Oil Company "Windfall Profits" – The New Political Catch-Phrase

“The best time to plant a tree was twenty years ago. The second best time is now.” Chinese Proverb

drilling for oilI won’t pretend to be happy about paying higher prices at the gas pump. I know there are many families that are really struggling and many industries, such as shipping and travel, that are being particularly hard hit. Politicians are using the opportunity to invent new catch-phrases that insult our understanding of basic economics in the name of getting votes.

Taxing “Big Oil” is a Big Mistake

I’ll attempt to keep this post mostly apolitical, but I can’t make any promises. One of the two remaining contenders for president recently said, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Oh really? That sounds an awful lot like socialism to me. After all, it was Karl Marx himself who said, “From each according to his ability, to each according to his need.”

Besides, taxing oil companies to reduce profits only hurts the very constituency politicians claim to be protecting. 98% of these companies are owned by shareholders. The large majority of those shareholders are mutual fund investors belonging to the middle class (or institutional investors managing retirement wealth for that same class). If we begin taxing an oil company’s “windfall profits,” causing a decline in shareholder value, aren’t we simply cutting our noses off to spite our faces?

So What is the Answer?

The answer is buried beneath us in places like ANWR, the Gulf of Mexico and the Midwest. The answer is domestic drilling. It is the fastest way to increase supply and reduce our demand for foreign oil. Many of the same politicians who today demand an answer to our energy crisis are the very ones who for years blocked attempts to increase domestic drilling. Environmental concerns are real, but efforts have been made to improve drilling technology to lessen the effects on the environment.

Is It Enough?

No matter what we do as a country, world-wide demand for oil continues to skyrocket. It is this world-wide demand that is driving up the international price of oil. Places like China and India are consuming far greater amounts of oil, per capita* (see comments for correction), than the United States. So even after considerably reducing our consumption of oil domestically, we still may not see any easing in pricing as other countries continue to increase consumption.

photo by giblee

Comments

  1. Domestic drilling is an incredibly short term solution to a long term problem.

    The best solution is to lower your oil dependency and help promote renewable energy sources. My wife and I got rid of our car last year, and we’re looking at ways that future places we live can be self sustaining as far as energy goes.

    People used to not commute 20 miles each way for work. Let’s go back to that. Let’s buy local, work locally, and invest more in local communities.

  2. @cory huff:
    That is an incredibly long-term effort when we could use a short-term solution to get us there. That is like saying getting a glass of ice water is a short term solution to standing outside in 90 degree weather while you talk about constructing an aqueduct and ignoring your immediate needs.

  3. I signed the petition and I agree that something needs done. however we cannot rely on oil for long term energy needs. We are going to run out sooner or later. We need to get congress to stop doing what the oil compnies want and start doing what the country needs, alternative fuels. even though drilling for oil is better oil spills still happen and they are devestating.

  4. After Hurricane Katrina, oil producers worldwide learned that Americans were willing to pay higher prices for gasoline without cutting consumption. Storm damage caused justifiable jumps in gasoline prices. But after the refineries were repaired, gas prices did not come back down to pre-Katrina levels. Even if other countries were not burning more oil, why should oil producers lower prices for us if we are willing to pay higher prices?

    We face a similar situation now. On the one hand, we want oil companies to drill for oil here. But sky high oil prices, caused by rising demand not matched by rising supply, guarantee oil producers record profits without them having to add extra capacity. We demand more oil from our own ground, which would lower oil prices and their profits in the long run. How, exactly, do oil producers win in this situation?

    Each individual oil producer needs more oil in the future in order to stay in the oil-producing business. That much is obvious. They also need to calm angry consumers, lest we actually do switch to non-oil-based energy consumption.

    But let’s not kid ourselves. Environmentalists and petrocapitalists strangely sing from the same song page on this issue. Both want us to pay more money for less oil now and in the future. It ever has been thus. It might cost you as much today to fill up your hybrid as it cost you years ago to fill up your gas guzzler.

    Oil producers hold our heads over the oil barrel on this one. President Bush went hat in hand to the Saudis for more oil. The Middle East now has 500,000 more reasons for us not to pressure them into reform.

  5. @Becky: I hope domestic drilling is a short-term solution, even though it will take a while to get oil out of the ground, refined and delivered. As an old Chinese proverb says, “The best time to plant a tree was twenty years ago. The second best time is now!”

  6. Don´t you think that the USA should buy oil off other countries so that when their is finished, you guys still have enough? Gas prices will continue to rise before they fall as, hopefully, will your economy, so making decisions like that based on the price you pay for your oil is not sensible.

    You could also start buying/importing European cars, which consume a third of what American made cars do. Check out the iol lobbies and see how they are always so linked to your presidents that they disable these kind of initiatives which would so decrese your environmental footprint as well.

