R-Squared Energy Blog

Pure Energy

Top 10 Energy Stories of 2008

Tis the season for Top 10 stories, and here are what I think were the Top 10 energy stories of the year.

1. Unprecedented volatility in the energy markets

Oil prices raced to nearly $150 a barrel, and then fell to the $30’s by year end. This marks the highest ever prices for oil, followed by the lowest prices in four years. Gasoline, diesel, and natural gas prices demonstrated the same kind of volatility. There are multiple factors behind the volatility. The role of speculation was hotly debated, and the economic collapse – fueled by cash-strapped consumers who had overextended themselves – resulted in a sharp drop in demand. Some even argued that the real reason behind the plunge in prices was closure of the so-called “Enron loophole.”

2. Oil price volatility fallout

A consequence of the incredibly volatility was the economic damage done at both ends of the price spectrum. At the upper end, airlines were going bankrupt and car companies were in deep financial trouble as consumers stopped buying the higher profit margin SUVs. After oil prices plunged, some non-integrated oil companies found themselves in financial trouble, including Flying J who declared bankruptcy.

3. Barack Obama elected

In a normal year, this would have been my #1 story, especially considering that the new administration is likely to attempt a major shift away from fossil fuels. My prediction is that reality is going to collide with enthusiasm, and while gains are likely to be made along several fronts, aggressive renewable energy targets will not be met.

4. Ethanol producers struggle

Despite production mandates and generous federal subsidies, ethanol producers struggled to make a profit. A combination of high corn prices followed by falling fuel prices pushed even some of the largest ethanol producers to bankruptcy. Corn growers fared much better, as higher prices and mandated demand from the ethanol industry provided them with the same sort of windfall seen recently by the oil industry (prompting some to ask whether a windfall profits tax on corn would be good for consumers). Xethanol finally ceased operations, as I had predicted in early 2007.

5. Somali pirates hijack supertanker

Somali pirates, emboldened by recent multi-million dollar ransom payments, hijacked a Saudi supertanker carrying $100 million worth of oil. At the time of this writing, the situation remains unresolved, although the value of the oil at current market prices is now considerably less than $100 million.

6. 2nd generation ethanol is delayed

The story this year was supposed to be “2nd generation ethanol production begins“, but alas the over-promise, under-deliver meme that I have been critical of continues. Range Fuels had initially intended to start producing in 2008, but that was delayed to 2009 and now production isn’t forecast to begin until 2010. Meanwhile, other 2nd generation ethanol companies continue to promise the world, including Coskata who claims they can make ethanol for “under US $1.00 a gallon anywhere in the world.” (I took a good look at those claims here.) Finally, according to this source (another here), of the six cellulosic ethanol projects selected to receive $385 million in federal funding in February 2007, almost two years later only one plant is actually under construction (Range Fuels).

7. Peak oil becomes fashionable, then unfashionable again

High oil prices demanded an explanation, and peak oil was ready to provide that explanation. 2008 was probably the year that the mainstream began to seriously discuss and debate peak oil. However, when prices began to plunge, the peak oil skeptics began to say “I told you so.” Others suggested that this was just a continuation of the normal cycles.

8. Gas stations in the southeast run out of gasoline in the wake of Hurricanes Gustav and Ike

Some major oil refineries that shut down in the face of Hurricane Gustav had to remain shut down with Hurricane Ike following closely behind. Gasoline inventories heading into the hurricanes were low, so it wasn’t long before spot outages began to show up across the southeast. As I predicted during a panel session at this year’s ASPO conference, the outages were likely to be short-lived, and inventories would recover as refineries came back online. This was in response to wide-spread concern, partially fueled by Matt Simmons’ presentation, that the outages were the beginning of something much more widespread. (I think my answer was literally “This situation is temporary. I expect inventories a month from now to be substantially higher.”)

