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Posted by on Feb 7, 2007 in Politics | 30 comments

Boom Times: Busting Big Oil

In an email from the Hillary campaign team was the following problem statement:

It’s time to end our country’s dependence on foreign oil. Unstable prices at the pump are a burden for families. Our dependence props up extremist regimes that threaten our national security. And the threat to our environment from burning fossil fuels is very real.

Hillary is proposing a plan that puts “some of the oil industry’s windfall profits into a fund that would help develop practical new sources of renewable energy”… and Polimom has some worries about this.

In boom times (like now), the oil and gas industries (Big Oil) are the boogeymen — clear targets as they reap record profits, but the other, less-profitable years pass unremarked.

Here along the Gulf Coast, though, we’ve been through the bust years, too — years where the prices went so low that exploration was frozen, projects didn’t go forward, and the industry laid off people in droves. In Houston in the 80s, in fact, there was a terrible downturn, and the values of houses plummeted as folks had to leave, leading to a regional depression.

I don’t recall hearing any outcry about helping the oil industry then.

If we’re going to target the oil and gas industries in times of high prices, are we then planning to close their gaps when prices are low … as they will no doubt be again?

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Copyright 2007 The Moderate Voice
  • Paul Silver

    My first reaction is not very sympathetic. I own a business and I have to sock away excess earnings in boom times to get through business cycles.

    My hope is that as the pace of adapting to alternative energy systems increases there will be a migration of jobs from the non-renewable to the renewable sectors. There will always be an oil industry for all the other uses of petrochemicals others than fuel. But perhaps as a smaller percentage of the energy industry.

  • Alan G

    I’m not sure the price of oil is ever really going to be low again..unless you mean “low” as in compared to the prices immediately after Katrina.

    Generally, I’ve heard that oil will remain above $50/barrel for the foreseeable future. I don’t think the oil industry has to worry about price.

    Unless domestic production begins to run short, something that I’ve heard is already beginning.

  • blackshards

    Paul, you wouldn’t be able to “sock away excess earnings in boom times” if Hillary confiscated them, would you?

  • The Master

    Polimom,

    Generally, I’ve heard that oil will remain above $50/barrel for the foreseeable future. I don’t think the oil industry has to worry about price.

    Sigh . . . . a typical reaction from those who do not understand the industry. FYI, the spot price of a barrel of oil dropped under $10/bbl in 1998. Fortunately it didn’t stay that low long enough to lead to wholesale destruction of the US oil industry, but layoffs, hiring freezes, and cancelled projects abounded. For that reason, the US industry has been very slow to staff up this time around, preferring to hire contractors instead of employees.

    However intelligent Hillary is, there are a number of areas where she is woefully ignorant, it seems. This piece of demagoguery is a good example. One would think her staff might have researched what happened the last time Congress imposed a windfall profits tax on the US industry.

    In short, the multinationals diverted investment in new exploration to their foreign subsidiaries (oil discovered in another country by companies not incorporated in the US was exempt from the tax). Perfectly rational and legal profit maximizing behavior on their part. The result was to reduce the new reserves found in the US and increase the percentage of oil that the US imported. Splendid policy . . . Let’s make us even more dependent on foreign oil . . .again.

    If Hillary is looking for industries with fat profits to tax to fund her preferred subsidies, she need look no further than the (New York City based) financial industry. As an example, Goldman Sachs just announced $1.6 Billion (with a “B”) in bonuses for its staff last year. Let’s tax that industry. At least it won’t reduce the amount of Oil & Gas exploration in the US.

    Oh, wait . . . they are her constituents . . . . and her campaign contributors . . . .

    Never mind, then.

  • lurxst

    Interesting to me that the US decides to increase its overall strategic oil reserve capacity when the price is high and the industry is raking in big profits as opposed to when the price is low and the US purchase can help stave off some of the economic fall out.

  • Entropy

    I could care less how much profit the oil industry makes. What I do care about is if they’re making it while getting subsidies from me. End all subsidies and make them pay more of a market price for mineral rights and let them have their profits. Then they’ll be like a real business.

    It’s sad the Democrats are using the “energy independence” myth as cynically as the Bush administration did. ANWAR will not make a significant dent in our dependence, and neither will this naive plan of Hillary’s.