  7. THANK YOU!!!

    There is SO much oil out there that if we had started drilling 20 years ago we would not be in this friggin’ mess. And if we start drilling now it will allow a less painful transition from oil to some other source of fuel. A viable alternative is just NOT ready yet and won’t be ready for many years still. We need the gasoline. That is just reality.

    We aren’t going to go back to working/living locally. Sorry. It’s not going to happen. I can’t AFFORD to live in the city where I work. Even with gas prices it’s still cheaper to live 25 miles away and commute. It’s painful to my wallet but still cheaper.

    And there is plenty of oil out there. There were scientists 30 years ago claiming that “10 years from now” all the oil would be gone. Yeah…not so much. And they continue to find new and unknown reserves of oil all over our country and others.

    DRILL DRILL DRILL!!! :)

  8. The suggested windfall tax is a bad idea. If only profits are taxed, we punish efficient companies with another gas tax, while leaving inefficient companies off the hook.

    For those who advocate drilling in ANWR and out in the ocean: How much destruction of nature are you willing to commit to satisfy your addiction to cheap oil?

    There is no end to oil anytime soon, but there is an end to cheap oil, and I rather have some of the price ending in federal coffers than all of it in Iran, Venezuele, Russia, and others. Therefore, I suggest increasing the federal gas tax and decreasing the income tax, to wean off the American cardrivers from their expectation of the return of cheap oil and to make working more fruitful. The increase could happen in ten annual increments of 10 cents per gallon, to allow everybody to plan ahead.

  9. > We aren’t going to go back to working/living locally. Sorry. It’s not going to happen.

    An increase in gas prices closes off many avenues to take in our life. Many avenues remain open. If you want to live non-locally at all costs, you should pay all costs.

  10. “For those who advocate drilling in ANWR and out in the ocean: How much destruction of nature are you willing to commit to satisfy your addiction to cheap oil?”

    The thing is … the drilling is NOT destroying nature. Look at Katrina. All those oil rigs off shore and not a SINGLE spill!!! Technology has advanced and getting oil (and natural gas) out of the earth is not nearly as destructive as it once was.

  11. > the drilling is NOT destroying nature. Look at Katrina. All those oil rigs off shore and not a SINGLE spill!!! Technology has advanced and getting oil (and natural gas) out of the earth is not nearly as destructive as it once was.

    I am willing to accept that technology has advanced. The argument with Katrina, however, doesn’t seem strong – those oil rigs were shut off before the storm hit. Do you have information about the number of spills from oil rigs and how much they have decreased? Additionally, a spill in cold Alaska is worse than a spill in a warmer zone, due to the slow growth of nature when it’s cold.

  12. Honestly? No I have no stats…I heard it on the news the other day. With all the destruction that Katrina brought, even with the rigs shut down, you’d think there’d be *some* sort of spills but we’ve heard nothing. If there were even a small one I’d think we’d hear all about it from the Enviro-wackos.

    And I don’t know for sure but I thought I heard that the Exxon spill area has recovered better than anyone expected.

    I’m not saying oil spills are good things…I hate it when gorgeous nature is spoiled by unnecessary destruction. However, I have no problem with frozen tundra up in remote Alaska where there is nothing except … nothing … being drilled.

    I was watching Ice Road Truckers (yes I am a geek!) and those guys have to drive to the most remote places and even out there where there is nothing the people doing exploration for some new gas source (not natural gas, something else I can’t remember) were creating their work area with the absolute utmost care. It was pretty impressive the lengths they were going to.

  13. I’m sorry, but I have to point out a pretty glaring error in this article. China and India use less than 1/10th of the oil per capita than the United States. In fact, the United States alone uses 4 times the oil than China, even with its significantly higher population. I love reading your articles but the second to last point is actually offensive to me. American’s not only have the ability to change things, it is our responsibility to change them.

    http://www.nationmaster.com/graph/ene_oil_con_percap-energy-oil-consumption-per-capita

  14. Somebody help me out here if they know better information than what I can find.

    My curiousity got to me from the American Solutions website where it says 38 Billion barells of oil are “inaccessible” by law. So I did a quick search and on cia.gov it says that the US oil consumption is 20.8 million barrels/day. And current US oil production is 8.3 million barrels/day. So we roughly import in 12.5 million barrels/day.

    So if we open up 38,000 million barrels to offset all of our imports, won’t we consume it all in 3,040 days (38,000 / 12.5), which is only 8.3 years?

    Then what happens?

    Again somebody help me out if my numbers aren’t correct, or if I’m missing some piece to the equation.

  15. Okay, I guess I needed to scroll down further. There is another 1 TRILLION barrels potentially? That would last more like 219 years.

    I’d be for drilling domestically if it doesn’t cause harm to the environment. I’d hate to have our addiction to oil end up causing even more problems in the long run.

    I think long-term we still need a more environment-friendly and renewable resource solution.