9. “Drill here, drill now”

Momentum for more exploration and production in U.S. waters increased along with oil prices. This became a campaign theme for Republicans, who adopted the slogan “Drill here, drill now.” President Bush lifted a moratorium on offshore drilling. Democrats initially responded with calls for oil companies to be forced to drill on current leases before opening up new ones. However, Congress – facing constituents unhappy with high gas prices – ultimately followed suit and allowed the 25-year moratorium to expire. The response from then candidate Obama was that he wasn’t happy to see the moratorium expire, and that he favored “responsible” drilling as part of a broader energy package. My own proposal was to allow drilling and funnel the lease proceeds to alternative energy, mass transit, and other initiatives designed to reduce oil consumption. This proposal later received quite a lot of attention when Paris Hilton proposed the same thing.

10. Record profits by US energy companies

On the back of high oil prices, the integrated oil companies (those who produce both oil and refined products like gasoline and diesel) once again saw record profits. There was an interesting dichotomy, however, as downstream profits in the refining sector vanished as gasoline consumption fell. Pure refiners like Valero saw their profits crash.

That’s more or less what I think were the Top 10 stories of 2008. There were quite a few in the honorable mention category, such as T. Boone Pickens energy plan, the decision by OPEC to reverse direction and propose big production cuts, falling oil production in Russia and Mexico, and postponed investments in the wake of lower prices.

So, what did I miss? Which stories do you think should be ranked in a significantly different order?

In closing, Happy Holidays to all readers. I am now going offline to spend some good family time. Here’s hoping that you all have the same opportunity.

December 24, 2008 Posted by | Barack Obama, cellulosic ethanol, ethanol production, oil prices, Peak Oil, windfall profits, Xethanol | 42 Comments

Obama’s Change of Heart on WPT

It seems that President-elect Obama has had a change of heart on enacting a windfall profits tax on oil companies. That, among other things, is angering the liberal wing of the Democratic Party:

Liberals voice concerns about Obama

Here are the excerpts from the article specific to this issue:

Liberals are growing increasingly nervous – and some just flat-out angry – that President-elect Barack Obama seems to be stiffing them on Cabinet jobs and policy choices.

Obama has reversed pledges to immediately repeal tax cuts for the wealthy and take on Big Oil. He’s hedged his call for a quick drawdown in Iraq. And he’s stocking his White House with anything but stalwarts of the left. Obama drew rousing applause at campaign events when he vowed to tax the windfall profits of oil companies. As president-elect, Obama says he won’t enact the tax.

One of the Campaign for America’s Future blogs commented on Obama’s decision not to tax oil companies’ windfall profits saying, “Between this move and the move to wait to repeal the Bush tax cuts for the wealthy, it seems like the Obama team is buying into the right-wing frame that raising any taxes – even those on the richest citizens and wealthiest corporations – is bad for the economy.”

“I’ve heard the most grousing about the windfall profits tax, but on the other hand, Obama has committed himself to a stimulus package that makes a down payment on energy efficiency and green jobs,” Hickey said. “The old argument was, here’s how we afford to make these investments – we tax the oil companies’ windfall profits. … The new argument is, in a bad economy that could get worse, we don’t.”

Obama is asking for patience – saying he’s only shifting his stance on some issues because circumstances are shifting. Aides say he backed off the windfall profits tax because oil prices have dropped below $80 a barrel. Obama also defended hedging on the Bush tax cuts.

One of my hopes was that some of his promises amounted to campaign rhetoric, perhaps necessary if he was to win the election. Since winning the election, it does appear that he has taken a pragmatic approach to a number of problems, including this one.

On the other hand, if you are ever going to enact a windfall profits tax, now would be the time to do it. Let me explain. If you had a tax that triggered off of $80 oil – as has been mentioned – at least the oil companies could build that into their economic evaluations of new projects.

Mind you, I am not arguing for this approach, but it makes more sense than the standard knee-jerk reactions every time gasoline prices go up and profits rise. Of course what we really need is a comprehensive, long-term energy policy. What we have had over the past few years is an energy policy that changes every year or so. This makes life difficult for all energy companies (and not just oil companies).

