The Pitfalls of Windfall Taxes on Oil Profits

Investor's Business Daily has an editorial on the renewed campaign to punish oil companies like Exxon Mobil for their recently announced record profits. Here is are two key quotes.

Remember: Oil companies don't really pay "windfall profit" taxes, anyway. You do. Some 50 million Americans today own oil company stock, either directly or through 401(k)s and mutual funds. Don't be suckered: "Windfall profits" taxes come right out of your retirement account, not out of the oil industry's business.

[A]ccording to Ernst & Young, from 1992 to 2006 the U.S. oil industry spent $1.25 trillion on long-term investment vs. profits of $900 billion.

The other question our politicians don't ask is: What do the oil companies do with these profits? Hide them under a mattress? I don't think so! It is put somewhere, in supporting drilling (where it's allowed), in investments in other technologies, or in research. Even if Exxon puts the profits in money market funds it is still being used for some financial purpose that has ripple effects in the economy. On the other hand what happens to windfall profits taxes? Into whose hands does this money go? Our government and our politicians. I don't know about you but I'd rather have that money being put to some productive use somewhere in the market than feeding our legislators and their pet projects.

The Why’s of Rising Oil Prices

As prices at the gas pumps rise almost daily questions about the role of oil companies start to float on TV and radio. Each night I watch the local TV news where a reporter stands in front of a gas station with the price prominently displayed in the background. This is usually followed by an enlightening man-on-the-street interview where people who are filling their tanks and emptying their wallets are asked why they think prices are increasing (as if they’re experts on the subject). The usual reply is that the oil companies are colluding to drive up prices simply to build up their bottom line. (A clip just like this aired while I was writing this.)

To shed some light on the forces at work here are several links that address what is happening in the global oil market.

http://www.physorg.com/printnews.php?newsid=128264775

In summary, this article lists the following factors:

1. Rising demand, primarily from China
2. Stagnant oil production
3. Falling U.S. dollar
4. Insufficient U.S. Refinery Capacity

This link - http://www.globalenvision.org/library/3/1652 - has a nice explanation, some of which is provided below.

The Organization of Petroleum Exporting Countries (OPEC), a group of 11 countries,¹ produces close to 40 percent of total world oil production² and owns about 70 percent of proven oil reserves. Other major oil producers in decreasing order of production are the U.S., Russia, Mexico, China, Canada, and Norway.³ Overall, the Middle East, especially the Persian Gulf, remains the major oil-producing region, and holds around 60 percent of the proven global oil reserves.⁴

How Oil Prices Are Determined

Forces of supply and demand determine global oil prices. OPEC's primary goal is to manage market supply by limiting oil production among its members. The objective is to maintain prices that are high enough so that OPEC members make a healthy profit, but not so high that consumers significantly reduce their consumption of petroleum. Because of its production capacity and oil reserves, OPEC's decisions significantly influence world oil prices. However, the power of OPEC to manage world oil prices has diminished in recent years because of increased production from non-OPEC oil producers, such as Russia, Norway and Mexico.

¹ OPEC countries include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

² International Energy Agency, Oil Market Report, May 11, 2005. For the most recent issue of the Oil Market Report, available free of charge, please go to http://omrpublic.iea.org/.

³ Department of Energy, Energy Information Administration, "Non-OPEC Fact Sheet." Available online at http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.html.

⁴ For more information on oil and oil markets please see the Department of Energy, Office of Oil, Gas, Energy Information Administration's "Oil Market Basics"

This document by Global Oil Watch - http://www.globaloilwatch.com/reports/Oil%20Primer.pdf - lists the world’s largest oil companies based on oil reserves.

A couple of interesting things can be taken from this list. First, the top 11 companies are government owned. Exxon Mobil, the first privately owned company on this list, controls only 1.08% of oil reserves. The UK’s BP comes in at number 17 with 0.85% of reserves. Second, the Middle East countries of Saudi Arabia, Iran, Iraq, and Kuwait possess more than half of the oil reserves. From this we can conclude that private oil companies who are the favorite whipping boys of the media and posturing politicians control literally a drop in the oil bucket and have little ability to influence the global market price of oil.

Gore on 60 Minutes

Al Gore, the guru of global warming gloom, appeared on 60 Minutes this week for an interview. Note that I didn’t say for a hard-hitting interview. Below is an except for the transcript followed by some comments to explain why I think this was a puff piece.

From 60 Minutes

"There's still a lot of skepticism about whether global warming is man made," Stahl remarked.