    But for now I just keep increasing my gas budget. Fortunately I live close to work and only have to fill up once every couple of weeks.

  16. Keep in mind that drilling in ANWR isn’t a short term solution. It would take several years before the first drop of ANWR oil flowed down the pipeline and found its way into a refinery.

    I’ve read (I’ll try to find the link again) that unless we build another pipeline spanning the entire width of Alaska, oil fields in Alaska would only be able to provide 10% of the US daily use of oil (about 2 million barrels/day). That’s counting what’s already flowing (additional flow would max out around 1.4 million/day). While that’s not insignificant, it probably won’t drop prices as much as some advocates say.

  17. “Windfall Profits tax” is not a new term by the way. In 1980 a tax was imposed on oil companies because of the profits they earned from a sharp increase in oil prices due to the OPEC oil embargo. It was ended in 1988 once oil prices were low again.

    If I understand it correctly the “crude oil windfall profit tax” (WPT) was actually more of an excise tax than a profit tax. The tax was on each barrel of oil produced and sold to a refiner. They established a baseline tax based on the 1979 prices and anything above that got taxed.

    I doubt they would do the same structure as they tried then, because ultimately it sounds like it didn’t generate the revenue they thought it would and was administratively burdensome to everyone in the distribution chain, especially in the later years when it was bringing in 0 tax.

    I’d personally like to see the Oil companies reinvest their “windfall” into finding a new source of energy (is that dreaming?) rather than have the government take it and likely waste it on who knows what. Or would the government redistribute these windfalls back to the american people? Thru rebate checks? Lower income taxes?
    Removing the federal gas tax?

    I’m all for lower taxes and less government spending, so if they want to give us our money back that’s fine with me.

  18. Greg – I HIGHLY doubt the government would “refund” any of the money back to us. They’d just continue to spend and bloat government. Blech.

    I am pretty sure that many of the oil companies reinvest a LOT of money back into exploration and alternatives. If they want to stay in business after the supposed loss of all oil someday then they will have to find an alternative.

  19. First, as a fellow blogger, I must that I really respect your willingness to write such a challenging post. And, unfortunately, I can see by the comments that a few readers couldn’t handle it. Whether I agree with you politically or not, you have taken on an important topic and shed some light on Robin Hood politics.

    Great post!

  20. I’m for drilling, but I really couldn’t tell you what depleting this natural resource would do. What happens when we use all the oil in the ground? Is that good? Bad? No effect? Nothing has happened over the last century except a few spills. But does something negative acually take place b/c of removal?

    I’m also for letting natural supply/demand drive us towards another source of energy sooner, rather than later. So what if prices rise? Won’t that eventually just inflate everything else? My salary included? Won’t it also just drive us toward greater efficiencies?

    Lot’s of questions in my mind on this issue. I’m impressed with your bold stance though.

  21. You are a stupid *******(edited to remove cursing)! The oil companies have tax breaks most of us can only dream of. And they are indeed enjoying windfall profits. Raising the ‘evil’ specter of socialism is sooo tired. What a jerk. And I am done reading any doofus who makes statements like this.

  22. @Jonathan: You have a valid point. I was wrong to include the “per capita” part of that statement. However, China, India and Middle East have become larger consumers of oil than the United States, so the point of world-wide demand causing much of this price increase is still valid. I certainly wasn’t trying to be offensive. After all, the U.S. has far and away been the leading consumer of oil for many years.

    Bloomberg.com: http://tinyurl.com/4j845o

  23. Dear Frugal Dad,

    I Googled the quote about taxing oil companies to see who said it. I promise to still read your column despite our conflicting political views.

    In my experience, it has worked to stick to a primary purpose. We made the mistake once of discussing politics and religious beliefs at a family dinner (we kids are all in our 30s now). We ended up in a big fight and with a lot of hurt feelings that took a while to heal. Mostly instead of politics now, we talk about The Daily Show and the Colbert Report.

    I do not think there is any quick fix to the oil problem, and I feel kinda sorry for the presidentail candidates who have inherited this mess. My nutty idea is to have a high speed railway system that criss-crosses the country, like Europe. And here in Chicago, our public transist system is out-dated; and badly in need of repair and expansion due to decades of budget-cuts and underfunding.

    One problem I see, that does not seem right, is that while the rest of us are suffering, big company CEOs’ salaries have stayed the same, or have even risen.

    Thank you for your consideration.

    Best Wishes,
    Francine

  24. And just like that, I’m unsubbing from this site. Sorry, but if I wanted to read politics, I would read a political blog.

  25. @Francine: That’s what makes this country so great! We don’t all have to agree on every point. I rarely agree with every idea put forth by a presidential candidate, anyway. And this year I disagree on more points with both candidates than I agree with. That said, I’m honored to have you as a reader, and I encourage everyone to share their opinion here in an open (but family-friendly) way.