December 8, 2008 Posted by | energy policy, oil companies, politics, windfall profits | 105 Comments

Come Again?

It seems that the Democrats have crafted a plan to “make America energy-independent of foreign oil within a decade:”

Democrats are working on drilling bill

WASHINGTON — Oil and natural gas producers might soon be able to drill in the eastern Gulf of Mexico as well as along the Atlantic coast from Virginia to Georgia under an energy plan being crafted by House Democrats.

While details are still being worked out, the plan would raise taxes on the oil companies; force producers that benefited from botched lease agreements with the government to pay royalties; require electric utilities to generate 15 percent of their power from renewable sources; and provide loan guarantees to automakers to help produce more fuel-efficient cars.

Pelosi insisted the plan would “make America energy-independent of foreign oil within a decade.”

Really? How? Is increasing taxes on the oil companies going to increase supplies? Is forcing renegotiation of the leases going to reduce demand? How is the electric utilities provision going to affect either since we don’t produce much electricity from oil? (Note that I am not necessarily against all of these provisions, they just aren’t going to help close our supply/demand imbalance).

The drilling itself should bring a little oil online (not nearly enough to make us energy independent), but I suspect the conditions are going to be Draconian enough that oil companies won’t be lining up to take part in the lease auctions. No, I suspect this is just a bit of political smokescreen as Pelosi is starting to feel the pressure from the “drill here, drill now” crowd. She wants to offer up a bill that won’t actually result in any drilling, but will allow her to claim that she supported drilling.

I still believe the compromise I suggested previously is the right one. Open up some drilling, and earmark the money for programs designed to reduce our fossil fuel consumption. And by ‘programs’, I mean actual programs and not some pandering line about taxing oil companies to promote energy independence.

After all, let’s face facts. There was enormous pressure to drill when gasoline cracked $4/gal. It is only going to increase as gas creeps higher and higher in the coming years. Right now the Democrats have some leverage in which to get a compromise that will help stem the demand side of the equation. But that leverage will disappear as the cries to drill grow louder and louder.

September 10, 2008 Posted by | energy policy, oil companies, politics, windfall profits | 140 Comments

A Spite-Based Energy Policy

I would be remiss if I didn’t mention the latest attempt to pass a windfall profits tax on oil companies. You know, it isn’t the windfall profits tax itself that bugs me. It is the fact that it wouldn’t be applied consistently across industries, some of which have much higher profit margins. These measures would single out the oil industry for punitive measures, which just reinforces the image that oil companies are manned by people who like kicking puppies and pushing old people down stairs.

I actually spent some time digging around in the legislation to understand how they were defining windfall profits, reasonable profits, and what exactly constitutes “gouging.” You might be surprised (and I explain below). One section actually amends a section on “alcohol, tobacco, and certain other excise taxes” and throws crude oil into that mix. Glad to see that our lawmakers have such regard for the fuel that allows them mobility.

But just about the time I was knee-deep in the legislation, I read that the measure had been blocked:

Senate GOP blocks windfall taxes on Big Oil

The Democratic energy package would have imposed a 25 percent tax on any “unreasonable” profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

“Americans are furious about what’s going on,” declared Sen. Byron Dorgan, D-N.D. He said they want Congress to do something about oil company profits and the “orgy of speculation” on oil markets.

So there you have it. Americans are angry. They are paying more than they like for gasoline. Oil companies are making more money than they think is fair. So let’s base our energy policy on spite. Throw in a provision to sue OPEC and force them to abide by U.S. law, mandate a few alternative energy technologies that aren’t commercially viable, tap into our Strategic Petroleum Reserves in a short-sighted attempt to bring prices down – and you begin to understand why U.S. energy policy is dysfunctional. U.S. energy policy can be summed up as “Cheap energy for everyone, and if it isn’t cheap someone shall be punished.”