"I don't think there's a lot. I think there’s…" Gore said.

"Well, there's pretty impressive people like the vice president," Stahl pointed out. "He said, 'We don't know what causes it.'"

"You’re talking about Dick Cheney," Gore replied.

"Yeah, but others. And they say: we don’t know what causes it and why spend all this money till we really know," Stahl said.

"I think that those people are in such a tiny, tiny minority now with their point of view. They’re almost like the ones who still believe that the moon landing was staged in a movie lot in Arizona and those who believe the earth is flat. That demeans them a little bit, but it’s not that far off," Gore said.

There are so many issues packed in this I’ve used bullet points to highlight them.

1. Of all of the people Stahl could have cited as skeptics she picks Dick Cheney! ?? I suspect Cheney was chosen as the sole example to take advantage of Bush’s low approval ratings (guilt by association). It also creates the impression that only Republicans deny man-made global warming and therefore this is merely a partisan political issue. I’d like to note that this is the typical ploy I get when I reveal to a liberal friend that I question Gore’s position. They automatically assume my disagreement means that I am just blindly following Bush’s lead and therefore can be summarily dismissed as his lackey. (Now that is an insult!) This immediately puts the issue into the political arena instead of addressing the scientific merits (or lack thereof) of Gore’s cause.
2. Gore demeans scientists who don’t agree with his pet cause. I recall a 1992 Boston Globe interview when Gore stated he wished he could find a way to “shut up” those who challenged his global warming position. When his book came out Gore’s method of squelching dissent was to repeatedly claim, like a mantra, that the vast majority of scientists agree with him. (Where are they, by the way? Why doesn’t he trot them out as expert witnesses?) Still, this leaves the possibility for a significant minority of dissenters. Now he claims people who disagree with him are an insignificant minority of crackpots. Is this a sign of arrogance, desperation or delusion? (Or a combination of all three?)
3. The Nobel Peace Prize is a political, not a scientific, award. To quote the Peace Prize web site, the prize is “awarded by a committee of five, appointed by the Storting (the Norwegian parliament).” Their charge? “To decide who has done the most to promote peace is a highly political matter, and scarcely a matter of cool scholarly judgement.” In other words, the committee has given themselves free reign to allow their political motives to override objectivity, the exact opposite approach scientists should take. At least they got it right in one way. Gore is indeed pushing his highly political global warming agenda in a highly political manner. (Plus, it’s not clear to me how pushing global warming is related to peace.)
4. 60 Minutes didn’t ask the tough questions. I’m sure the lack of hard hitting questions (and 60 Minute trademark cutaways to those with disagreeing opinions) was a precondition Gore stipulated before agreeing to the interview. Even if Gore didn’t demand a softball-questions-only policy, I’d say CSB was predisposed not to push Gore too far because ultimately they agree with him. Examples:

· Stahl doesn’t press on for details on all of the sources of the $300M. Gore doesn’t volunteer any additional information. He makes it sound like it all came from proceeds of his book and movie along with the Peace Prize money.

· Stahl doesn’t specifically mention the skeptical scientists by name. There are plenty to choose from. (See my posts dated December 21, 2007 and March 5, 2008)

· Stahl cites no contrary evidence that shows why some scientists challenge Gore’s theory. (See earlier entries in this blog and in the blog links for ample examples.)

5. The piece mentions Gore’s gargantuan house with its huge energy use then tries to defuse it by saying he has mounted solar panels. There is no mention whether the house can now sustain its own energy use. I suspect it’s not even close.

There is more at Glenn Beck’s web site.

It is also interesting to see how much money Gore has made from his campaign. The 60 Minutes introduction reports that Gore was less than $2 million in 2000 yet now has enough to invest $35 million in hedge funds and other investments. Appears that scare mongering is a lucrative business!

Antarctic Ice Shelf Collapse: Another View

Yesterday morning the first story I heard on the TV was about a portion of the Antarctic ice shelf collapsing. As usual the newscaster read this story in a somber tone while citing unnamed scientists who claim this is further proof of alarming global warming, caused by humans of course. Below is an excerpt of an analysis from ICECAP.

Mar 25, 2008

Misleading Reports About Antarctica

By Joseph D’Aleo, CCM

Last year when Antarctic set a new record for ice extent, it got no media attention. They focused on the north polar regions where the ice set record low levels. This summer when unprecedented anomalous cover continued in the Southern Hemisphere again no coverage. Then this report in the news today. You probably saw it on your favorite network or internet news site (pick one, anyone).