    @T: Sorry to see you go. However, my post was less about politics, and more about finding solutions to a very real problem that is affecting the finances of families across America.

  26. Thanks for the article. I live in Alaska and just paid $4.37 a gallon when filling up my tank 30 minutes ago. Believe me–most Alaskans WANT drilling in ANWR. The drilling area is not the pristine wilderness you might think. It is barren tundra, and the impact on the environment would be minimal, at best. It really burns me up that McCain is so anti-drilling. I hope he noticed that he came in dead last in the republican primary here (even behind Ron Paul). Don’t even get me started on Obama! I will definitely sign the petition.

  27. I realize this post is about solutions, but I do not think that drilling for domestic oil is a long term solution. There’s a reason we don’t drill for domestic oil, and it’s because it’s NOT cheap, and it’s quite dirty, and very hard to get out of the ground.

    Meanwhile, the energy and pollution produced by that oil has created irreversible effects on the environment (don’t mind me, I have a horrible bias: I’m an environmental scientist by occupation). I’ve looked at domestic oil rigs, and they just don’t produce. It becomes an energy sink, where it is cost-prohibitive to get the oil from the ground (hard to imagine that, eh?)

    I think we hit Hubbard’s Peak some time ago. We should probably look to rearranging the current infrastructure in the least invasive way possible.

    That is my personal opinion, though. I hold no expertise.

  28. As an oil driller myself I think this article is a little narrow minded. There is a reason why most countries don’t turn to a domestic supply now and thats because its depleted, not completely but the oil that is left is hard and expensive to extract. So hard and expensive that it is actually cheaper to go abroad for it. As for oil company profits, those profits are going to be needed for the future of oil extraction. Extracting the remaining reserves of oil will be a very costly process both in terms of R&D (how will we do it) and the extraction itself.

  29. @ T-I think that this post was more about the economy than politics, and I can understand a PF blogger writing about gas prices, oil policies, etc…

    Thanks for the link FD I have signed the petition.

  30. This topic overall shows Americans’ ignorance on basic economic principles. Forget the people who unsubscribed — they are looking for a magical political fix. This will likely be the personal finance issue of the next X years until it is replaced by water.

    Everyone is doing it
    By the way, Obama is not the only panderer on this topic. McCain still supports a summer gasoline tax holiday which economists have universally lambasted. Obama is taking the Let’s-stick-it-to-the-bastards route while McCain is taking the two-additional-chickens-in-your-pot method of dealing with the issue. Both plans are economically useless if not outright harmful.

    Solutions not mantras
    Too many people worship their party and don’t seek real solutions. We need a mixed and balanced solution that leverages America’s capitalism and ingenuity. The short, mid, and long range need to be addressed.

    Socialism?
    Redistributing wealth (and that includes telling companies exactly where to re-invest their profits) is socialistic. Although, the US has long had some socialist tendencies. Social Security anyone? What about welfare? Adding the socialist label to the proposal seems to turn off some people’s ears, so I try to avoid it as a logical argument just as anyone should avoid Hitler comparisons (see #4) to be taken seriously.

    If you need more of something…
    If you need more widgets, do NOT tax widget production. Taking away tax subsidies IS increasing taxes. A single industry should not be targeted for taxation. If you want more energy, offer additional incentives, but only have those incentives come on-line with new production.

    Switch to what?
    @Michael: “[Oil companies] also need to calm angry consumers, lest we actually do switch to non-oil-based energy consumption.”

    What are you going to switch to? Your bike? I encourage you to. It will reduce consumption which is exactly what high prices are supposed to do. Most of us can’t switch to another form of transportation. Even Honda’s pending electric car still uses electricity which in most of the US it requires coal (another non-renewable) or natural gas for the most part. Wind and solar (and other renewables) generated 0.3% of the US electricity. Even if you waved a magic wand to increase that tenfold, it would only make up 3% of our electric consumption. See spreadsheet 1.2.

    Band aids DO help
    Drilling more a mid-range band-aid. It will help buy some time, but other solutions are also needed. Just because it is not the best long-term solution does not mean that it should not be pursued.

    What about consumption?
    There must also be mid-range solutions on the consumption side. Congress did nothing for years to improve CAFE standards. GM, Ford, Chevrolet were content to keep selling gas guzzlers. They lay off workers and blame high gas prices. Anyone else care to blame lack of management fortitude to deal with the inevitable in a timely manner?

    To me, it seems that neither party is offering a comprehensive solution that will help make America continue to be great for the next 100 years.

    Wow…I already wrote nearly as much as Dad’s post, so better stop here. :)

  31. India, China and Russia combined may consume more oil than United States this year. The key word here “combined”. So lets not blame India and China just yet when a country with less than half the population of India or China consumes more oil than them “combined”.