  • kritter

    Good point, lurxst. But the price has backed off its alltime high of over 70$ a barrel. I think the best strategy is to increase the CAFE standards, despite the effect on Detroit, and resource renewable fuel sources.

    The oil industry has never had it as good as they had it the past 6 years. They literally wrote our energy policy with Dick Cheney’s blessing. During their appearances on the Hill, their CEO’s were not even sworn in, and gave extremely vague responses. I’m not a socialist, but a 400 million dollar golden parachute for Exxon’s CEO seems just a mite excessive, when gas hits over 3$ a gallon.

  • Sam

    I think the “Windfall Tax” idea is shitty and kneejerk. I don’t think oil companies should be punished for doing well. However I also think its an outrage that during their record profits and with oil at record prices that they receive $8 billion or so in tax breaks. Obviously some legislators have been bought off and the people that are getting fucked still vote them back in.

  • I lived in Tulsa when prices crashed in the Eighties. I remember very well what it was like. That having been said the following must be considered.

    The oil companies are, in this time of record high profits pushing for more subsidies from the government. They are also resisting an attempt to correct an error made in contracts signed with them that minimizes the royalties they pay for oil extracted on public lands. So long as their greed is so unlimited you can’t reasonably expect anyone to feel an ounce of sympathy for them. They’re their own worst enemy.

  • Hi Jim —

    Sympathy? No. But the industry is SOooooo much more complicated than “400 million dollar golden parachute for Exxon’s CEO seems just a mite excessive, when gas hits over 3$ a gallon” or “sock away extra earnings”.

    There are any number of problems with how the government is handling the oil and gas industries (most of which immediately exceed my capacity to discuss coherently), but anytime somebody starts targeting “profits” smacks me right in the face with a big Socialism bat.

  • Upinsmoke

    Exxon and its 37 billion dollars in profit this year should be investing for the future. They and companies like them should be investing in ways to make money once the oil is gone.

    The lack of foresight on their part is only going to hurt Americans who have good paying jobs working for Exxon/Mobile. What will become of all those workers if we end our dependence on foreign oil? When oil once again is 10 dollars a bbl and the wells are capped as they capped them in the early 80’s?

    They should be leading the way on renewable energy, Wind, solar and Ethanol and any other means to make money in a drastically changed future. Instead they are spending their money buying back shares to prop up their stock price and paying their CEO what amounts to an obscene paycheck.

    While I on principal do not oppose any of these factors I do oppose the total and absolute lack of foresight and forward thinking these big oil companies have shown with these tremendous profits they have experience the last two years.

  • Upinsmoke

    OMG you are screaming. A conservative republican not standing up for big oil.

    Well remember that Neoconservatives were actually democrats who rebelled against their former party and formed a coalition with Ronald Reagan. The tenets of neo conservatism does not necessarily embrace big business. It embraces big government and tax cuts which by its nature would benefit big business.

    So no. I have no problem opposing big business and offering up my take on Global warming and protecting the environment at the expense of big business.

  • Exxon and its 37 billion dollars in profit this year should be investing for the future. They and companies like them should be investing in ways to make money once the oil is gone. [snip]

    While I on principal do not oppose any of these factors I do oppose the total and absolute lack of foresight and forward thinking these big oil companies have shown with these tremendous profits they have experience the last two years.

    The industry is, as a whole, investing in various alternatives, and other explorative sources. ExxonMobil is one company, and since I’m not a stockholder, I don’t actually know what it is their stockholders are directing them to do.

    Which brings up something else: these companies are all owned, at least at some level, by their share-holders. Targeting them targets, by definition, probably many thousands of people’s invested money. Going after Big Oil kind of overlooks the many other aspects of the companies themselves.

  • Upinsmoke

    Really do you ant to know what their stance is? Check this out. I find it totally lacking in foresight.

    http://exxonmobil.com/Corporate/Files/Corporate/OpEd_peakoil.pdf

  • domajot

    Let’s see.
    We should pay subsidies to oil companies, so that they and their shareholders can make more money.
    Subsidies are the good kind of welfare.

    We can’t afford healthcare or social assistance programs for the poor and elderly, because this is bad welfare.