Other noteworthy comments:

“The oil companies need to know that there is a limit on how much profit they can take in this economy,” said Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, warning that if energy prices are not reined in “we’re going to find ourselves in a deep recession.”

So, Durbin obviously believes that a windfall profits tax is going to bring down oil prices. Maybe we should do that with the solar industry. Prices are still too high at $4.82/watt for solar PV to be competitive with coal. I had never considered that we might pull prices down to <$1.00/watt by slapping a windfall profits tax on solar firms. It's brilliant, and sure to work.

“We are hurting as a country. We’re hurting individually as Americans … and the other side says, `Do nothing. Don’t even debate the issue,'” complained Sen. Charles Schumer, D-N.Y. “Average citizens are scratching their heads and saying, what’s wrong with Washington,” said Schumer.

Heh. I have been asking myself what’s wrong with Schumer for a while now.

“This is a start. It will help lower prices. It will help working families make ends meet,” Democratic Senate Majority Leader Harry Reid said in a vain effort to keep the bill alive. “It is one small step on a long and uphill road to a cleaner, more affordable energy future.” The bill would have ended tax breaks for big oil companies, imposed a new tax on windfall profits and fought price manipulation by OPEC, Reid said.

Of course ole Harry knows a thing or two about windfall profits. But does he really believe that this will lower prices? Why does he think things will be different this time than last time?

Back to the legislation, though, because I think some version of it’s going to eventually pass. So it was of interest to me to wade through the language. You can find the text of the bill here: Consumer-First Energy Act of 2008.

Of particular interest to me was “SEC. 202. DEFINITIONS.” Here’s what I found:

PRICE GOUGING- The term `price gouging’ means the charging of an unconscionably excessive price by a supplier in an affected area.

Hmm. That’s not very helpful. Fortunately, they followed up with a definition of “unconscionably excessive price.”

UNCONSCIONABLY EXCESSIVE PRICE- The term `unconscionably excessive price’ means an average price charged during an energy emergency declared by the President in an area and for a product subject to the declaration, that–

(A)(i)(I) constitutes a gross disparity from the average price at which it was offered for sale in the usual course of the supplier’s business during the 30 days prior to the President’s declaration of an energy emergency; and

(II) grossly exceeds the prices at which the same or similar crude oil, gasoline, petroleum distillates, or biofuel was readily obtainable by purchasers from other suppliers in the same relevant geographic market within the affected area; or

(ii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs, including replacement costs, outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, petroleum distillates, or biofuel, and is not attributable to local, regional, national, or international market conditions.

Some interesting tidbits in there. I find that it is very important to properly define terms, especially when debating issues. Here, the legislation defines “unconscionably excessive” with terms like “unfair”, “unconscionable” (isn’t this what we are trying to define?), and “gross disparity.” The courts would have fun with this. “That’s a gross disparity! Gasoline was selling down the street for $0.20/gallon less!

I also find it interesting that biofuels would have been covered.

So let’s set the stage and play this one out. A hurricane is bearing down on the coast of Texas. There is a run on gasoline, as people hoard. The local 7-Eleven would normally respond to such increased demand by raising prices, and forcing people to decide just how much they really needed the gasoline. But, as a result of the new price gouging provision, they don’t raise prices. They simply run out of gas. That is exactly what would happen. Is that preferable to allowing merchants to raise prices? In that case, those who have a critical need can still get it. Those who don’t can wait. But due to the price gouging stipulation, even if you don’t really need it, you can buy it up and hoard it from those who do.

How about a definition of ‘windfall profit’? This one’s a gem:

For purposes of this chapter, the term `windfall profit’ means the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year.

Reasonably Inflated Average Profit- For purposes of this chapter, with respect to any applicable taxpayer, the reasonably inflated average profit for any taxable year is an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average.