  32. I was so shocked when I read some of the horrible comments … name calling is so not necessary. Get a grip. And unsubscribing? Someone is a little too sensitive.

    BAM…your comments are spot on. I am NOT a fan of McCain’s but I’ll be (reluctantly) voting for him because he’s ten times better than Obama. At least I don’t *think* he’ll raise taxes when I KNOW that Obama will.

    I’m sick of seeing gas prices jump 10 cents in one day but I also don’t want the government to step in because they will just inevitably make it worse.

  33. Frugal Dad, you’re absolutely right!! Amen to the above post! I’m glad there are others out there who can use common sense and understand how the economy works. I will be sure to sign the petition and send the link around to other like-minded individuals.

  34. Well, maybe a windfall tax MIGHT be considered socialism… but calling it such doesn’t make it wrong. Unless you think other socialist policies in the U.S. such as public schooling, fire departments, police protection, road maintenance, etc. which are paid for and supported by the collective, are.

    Socialism itself isn’t an evil. Making record profits in a time of war and need, well… that kinda sounds a little on the evil side to me…

  35. I think most people can agree the U.S. needs to steadily decrease its oil consumption with an eye toward eliminating most if not all oil usage sometime down the line.

    With that premise stated, the minute we start drilling in ANWR (or anywhere else in the US) and lower the price of gas the incentive to spend money on the development of hybrid/electric/solar/etc. cars in the US will come to a halt. American car companies will fall back into making oversized, inefficient, gas-guzzlers. Why? Because the profit-margin is higher on these behemoths.

    Gas prices are literally shooting my wife and my budget to hell (she drives 100 miles/day teaching blind and visually impaired chrildren). However, the fact that it is actually changing consumer and car producer behavior is a good thing. I hope they continue to increase.

    American car and Big Oil companies have been in Bush’s pocket since his first political job. The guy is a joke, as well as Cheney and Rice. Its plainly obvious at this point there are no WMD’s in Iraq. Bush started a war on false pretenses to ensure the flow of oil to the US. Gee – the Bush family fortune is directly tied to Big Oil. Oh and by the way – Rice has ties to Chevron as she was a board member of that company.

    Who benefits from the war in Iraq? That would be any American company who supplies war products and re-builds infrastructure (Halliburton – see Cheney).

    Sorry – got a little off target there. But its ridiculous that we have GM coming out with the Chevy Volt possibly in 2010 when they had the EV-1 (please Google it) back in 1998!! We deserve our fate if we continue down the path of over-indulgence and hyper-consumerism we have been on.

  36. Elle please let us know what your role is in the operations you are describing. I have doubts that you know much about the true reasons behind the project.

    Storage Numbers are Federally Reported
    Storage capacity and energy in storage are required to be reported to the federal government. The fines for non-compliance are huge, and this would be a very bad time to be in non-compliance.

    The storage numbers are reported at the DOE website. The energy market waits eagerly for the reports. More energy in storage indicates potential slackening of demand and lower future prices, so traders sell which forces prices down. Here is the June 13th report.

    If you truly have information that storage numbers are being falsified you should contact the DOE. I won’t hold my breath.

    Of course, there is no shortage where oil is produced and thus likely needs to be stored. Average Joe in Texas is constantly scratching his heads wondering: “We have so much oil here. Why is gasoline so expensive?” It is a global market. If another location will pay more for the oil, they will sell it there. The only discount that oil producing regions in the US receive is the transportation differential.

  37. I work for a big oil company, and we’ve been building storage facilities to hold hundreds of MILLIONS of barrels of oil… why? Because we have PLENTY here! There is no shortage.

    I believe they are scamming the US citizens into believing that we need to drill domestically in enviornmentally sensitive areas… to make it okay with the American citizens. They are spiking the price of oil to upset us, and it’s working… but drilling in Alaska will NOT solve anything!!

  38. @Elle – isn’t a 100 million barrels of oil only 5 days worth of what the US consumes?

    Granted I understand there is more than 1 oil company, but 100′s of millions doesn’t seem like that much when we consume over 20 million barrels per day.

    If we have PLENTY here, then why do we buy so much from Saudi Arabia?

  39. Fire, police, school, trash pickup, sewage containment, roads, bridges are all examples of “socialism”, so I guess to get rid of so-called socialism we can all go back to putting out our own house fires, stopping the people that rob us ourselves, homeschooling every child, and getting out our own cement to fill potholes and build bridges…

    Wouldn’t a real solution be to change the way we behave rather than continue to dig holes in the earth looking for something that while there might be some left, will definitely be gone someday? And we cannot blame China and India any more than we can blame ourselves; if we can drive SUV’s and do whatever we want, than so can they.

    Anyway, my 2 cents FD, hope you don’t mind.

  40. @David: Don’t mind at all – that was the point of this, to generate some discussion. By the way, of the things you mentioned regarding reasons for “socialism”…I wouldn’t mind us being more in charge of stopping people who try to rob us, or educating our own children.

