Sorry.

|9.29.06 @ 10:00AM|#

I'm wondering how a law 'bans' passing the cost from a tax on to customers. Is there some other magical source of income to oil companies that they can get revenues from to pay taxes?

|9.29.06 @ 11:22AM|#

Taking Mr Khosla's referendum at face value, is it not a matter of "corporate welfare" that oil companies can extract resources from a state-owned commons without paying a royalty?

My preference would be to tie such a royalty either directly to externality-remediation (ie, such things as spending the money directly on carbon sinks, or oil-spill remediation) or into a power-to-the-people financial structure like the Alaska Permanent Fund.

But if the people of California have been "giving away the store" to oil explorers for decades, eh. The issue to me is less whether the oil companies can be assessed the fee vs. who controls the result. If CA ends up wanting to spend the money on a connected industrialist's pet proejct, that's not ideal, but CA's decision to make.

|9.29.06 @ 11:39AM|#

Couldn't we just stop the 15 billion or so dollars worth of various subsidies the fossil fuel industry gets? And put an end to the messy subsidies and regulations the agricultural industry gets. This would boost the biofuels industry more than they need.

|9.29.06 @ 2:02PM|#

Taking Mr Khosla's referendum at face value, is it not a matter of "corporate welfare" that oil companies can extract resources from a state-owned commons without paying a royalty?


Silly me - I THOUGH drilling sites are PRIVATE PROPERTY, even in California . . . Or does the State own everything now? Why would I have to pay ANY royalty for something I own?


My preference would be to tie such a royalty either directly to externality-remediation (ie, such things as spending the money directly on carbon sinks, or oil-spill remediation) or into a power-to-the-people financial structure like the Alaska Permanent Fund.

Translation: TAX the oil companies to spend the money on virtual bottomless pits due to the calculation problem inherent with such quasi-concepts as "Externalities" or pinpointing liability when every single organism generates carbon.


But if the people of California have been "giving away the store" to oil explorers for decades, eh. The issue to me is less whether the oil companies can be assessed the fee vs. who controls the result. If CA ends up wanting to spend the money on a connected industrialist's pet proejct, that's not ideal, but CA's decision to make.

Actually, the decision that matters is the one people make with the wallet - each individual decides what to buy and how much of it. Those decisions drive the market and producers. Overweight bureaucratic dodos do not represent the people of CA - they merely live off them.

|9.29.06 @ 3:10PM|#

Fransisco Torres:

"Silly me - I THOUGH drilling sites are PRIVATE PROPERTY, "

Perhaps on land and outside of Alaska. I believe that the bulk of CA's oil lies offshore. Link me an example of a fee-simple deed for seafloor. See the end of this post for my link regarding state programs where I understand most of CA's oil to lie: the Santa Barbara channel and Long Beach Harbor wells.

"California enacted the State Lands Act in 1938, which established the State Lands Commission and assigned to it exclusive jurisdiction over all State-owned tide and submerged lands. In 1955, California enacted the Cunningham-Shell Act, which amended the 1938 State Lands Act and added more detail on leasing of submerged lands under the jurisdiction of the State Lands Commission. Both Acts are codified in Division 6 of the Public Resources Code."

http://www.countyofsb.org/energy/information/CAleasing.asp