    Did I get that right?

  • The Master

    Exxon and its 37 billion dollars in profit this year should be investing for the future. They and companies like them should be investing in ways to make money once the oil is gone.

    Actually, if you read its annual reports, ExxonMobil does believe it is investing for the future. Its management just doesn’t share the same assumptions that many of its critics do. It believes that its stock is underpriced and that by buying it now they are acting in the best interests of the shareholders. Management may be wrong in its assumptions, and if one thinks so, then one should invest in Shell or BP, both of which are spending quite a bit of money on future alternatives to oil & gas.

    The Peak Oil hypothesis is an example of an assumption they apparently don’t share with Upinsmoke. From a geological perspective, Peak Oil is a tautology. There is only so much oil in the earth; once you have produced the “easy” half of it, producing the other half will be harder and more expensive. (Precisely the same theory would apply to copper, lead, zinc, gold, or silver mining as well.)

    Peak Oil True Believers will tell you that the-end-of-the-world-as-we-know-it-is-at-hand. Western civilization was built on and forever will depend on cheap oil. Skeptics (apparently including ExxonMobil’s management) believe that the only end in sight is that of “cheap oil”, not oil itself. Society, rather than coming to an end, will adapt to more expensive oil.

    Maybe ExxonMobil is right; maybe Shell and BP are right. Investors have a clear choice. However, if the US government gets into the business of taxing the profit out of oil & gas in the industry’s “good” years in order to subsidize the creation of “new” industries that will compete with the oil & gas industry to provide energy, we all lose. Either 1) oil & gas exploration and production will leave the US and go where it is better treated, increasing our dependence on foreign oil, and 2) the new industries that receive their subsidies from the windfall profits tax will wither(with the source of their subsidy gone), or 3) we will have no domestic oil & gas industry, and the subsidized alternative energy purveyors will become a drain on the taxpaying citizens.

    A pity that politicians are not required to take the Hippocratic oath before they administer their leeches and bloodletting.

  • domajot, you lost me. How did we segue from windfall profit taxes for renewable energy sources to healthcare and social assitance, much less good or bad welfare?

    Do you have a view of stockholders as being economic giants or something? For the most part, they’re part of ordinary people’s retirement and investment portfolios.

    I’ll be the first to say that I cannot dissect the subsidies and tax breaks that Big Oil receive. Furthermore, while I understand incentivizing business for exploration and development, I suspect there are a number of these incentives that are unnecessary.

    But as prior commenters have said, approaching the issue from that angle is quite different from going directly after profits.

  • Polimom,

    I think you’re a little mild on the subsidies and tax breaks. And the incentives for exploration make sense when prices are low but are utterly insane at $50 a barrel much less the $60+ they were at. Besides, doesn’t their glee at using the contract loophole on their leases to cheat the American public doesn’t make you feel the least bit slimy? And what about that unending intellectual honesty on global warming?

  • domajot

    Polimom: “How did we segue from windfall profit taxes

    We are subsidizing businesses that have realized these huge profits. Shareholders, ordinary people who are taxpayers benefit. But there are lots of ordinary taxpayers scraping by who can’t afford to be shareholders in anything but their food bills and mortgages. So, the nation’s resources are being used to aid a limited class of citizens.

    Looking to the future, I think it would be wiser to invest in a broader range of citizens, so that they, too, can share in the nation’s wealth, and, thereby contribute more to it. Healthcare insureance would be one form of investing in the future, because a healthier people are more productive, can contribute more, and less of a drain.

    I don’t like the idea of taxing profits just because they’re big, but
    to the extent that the government aids business in realizing these profits, it’s not outrageous to expect a little return of the favor.

  • Hi Jim — the royalties contractual problem in the Gulf were a big topic down this way. My understanding of it is that the oil companies pointed it out, in writing, at least twice to the Dept. of the Interior when the contracts were drawn up. DofI said, “no worries…. prices’ll never go that high…” Not that it changes the end result, of course, but I don’t read that in the MSM much. Here’s a link from last year.

    While googling for that, though, I also came up with this:
    U.S. House Votes To Rescind Big Oil Tax Breaks

    House Democrats checked another box during their first 100 legislative hours in charge of the 110th Congress last Thursday, after a bill rescinding oil industry tax breaks passed by a comfortable majority.