    I do agree with tax collection for national defense, highway programs, etc, but let’s not kid ourselves – a lot of taxes are siphoned from our paychecks each week to pay for pork-barrel spending on behalf of Congress’ attempt to get elected and re-elected. And that’s true on both sides of the aisles!

  41. @Andy: I respectfully disagree with your assertion that domestic drilling will not bring down prices. The mere mention of us drilling oil will cause a slight easing in prices because supply will increase, and international suppliers will lower their prices to remain competitive.

    I don’t understand why this has to be an either/or issue. Why can’t we drill domestically to ease pricing in the near term (relatively), AND continue to work on alternative energy research and production.

  42. FD – I agree that tons of money is wasted on pork-barrel spending, for sure. However, even without that $, the last 7 years has seen a supposedly conservative govt. spend their way into trillions in debt, increase the size of govt, and cut taxes all at once. This will take forever to dig out of, and raising taxes is unfortunately one way to at least try to cut some of that down in the next X amount of years. If they raised taxes and spent the money on important things rather than pork, I am all for it.

    As for digging for new oil, digging here will only help in the short term, and could be worse for us long term as prices come down and no one tries to conserve anymore. If anything, these high prices have reduced our dependence on oil in general, as people try to conserve. Truthfully, if this is what it takes for more to be interested in allowing spending for alternative fuels and conserving what energy we do have left in the ground, then bring on $6 a gallon – I already pay $5 here!

  43. @Andy: “The only way to bring down prices of anything is to reduce consumption. It is one of the oldest economic principles in the book. Period.”

    You can also increase supply. Economics works that way too. However, in the long run something else must be done. There is nothing else close to ready available to run the whole country so we need to buy a bit of time IMO.

    I WOULD be in favor of an extra tax on consumption. That drives the right economic behavior.

    By the way, what if states won’t pitch in to help? Should they receive an extra energy tax at the pump? It seems everyone wants cheep energy, but they want it to come from someone else’s backyard.

  44. “You can also increase supply”

    However, supply will definitely run out, if not tomorrow, the next day. :-) And yea, I would be in favor of a tax on consumption, and extra energy taxes on states that don’t want to participate. Like it or not, we are all in this together.

  45. While I agree that a “windfall tax” on oil companies would be largely meaningless and counterproductive, I do believe that we should stop the subsidies we give to Big Oil. Taxpayer dollars are subsidizing Big Oil, and the companies do not pay all the royalties they owe for drilling on government land. “Sounds like socialism”? We already have socialized capitalism, wherein very profitable companies receive government subsidies.

    I also disagree that domestic drilling is the solution. It would take between 7 and 10 years to see any true results. What if — and I know this is crazy — we spent that billions of dollars and years of time actually improving current renewable technology so that in 7-10 years we had viable and cost-efficient alternatives that contribute toward ending our dependence on oil altogehter. The points above, that oil companies will continue to charge high prices, remain in force. Increased supply 7 to 10 years down the road isn’t going to change that.

    Instead of looking to fossil fuels (the energy source of the last century) for solutions, we should be focusing our efforts and money on moving into the 21st century of energy production. We’re America, for heaven’s sake! Why aren’t we innovating?

  46. Amen!

    Windfall taxes are not a solution. Would it have made sense to tax the windfall profits on the housing market before it started to bust? Why is it ok to tax windfall profits of ANY company? You want American companies to move their headquarters to tax friendly places like Ireland (12.5%)…implement a windfall tax. Companies subjected to such taxes will start to move…many already are.

    Drilling is the answer. This will increase the supply and make the dollar stronger. Decreasing demand may make some feel better about themselves, but that alone will not affect the global demand.

    Unfortunately, there is no universal alternative for fueling vehicles. Production of Ethanol requires the use of fossil fuels for tractors and trucks. Wind is not a viable option for cars. Electricity grids are often run with fossil fuels. Even if we expanded nuclear enegery, it is not a viable option for vehicles. Mass transit uses electricity or fossil fuels. American society is set up as a car society and shifting to something else is not going to happen overnight.

    Environmental concerns are over-played in the mainstream media.

  47. Drilling is the answer.

    A windfall tax on any companies profits will only make companies move to more tax friendly tax havens. It makes no economic sense to tax a company for windfall profits. It may make political sense, but not economic sense.

    More supply will strengthen the dollar. More supply will offset some of the trade deficit. More supply may even creat more jobs at home. Punishing a company by taxing profits will not have an economic impact, short or long term.

  48. I’m all for more drilling here in the US, but it isn’t going to increase the supply short term. The oil companies could be pumping more petroleum right now, but have chosen not to because they like the price where it is.

