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?
I am with you. I think global warming is a bunch of garbage, but I am all for finding ways to stop giving oil money to Russian oligarchs, third world dictators, and middle eastern monarchies, dictatorships, and oligarchies. Call it the Energy Independence Fee. Independence from communism, islamofascists, and so on.
But you need to give help to the working men and women in the US that’d be hurt due to job losses in refineries, and such. Historically, the free trade left and right, does crap for people hurt by free trade.
That’s absolutely right, and our track record on this subject isn’t wonderful. Contrary to initial announcements, gaming taxes do not go to local education, tobacco taxes do not go to stopping smoking, and the removal of trade barriers is rarely accompanied by the sort of retraining that would cushion the blow.
However, a country that consumes 20% of the world’s petroleum and has 3% of its supply can cut back pretty heavily without doing too much domestic harm.
Good post! I like the idea and really love the name!
I love it.
How about the Energy Security Fee or Energy Defense Fee?
Oil prices will consume a larger precentage of economic activity going forward, regardless.
One reason is oil producers ARE large consumers of their own products. People like cars the world ’round.
Oil + $45 or so is an economy killer. It elbows out business profits. Petroleum is embedded in all products and services, when the price of oil increases (relatively, even in deflation) it crowds out profits.
No profits means no business. Oil is +$65 – 70. Watch the world’s economies evaporate. Bank failures, real estate failures, business failures, auto company failures, retail failures.
The bubble economies are oil price hedges. The idea failed. The tax idea gives too much authority to governments which are agents of … producers. Better to let the producers set their own prices directly; the people will wind up conserving whether they intend to or not.
Why would you assume that? The Stone Age didn’t end because people ran out of stones…
Wouldn’t you assume that commodities would decline in real value over time? Much of human progress is figuring out how to do things more efficiently. Look at the astonishing increase in semiconductor density over the past forty years.
Oil has been so cheap for so long that in most cases it has not been the binding constraint. But if that changes, people will change along with it. You treat gold differently at $35/oz and $850/oz.
Great post. Tax on oil achieves two hard-to-reach goals: reducing carbon emissions and dependency on a politically unstable and dangerous region.
However, it’s completely unfeasible politically. At an Obama rally last year, a young — and very economically confused — campaign staffer promised that Obama would bring “health care” — crowd cheers — “a better environment” — more cheers — and, wait for it, “lower gas prices!” Even more cheers.
And yet they do not also cheer for “lower house prices”.
I am a little confused. Probably because I don’t understand a few things, but nonetheless:
Who would pay the tax? The Saudis? Wouldn’t that maker it uneconomical to drill and extract anywhere?
Instead of $3.20/gallon I would be paying $13.20? So my gas bill would go up by four-fold, while wages stagnate since the 70′s?
Do we really have the necessary advances in substitutions to deal with the massive inflation that would ensue in consumer products that use petroleum-based products to produce goods?
Perhaps I am missing something obvious, but it seems a bit outlandish…. I’m all for curtailing our dependence on foreign oil and/or shifting the power dynamic but this seems like we aren’t ready for it.
Last summer gasoline was $10.15/gallon in the Netherlands, $9.40/gallon in Belgium, and roughly $9/gallon in France, Germany, and the UK. Their technology is not amazingly different from ours.
“Who pays” is a bit of a combination of questions. There is “where is the tax literally collected” and “who is affected by the tax”.
From a practical perspective, it would probably be easiest to apply the tax at the refineries (there are comparatively few of them) and points of entry for any already-refined products. Service stations would be required to documents that they had purchased fuel from a certified refinery that had its tax documents in order, which might sound onerous until you remember that they already have to demonstrate that the octane quoted on the pump is the octane in the tank.
The burden would fall on both producers and consumers of gasoline. It is a straight loss to the producers. It is both a loss and a gain to consumers; they pay more money, but they receive more government services. Within the country is it a transfer of wealth from drivers to non-drivers, and higher-volume drivers to lower-volume drivers.
It continues to be quite economical to drill. At $65/bbl WTI (pre-tax), the Saudis are clearing $50-55/bbl (actual lifting cost is a state secret). WTI could fall to $10-15 and the Saudis would have economic reasons to keep pumping.
Assuming 50% demand destruction due to the rise in prices (total guess, likely not even close to correct.), that would generate something like $1.5 trillion dollars for the government in taxes….
Using your $10–15/bbl for the Saudi’s to stop drilling, they would be unable to absorb almost any of the tax due to the per gallon tax, as that would quickly (5 gals) bring them into an uneconomic situation, so the remainder of the money would be borne on the consumer.
Also, should we be giving the government that kind of transference of money to “spend” on whatever they want? Where would this tax windfall go? Reduce the debt? Health Insurance?
I don’t know enough about the issues at hand, so if you don’t feel like educating me on my shortfalls, I understand.
Do the European countries have an advantage on us due to their smaller country size when compared to us? Making mass transit and/or biking, walking, etc easier? Why do you think they consume far less than us (or do they?)
The elasticities would change over time, but without a doubt it would be a massive amount of money. The obvious places to put that amount of money: reducing the federal debt, reducing payroll and income taxes, rebuilding our infrastructure, etc. Single payer health insurance probably saves money versus the status quo, but if you want to consider any windfall a buffer against Boomer retirement, go for it.
European countries are more densely populated than the US, but that is both cause and effect of fuel prices: expensive gasoline has caused denser construction that is more conducive to mass transit and has allowed public support of higher gasoline taxes, and so on. Europeans tend not to drive SUVs or pickup trucks.
Mostly, however, they do not think they have a God-given right to gasoline that is cheaper than bottled water. There is a cost to providing government services. Might as well pay that cost in an efficient fashion that encourages conservation and chokes off the money supply to our enemies.
I really like the way you think. Glad I stumbled upon your blog.
[...] they can lay their hands on, it is no contest who comes off the better…and, as I mentioned here, that’s assuming we play nice and do include “their oil” on the list of assets to [...]
[...] Sheikh Yamani supposedly told his fellow ministers that “the Stone Age did not end because the world ran out of stones.” He meant it as a warning that the West would sooner or later figure out a way around oil. I hope he was not giving us too much credit. At some point, supply will fall off. Our decision is whether we will prepare ourselves in advance or continue to blunder through the wilderness, bleeding wealth for lack of imagination and will. I hope we do. [...]