Let me make sure I understand this. You are proposing that a publicly traded company – not a public utility, mind you – has an unreasonable profit if the profit increases by more than 10% from one year to the next? Do you hear that giant sucking sound? It is the enormous flood of money out of the energy sector and into other sectors – where a 40% year on year increase in profits is just peachy. Are you people serious?

I think it is inevitable, though, that we will try this experiment once again. I believe Obama will win the presidency, and he is all for it. I just hope he has the sense to pick a running mate who knows more about energy than he does (Hint: Bill Richardson).

Obama says he would impose oil windfall profits tax

RALEIGH, North Carolina (Reuters) – Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans’ pain over high gasoline prices.

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,” the Illinois senator said.

Doesn’t ExxonMobil already pay taxes on their “windfall profits?” Something like $30 billion last year? That windfall belongs to the government, though. I wonder if it is unconscionably excessive?

June 10, 2008 Posted by | energy policy, ExxonMobil, politics, windfall profits | Comments Off on A Spite-Based Energy Policy

A Spite-Based Energy Policy

I would be remiss if I didn’t mention the latest attempt to pass a windfall profits tax on oil companies. You know, it isn’t the windfall profits tax itself that bugs me. It is the fact that it wouldn’t be applied consistently across industries, some of which have much higher profit margins. These measures would single out the oil industry for punitive measures, which just reinforces the image that oil companies are manned by people who like kicking puppies and pushing old people down stairs.

I actually spent some time digging around in the legislation to understand how they were defining windfall profits, reasonable profits, and what exactly constitutes “gouging.” You might be surprised (and I explain below). One section actually amends a section on “alcohol, tobacco, and certain other excise taxes” and throws crude oil into that mix. Glad to see that our lawmakers have such regard for the fuel that allows them mobility.

But just about the time I was knee-deep in the legislation, I read that the measure had been blocked:

Senate GOP blocks windfall taxes on Big Oil

The Democratic energy package would have imposed a 25 percent tax on any “unreasonable” profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

“Americans are furious about what’s going on,” declared Sen. Byron Dorgan, D-N.D. He said they want Congress to do something about oil company profits and the “orgy of speculation” on oil markets.

So there you have it. Americans are angry. They are paying more than they like for gasoline. Oil companies are making more money than they think is fair. So let’s base our energy policy on spite. Throw in a provision to sue OPEC and force them to abide by U.S. law, mandate a few alternative energy technologies that aren’t commercially viable, tap into our Strategic Petroleum Reserves in a short-sighted attempt to bring prices down – and you begin to understand why U.S. energy policy is dysfunctional. U.S. energy policy can be summed up as “Cheap energy for everyone, and if it isn’t cheap someone shall be punished.”

Other noteworthy comments:

“The oil companies need to know that there is a limit on how much profit they can take in this economy,” said Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, warning that if energy prices are not reined in “we’re going to find ourselves in a deep recession.”

So, Durbin obviously believes that a windfall profits tax is going to bring down oil prices. Maybe we should do that with the solar industry. Prices are still too high at $4.82/watt for solar PV to be competitive with coal. I had never considered that we might pull prices down to <$1.00/watt by slapping a windfall profits tax on solar firms. It's brilliant, and sure to work.

“We are hurting as a country. We’re hurting individually as Americans … and the other side says, `Do nothing. Don’t even debate the issue,'” complained Sen. Charles Schumer, D-N.Y. “Average citizens are scratching their heads and saying, what’s wrong with Washington,” said Schumer.

Heh. I have been asking myself what’s wrong with Schumer for a while now.

“This is a start. It will help lower prices. It will help working families make ends meet,” Democratic Senate Majority Leader Harry Reid said in a vain effort to keep the bill alive. “It is one small step on a long and uphill road to a cleaner, more affordable energy future.” The bill would have ended tax breaks for big oil companies, imposed a new tax on windfall profits and fought price manipulation by OPEC, Reid said.