    By the best estimates, if we start the process of sinking new wells this year it will be another seven years before they will be producing. There again, I doubt the oil companies are going to pump so much petroleum it brings the price back down to $60 a barrel.

    In the mean time, if every vehicle in America got just two more miles to the gallon then currently, it would reduce petroleum consumption by millions of barrels per year! If you cut demand, it has the same effect on the market as increasing supply. And we can start conserving immediately.

  49. I’m with Andy. Here’s why, by way of analogy:

    When compact disks hit the market, a produced CD in a music store costed $18 (while LPs went for about $10-$12). While the cost of production went down, price did not. In my opinion, the industry found that the market would bear the price, and so the prices stayed where they were. It stayed up, until the internet took off, leading to online piracy, and a huge reduction of demand (the number of buyers — a leftward shift in the demand curve) for legitimately produced CDs. Now CDs can be gotten for around $13. (Not $0.50, as CD-R blanks cost, because of the cost of the full production: payment for the artists and engineers, and for shipping, etc.).

    As for oil, I humbly predict that the same will occur. While a few drivers have curbed their consumption, they continue to drive because their livelihood demands it: you gotta go to work, you gotta grocery. Even if oil prices ease up, the industry has already seen that people have gotten used to high prices. As long as we demand our personal vehicles (of the current preference), we will demand gasoline; we will provide “demand”.

    An increase in supply will not necessarily lower price because the Industry knows our taste and our behavior.

    When we convert to bikes, quad cycles, or solar cars, and/or make mass transit our way of life, the demand curve for gas/fossil fuel will shift to the left, lowering the equilibrium price.

  50. Jesus H Christ! Why does no one read other comments here before writing their own!

    DRILLING IS NOT THE ANSWER. As an oil driller (and having to repeat myself again!!) most of the oil producing countries are well past their peak. I believe north america passed it in the late 80s early 90s. That doesn’t mean you have no oil for domestic drilling but the oil you do have would be far to expensive to extract compared to buying from overseas. Therefore domestic drilling will not improve the situation. The only thing that will improve the situation is when america starts doing what everyone else is doing and develop more fuel efficient cars and start reducing emissions and looking for more fuel efficient alternatives. The rest of the world started this years ago yet when we invited the USA in on it your government gave us the middle finger!

    The other thing is Iran and Russia are probably the two biggest remaining reserves yet you want to threaten Iran and Russia doesn’t like you much either…. i fore see some major issues there!

  51. P.S. Working locally is yet possible: telecommuting and community design. Why go downtown to do paperwork or project managing? It can be done at home, or if your suburb will help and if demographics support it (enough downtown workers to justify), at a “business center”. We have the technology.

  52. Wow. Maybe it shows my political leanings, but I can’t imagine why anyone would seriously advocate drilling in oil reserves. Google “peak oil” and look what some predict will happen to the economy in the next 20 years. (I personally believe viable fuel alternatives will be available by then, but who knows what will really happen.)

    The problem isn’t finding more oil, but finding alternatives to oil consumption (whether it be riding a bike, public transportation, or alternative fuel sources). How about going after car companies to push them to mass produce fuel efficient or fuel alternative cars? They’re just as beholden to politics as the oil industry, so of course that’s not going to happen until gas reaches $10 a gallon and people start driving even less and buying fewer cars…

    Oh, and to the people who say it’s cheaper to live in suburbia than in an urban location: consider how much your rent/mortgage would be different, and then calculate how much you pay in gas for commuting, longer trips to grocery store, activities, etc. Odds are, it’s not that much different.

    Finally, and I apologize for not looking the specifics up for this, hasn’t anyone else heard about the oil (b?)millionaire in Texas who is actively putting his money towards researching and finding oil *alternatives*?? I think it says a lot when an “oil baron” is putting his money towards alternatives…

  53. @Miranda: “What if … we spent that billions of dollars and years of time actually improving current renewable technology so that in 7-10 years we had viable and cost-efficient alternatives that contribute toward ending our dependence on oil altogether.”

    How are “WE” going to decide how to invest the dollars that someone else earned? Are “we” more efficient at investing than they are? They made the money in the first place.

    There is no alternative, even with billions of dollars, that can replace non-renewable energy in seven to ten years. I too think we should be innovating, but let’s not run towards edge of a cliff hoping we’ll magically evolve wings.

    @djm: “As an oil driller (and having to repeat myself again!!) most of the oil producing countries are well past their peak. I believe north america passed it in the late 80s early 90s.”

    I did not miss what you said – I ignored it the first time. :) Regardless, of being an oil driller, I believe that you are missing Oil Sands, Gas-to-Liquids, coal-to-liquids, and Shale oil. All are other non-traditional petroleum products available that were never profitable to extract or convert at less than $60/barrel. These are now possible alternatives.

