Brazil has announced that it wants the national oil company, Petrobras, to control all future deep-sea oil resource development. Ever since Lazaro Cardenas nationalized Mexico’s oil reserves it has been the dream of oil-producing nations to control the wealth beneath their lands.
Two can play that game. But it takes courage and communication, and I doubt our willingness to deploy either.
Let’s start slowly. What happens when a country nationalizes its oil? On the most obvious level, it declares that all title to the oil resides with the state, and refuses to acknowledge any claim that might previously exist in private hands. This is not as easy as it stands, because most petroleum exporters are less militarily sophisticated than most petroleum importers. Had General Cardenas not had the presence of mind to nationalize in 1938 and instead waited a couple of years, he might have found a less indulgent northern neighbor. More recently, the Nixon Administration made it known during the 1973-4 oil embargo that the Saudis should think carefully about the amount of pain they chose to inflict on the US; hurt the US badly enough and we just might decide to take the oil fields.
But let’s accept that a nationalization has taken place. What now?
There is an inherent weakness in a petroleum exporter that seizes its fields: it still needs to sell the oil to someone else. There is no question of a typical communist takeover, where a comrade seizes the means of production and deploys them internally, for if the internal market were adequate to use all of the oil, the country would not be an oil exporter in the first place.
One reaction the rest of the world could have would be to refuse to buy the seized oil. It’s the reaction the US took to the overthrow of the Shah of Iran (never mind that Iran’s oil was nationalized twenty years earlier). Unfortunately, it doesn’t work unless the country can literally be blockaded. Think this through – even if only one country defects (call that country “China” if it helps visualize), the reduction in demand from that country is transmitted to all suppliers of that country and onwards to the entire market. By the way, if you can figure this out, you are more sophisticated than most presidential candidates, who talk of weaning the US from “Middle Eastern” oil as though it matters.
Assuming the oil can get to an importing country, however, there is one more catch, and it’s the crucial one: someone still has to buy it. Right now we have oil that has been located, extracted, and shipped. It still has to be refined, distributed, and pumped into the tank of your car while a homeless guy tries to squeegee it.
We assume – based on many years of experience – that the windfall profits accrue to the guy who digs the oil out of the ground. It costs $5 a barrel to find the stuff on land and $5 to dig it out and in a nice bubble you sell it for $140. Even if you are in deep water and it costs $50 to find the stuff and $15 to get it out, you can make a go of things. Thanks, OPEC. Meanwhile, the refiners barely earn their cost of capital when they aren’t setting off explosions and the gas retailers are on such thin margins many would go out of business if they had not discovered that people love to buy cigarettes while waiting at the pump.
We only believe this because it has been this way since World War II. But there is nothing inherent about it.
Saudi Arabia has oil, but no oil consumers. We have oil consumers, but no oil. Why would you assume the balance would favor the Saudis? Even if you leave the guns out of it?
Suppose, for argument’s sake, the United States decided to place a $10/gallon tax on crude oil and its derivatives. There are 42 gallons in a barrel (yes, there is processing gain, yes, only half the oil becomes gasoline while the rest becomes other stuff), so very roughly that would be $420/barrel in taxes. WTI is about $65 today, so the effective cost of a barrel of crude would be $485. All of a sudden the US government owns 87% of every barrel of oil. Didn’t even take bombing Riyadh.
Furthermore, the $65 going to the Saudis would actually decline. This may be a little less obvious, but stick with me: the $65 is an attempt by the Saudis to find the level that they believe maximizes the NPV of their fields. They could cut production and drive up the price, but they obviously believe the demand destruction at $75 outweighs the additional $10/bbl (recognizing that they have a limited ability to manage very short-term fluctuations). So what must they think of $485? And as if the classical economics were not enough, think of the idle production capacity that would be created by all of the reduction in demand – think there might be a slight temptation to defect on the part of an OPEC member or two?
They nationalize upstream, we nationalize downstream. We have a diversified economy. They have falconry.
I know – taxes are wrong. They are bad and nasty and only cheese-eating surrender monkeys like them. But what do you think we are paying today?
The difference between the fully loaded production cost and the spot market price is a tax. It is a tax on every Western consumer, payable to the inherited monarchs of the Middle East…monarchies that are not even as old as some people alive today. Why pay it? How is it that a tax assessed thousands of miles away by people who at best are indifferent to our needs and at worst fund our attackers somehow better than a domestic tax?
If we placed a massive tax on oil, we would consume less oil and keep more of the money spent on oil. It’s a great idea; it’s just the word “tax” that sics the ghost of Ronald Reagan on people. So how about renaming it? I would like to call it a “policing fee”, since we keep getting sucked into Arabian conflicts that would be points of trivia if there were nothing but rocks underfoot, but maybe that’s not populist enough.
So how about this: a Communism Prevention Fee. $10 a gallon for petroleum and its derivatives. Is there any price too high to prevent Communism?