Of course ole Harry knows a thing or two about windfall profits. But does he really believe that this will lower prices? Why does he think things will be different this time than last time?

Back to the legislation, though, because I think some version of it’s going to eventually pass. So it was of interest to me to wade through the language. You can find the text of the bill here: Consumer-First Energy Act of 2008.

Of particular interest to me was “SEC. 202. DEFINITIONS.” Here’s what I found:

PRICE GOUGING- The term `price gouging’ means the charging of an unconscionably excessive price by a supplier in an affected area.

Hmm. That’s not very helpful. Fortunately, they followed up with a definition of “unconscionably excessive price.”

UNCONSCIONABLY EXCESSIVE PRICE- The term `unconscionably excessive price’ means an average price charged during an energy emergency declared by the President in an area and for a product subject to the declaration, that–

(A)(i)(I) constitutes a gross disparity from the average price at which it was offered for sale in the usual course of the supplier’s business during the 30 days prior to the President’s declaration of an energy emergency; and

(II) grossly exceeds the prices at which the same or similar crude oil, gasoline, petroleum distillates, or biofuel was readily obtainable by purchasers from other suppliers in the same relevant geographic market within the affected area; or

(ii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs, including replacement costs, outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, petroleum distillates, or biofuel, and is not attributable to local, regional, national, or international market conditions.

Some interesting tidbits in there. I find that it is very important to properly define terms, especially when debating issues. Here, the legislation defines “unconscionably excessive” with terms like “unfair”, “unconscionable” (isn’t this what we are trying to define?), and “gross disparity.” The courts would have fun with this. “That’s a gross disparity! Gasoline was selling down the street for $0.20/gallon less!

I also find it interesting that biofuels would have been covered.

So let’s set the stage and play this one out. A hurricane is bearing down on the coast of Texas. There is a run on gasoline, as people hoard. The local 7-Eleven would normally respond to such increased demand by raising prices, and forcing people to decide just how much they really needed the gasoline. But, as a result of the new price gouging provision, they don’t raise prices. They simply run out of gas. That is exactly what would happen. Is that preferable to allowing merchants to raise prices? In that case, those who have a critical need can still get it. Those who don’t can wait. But due to the price gouging stipulation, even if you don’t really need it, you can buy it up and hoard it from those who do.

How about a definition of ‘windfall profit’? This one’s a gem:

For purposes of this chapter, the term `windfall profit’ means the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year.

Reasonably Inflated Average Profit- For purposes of this chapter, with respect to any applicable taxpayer, the reasonably inflated average profit for any taxable year is an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average.

Let me make sure I understand this. You are proposing that a publicly traded company – not a public utility, mind you – has an unreasonable profit if the profit increases by more than 10% from one year to the next? Do you hear that giant sucking sound? It is the enormous flood of money out of the energy sector and into other sectors – where a 40% year on year increase in profits is just peachy. Are you people serious?

I think it is inevitable, though, that we will try this experiment once again. I believe Obama will win the presidency, and he is all for it. I just hope he has the sense to pick a running mate who knows more about energy than he does (Hint: Bill Richardson).

Obama says he would impose oil windfall profits tax

RALEIGH, North Carolina (Reuters) – Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans’ pain over high gasoline prices.

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,” the Illinois senator said.

Doesn’t ExxonMobil already pay taxes on their “windfall profits?” Something like $30 billion last year? That windfall belongs to the government, though. I wonder if it is unconscionably excessive?

June 10, 2008 Posted by | energy policy, ExxonMobil, politics, windfall profits | 26 Comments

A Spite-Based Energy Policy

I would be remiss if I didn’t mention the latest attempt to pass a windfall profits tax on oil companies. You know, it isn’t the windfall profits tax itself that bugs me. It is the fact that it wouldn’t be applied consistently across industries, some of which have much higher profit margins. These measures would single out the oil industry for punitive measures, which just reinforces the image that oil companies are manned by people who like kicking puppies and pushing old people down stairs.