    Shale Oil
    Take a look at the example of Shale Oil: “A 2005 estimate set the total world resources of oil shale at 411 gigatons — enough to yield 2.8 to 3.3 trillion barrels (520 km³) of shale oil. This exceeds the world’s proven conventional oil reserves, estimated at 1.317 trillion barrels (209.4×109 m3), as of 1 January 2007. The largest deposits in the world are found in the United States…”

    Tar or Oil Sands
    Also check out Oil Sands: “[T]he world’s largest deposits occur in two countries: Canada and Venezuela, both of which have tar sands reserves approximately equal to the world’s total reserves of conventional crude oil.” Ask Alberta about Oil Sands: “Second only to the Saudi Arabia reserves, Alberta’s oil sands deposits were described by Time Magazine as … ‘could satisfy the world’s demand for petroleum for the next century’.”

    Coal to Liquids
    The US has the world’s largest reserves of coal (pdf) which can be converted to gasoline.

    Innovation
    @Mirand:”Why aren’t we innovating?”
    I believe that these technologies show that we are innovating. The market takes a while to respond and new technologies take some time. At $4 per gallon, innovation is coming, but maybe not in the radical form that you hope.

    Peak Oil: Real but Half True
    The typical person referring to peak oil is referring to conventional deposits like those in Saudi Arabia that are profitable at $4 per barrel. Most people mentioning peak oil do not realize that they are missing TONS of interchangeable resources such as those I mentioned above. Of course there is a peak, but it is not anywhere near if you include reasonably extractable alternatives.

    We have lots of the stuff left, but it will never be as cheap or as easy to get as the product as we are burning now.

  54. I think we should drill for more oil in America. But we need to conserve, too, because otherwise, no matter how much oil is pumped, we will be left begging oil producers – whether those producers are oil companies or governments – for more oil. The more consumers conserve, the more sway we may have with the oil markets. I would rather drive a fuel-efficient car with gas at $1.50 per gallon than drive the same car with gas at $4.00 per gallon.

  55. @brett, i wasn’t missing them that is what i am talking about. They are not as cheap to extract as extracting oil from countries still in their free flow peak and having it shipped over, even at its current price.

    Clearly if you didn’t ignore peoples comments and read correctly you would understand. I’ve clearly said that domestic drilling in the states is not the solution due to the fact the oil in the states would be far to expensive to extract i.e. shale oil.

  56. Great post Frugal Dad!

    As many of the comments show, to drill or not to drill is not an either/or proposition. Too many times people argue that drilling won’t solve the problem because it’s a short term solution to a long term problem, and the only long term solution is renewable energy. The problem is that renewable energy is not viable yet.

    It’s nice to see so many people get the fact that both drilling in the short term and investing in alternative energy in the long term are complimentary solutions to the problem.

  57. DJM: Did you see the smiley face? I was joking. There are so many comments that no one can possibly read them all, so don’t take it personally that someone missed your comment.

    You did clearly state that it is harder to get the oil that is left, but it was not clear that you were talking specifically about the other sources that I mentioned. :) Most people (maybe not you) don’t understand these as alternatives to the sources we currently use, so forgive me if I assumed that you did not too.

    Most Americans have seen an interview with someone like the author of Twilight in the Desert or headlines like this and are convinced that there will be no oil left on the planet in just a few years.

    I agree it is harder and more expensive to extract those, but some of those alternatives are profitable or could be within a few more years at today’s prices and/or a small amount of innovation. Alberta is raking in the money right now. Those sources are not profitable at $20 or maybe even $60 per barrel, so they were never considered until recently. If prices stay high, those sources will help on the supply side.

    You also mention the instability in the relationships with some of the countries who have the stuff we currently use. These alternatives are in much more stable locations which is also a significant plus. I don’t see us having a major conflict with the Canadians anytime soon.

    Shana: The guy investing in wind farms is T Boone Pickens. This is a perfect example of someone seeing a potential for profit in an alternative. He had a great interview on Larry King about this. I could not find that transcript, but i found another interview with Pickens on the topic.

    @Joe: “It’s nice to see so many people get the fact that both drilling in the short term and investing in alternative energy in the long term are complimentary solutions to the problem.”

    I agree. Is it only the politicians who have lost their minds? They keep seeming to draw ridiculously black and white lines in the sand to differentiate themselves, but not really fix anything.

  58. Domestic drilling is more about security than price – adding another 2 million bbl/day within 5-7 years to our current 8.3 million bbl/day is more insurance against import disruption.

    Coal-to-liquid – we don’t want to go there if we don’t absolutely have to – much dirtier than processing oil sands or even shale – massive CO2 emissions, very high production cost.

    Game-changing alternatives are coming – in 30 months we will have the first mass-market EV that can run on your choice of electricity – from coal or nuclear or gas or wind or solar.

    It’s getting from here to there without supply disruptions in our tight liquid fuels market (odd-even days, anyone?) that concerns me.

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