    The CLEAN Energy Act passed 264 to 163, as a group of Republicans joined Democrats to vote for the measures, which will roll back about $7.6 billion in tax breaks and impose an additional $6.3 billion in royalties on companies present in territorial waters in the Gulf of Mexico and off Alaska.

    The bill would also create a Strategic Renewable Energy Reserve to invest in clean, renewable energy resources and alternative fuels, promote new energy technologies, develop greater efficiency and improve energy conservation.

    Shows how well prepared I was for this thread, eh?

    Anyway — am I missing something? They’re evidently killing the tax breaks and adding the royalties, to the tune of ~$13.9 billion.

    I should perhaps mention that I’m not involved at all in the oil industry; I’m merely concerned at what feels a bit like a witch hunt.

  • Domajot — do you feel that the country would be better served if its national resources were a national asset run by the government, rather than by businesses?

  • UpInSmoke…BP is already heavily investing in alternatives…the other Oil majors should take note…BUT…TWO OF THE THREE LARGEST FIELDS IN THE WORLD (Burgan in Kuwait and Cantarell in Mexico) are in terminal decline, oh, and by the way, the last year in which production was put online that matched our consumption for that year was 1986. Marinate on that a little bit too…it’s more complicated than you think…also I believe the Saudis have nothing but paper barrels and most likely the Ghawar field is in terminal decline too.

  • Upinsmoke

    The entire point of my post is that we need to stop using oil almost totally and these companies in preperation for that day should be heavily investing in alternatives so that their employees continue to have jobs.

    They are not. They just keep singing the same tune……..Oil..oil and more oil.

  • I feel you, UpInSmoke. BP is coming around investing heavily in alternatives, and Shell is finally starting to come around too I believe…but American-based big oil companies just don’t want to…and I’m trying to figure out why…are they afraid in the change in the status quo that they want to keep the status quo? Who knows.

  • domajot

    POLIMON,

    It was a mistake for me to comment on this thread, because I was not advocating, I was merely making an observation.

    We seem to debate what course our country should take in bits and pieces and on an either/or basis. Since I’m a cautious person, I wouldn’t blindly trust government or business to take care of everything. Everyone is fed up with government, and so we fall in love with business. I prefer to keep a wary eye on both.

    In general, though, I think it’s very important to keep all segments of society rowing in the same directionn. To that end, we should be ready to help everyone, not just the most able, climb into the boat.

  • Polimom,

    The oil companies are threatening legal action over that bill. I sincerely wonder if Bush wouldn’t veto it as well. It’s future is very uncertain.

  • Jim — that’s too bad, because I really think that’s the right way to go. I’d be very surprised if quite a number of the subsidies or tax breaks didn’t date back to exporation or developments that have long since come to fruition.

    Domajot — I’m sorry if I’ve offended. I was trying to understand how far you were willing to take your line of thought. I didn’t mean to make you feel attacked.

    How our country handles energy in the future is one of my big worries; I see this as tied into so many other of our problems, and I’m a very strong advocate of pursuing alternatives. That said, though, the hooks are in very deep; it’s a symbiotic relationship, and thus, a real tangle.

  • Jim — more followup —

    Besides, doesn’t their glee at using the contract loophole on their leases to cheat the American public doesn’t make you feel the least bit slimy?

    Given the number of ways our government cheats us (imho) bothers me just as much. I’m not at all impressed, for instance, at the way Louisiana’s royalties were set. The government was just as gleeful about LA’s fiscal problems.

    No, I don’t like it, but I think I’m more perturbed by the smoke and mirrors being thrown around the global warming debates. That relates (like alternative energy) right back to the larger worries about the whole situation.

  • domajot

    POLIMOM:

    I wasn’t in the least offended, nor did I feel attacked. It’s just some times I veer off the subject, one question making me think of a relatied issue, and the next thing I know, I’m way off topic.

    I’ve been thinking about this government/business issue and how that works in terms of subsidies and contracts. The more I think about it, the more questions I have, but I don’t think this is the time or the place for that. I’ve been doing some research, only to come up with more questions still.

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