Icecap Note: Let’s put this in perspective. The account may be misinterpreted by some as the ice cap or a significant (vast) portion is collapsing. In reality it and all the former shelves that collapsed are small and most near the Antarctic peninsula which sticks well out from Antarctica into the currents and winds of the South Atlantic and lies in a tectonically active region with surface and subsurface active volcanic activity. The vast continent has actually cooled since 1979.

The full Wilkins 6,000 square mile ice shelf is just 0.39% of the current ice sheet (just 0.1% of the extent last September). Only a small portion of it between 1/100th-1/200th of Wilkins has separated so far, like an icicle falling off a snow and ice covered house. And this winter is coming on quickly. In fact the ice is returning so fast, it is running an amazing 60% ahead (4.0 vs 2.5 million square km extent) of last year when it set a new record. The ice extent is already approaching the second highest level for extent since the measurements began by satellite in 1979 and just a few days into the Southern Hemisphere fall season and 6 months ahead of the peak. Wilkins like all the others that temporarily broke up will refreeze soon. We are very likely going to exceed last year’s record. Yet the world is left with the false impression Antarctica’s ice sheet is also starting to disappear.

Here is the link to the information on the active volcanoes in the Antarctic. http://wattsupwiththat.wordpress.com/2008/01/22/surprise-theres-an-active-volcano-under-antarctic-ice/

Obama Drama

As usual Robert Bidinotto has an insightful post on the Obama speech about his relationship with Jeremiah Wright. Look under March 18, "An Elegant Farce." Lest we be accussed of being racially biased (i.e., a white guy cannot understand a black's perspectgive) here is a column from Thomas Sowell titled "Obama's Speech."

Global Warming Quiz

Or should I use the newer lingo and call it a "Climate Change Quiz"? A friend send me this link. Give it a shot. (I got a 100%, not that I'm bragging.)

Global Warming Quiz

Kudos for the Ayn Rand Institute

Anyone who happens to find this blog would probably know that I harbor some criticisms of Objectivism which would automatically disqualify me from being associated with ARI. To modify something Woody Allen said, I won’t belong to an organization that won’t have me. In any case, my first exposure to Ayn Rand was in 1968 as a freshman entering college, the year of the Rand-Branden split. Two of the people I hung out with in college who had been studying Objectivism for about a year originally sided with Rand. (One of them is a staff member of The Atlas Society but I won’t divulge the name in case this person objects.) Years later when Barbara Branden published The Passion of Ayn Rand I had come to the conclusion that there was more to the story about the Branden excommunication than the official version. I also concluded that Branden’s biography probably was a reasonably accurate depiction of Rand’s personality and its affects on the “Inner Circle” as well as those on the periphery.

Over the years my reading expanded beyond the usual Objectivist-approved books to include modern Aristotelians such as John Kekes and David Norton. (Norton’s Personal Destinies is still one of my favorite books.) Within the last 10 years I happened to also read Ken Wilber’s works after Nathaniel Branden referred to Wilber in a Full Context interview. (By the way, I used to write for Full Context.)

In the meantime I’ve subscribed to TAS's The New Individualist but not to any of the ARI-friendly mailing groups because I cannot in good conscience sign their loyalty oath. (Nor, as I said above, do I think they'd accept me.)

Why all of this personal information? To set the context for this post. Diana Hsieh posted a link to a video of ARI’s president Yaron Brook in which he discusses why he is optimistic about the future. He explained how ARI has placed about 1 million of Ayn Rand’s novels into the hands of teachers since 2002. Brook estimates that as many as 5 million kids could be exposed to her novels over the next several years. Visiting the ARI web site I also noticed they have developed lesson plans for teachers to use.

I think this is a clever and potentially successful strategy. Rand often said the route to cultural change was through the universities where kids are exposed to ideas at a time when they’re forming their own views on politics and life in general. The ARI approach of catching ‘em when they’re young and before kids enter college could help build a grassroots movement. Speaking from experience in raising twin girls I know they’re exposed to (politically) liberal, anti-free market ideas in high school but the intensity of this exposure seems to increase in college.

I think ARI folks realize that some percentage of these kids will be influenced enough to pursue Rand’s non-fiction and get heavily into the philosophy. Some percentage will read the books and move on. Others won’t dig into the philosophy but will like her approach. I’ve met several people through work and just recently in my tennis group who are confident and somewhat politically conservative. When they see me carrying a book related to Rand they’d say that they loved her novels. I’m sure over time this affect will spread as Brook predicts. If so, we should give ARI some credit for their role in this.