I actually spent some time digging around in the legislation to understand how they were defining windfall profits, reasonable profits, and what exactly constitutes “gouging.” You might be surprised (and I explain below). One section actually amends a section on “alcohol, tobacco, and certain other excise taxes” and throws crude oil into that mix. Glad to see that our lawmakers have such regard for the fuel that allows them mobility.

But just about the time I was knee-deep in the legislation, I read that the measure had been blocked:

Senate GOP blocks windfall taxes on Big Oil

The Democratic energy package would have imposed a 25 percent tax on any “unreasonable” profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

“Americans are furious about what’s going on,” declared Sen. Byron Dorgan, D-N.D. He said they want Congress to do something about oil company profits and the “orgy of speculation” on oil markets.

So there you have it. Americans are angry. They are paying more than they like for gasoline. Oil companies are making more money than they think is fair. So let’s base our energy policy on spite. Throw in a provision to sue OPEC and force them to abide by U.S. law, mandate a few alternative energy technologies that aren’t commercially viable, tap into our Strategic Petroleum Reserves in a short-sighted attempt to bring prices down – and you begin to understand why U.S. energy policy is dysfunctional. U.S. energy policy can be summed up as “Cheap energy for everyone, and if it isn’t cheap someone shall be punished.”

Other noteworthy comments:

“The oil companies need to know that there is a limit on how much profit they can take in this economy,” said Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, warning that if energy prices are not reined in “we’re going to find ourselves in a deep recession.”

So, Durbin obviously believes that a windfall profits tax is going to bring down oil prices. Maybe we should do that with the solar industry. Prices are still too high at $4.82/watt for solar PV to be competitive with coal. I had never considered that we might pull prices down to <$1.00/watt by slapping a windfall profits tax on solar firms. It’s brilliant, and sure to work.

“We are hurting as a country. We’re hurting individually as Americans … and the other side says, `Do nothing. Don’t even debate the issue,'” complained Sen. Charles Schumer, D-N.Y. “Average citizens are scratching their heads and saying, what’s wrong with Washington,” said Schumer.

Heh. I have been asking myself what’s wrong with Schumer for a while now.

“This is a start. It will help lower prices. It will help working families make ends meet,” Democratic Senate Majority Leader Harry Reid said in a vain effort to keep the bill alive. “It is one small step on a long and uphill road to a cleaner, more affordable energy future.” The bill would have ended tax breaks for big oil companies, imposed a new tax on windfall profits and fought price manipulation by OPEC, Reid said.

Of course ole Harry knows a thing or two about windfall profits. But does he really believe that this will lower prices? Why does he think things will be different this time than last time?

Back to the legislation, though, because I think some version of it’s going to eventually pass. So it was of interest to me to wade through the language. You can find the text of the bill here: Consumer-First Energy Act of 2008.

Of particular interest to me was “SEC. 202. DEFINITIONS.” Here’s what I found:

PRICE GOUGING- The term `price gouging’ means the charging of an unconscionably excessive price by a supplier in an affected area.

Hmm. That’s not very helpful. Fortunately, they followed up with a definition of “unconscionably excessive price.”

UNCONSCIONABLY EXCESSIVE PRICE- The term `unconscionably excessive price’ means an average price charged during an energy emergency declared by the President in an area and for a product subject to the declaration, that–

(A)(i)(I) constitutes a gross disparity from the average price at which it was offered for sale in the usual course of the supplier’s business during the 30 days prior to the President’s declaration of an energy emergency; and

(II) grossly exceeds the prices at which the same or similar crude oil, gasoline, petroleum distillates, or biofuel was readily obtainable by purchasers from other suppliers in the same relevant geographic market within the affected area; or

(ii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs, including replacement costs, outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, petroleum distillates, or biofuel, and is not attributable to local, regional, national, or international market conditions.

Some interesting tidbits in there. I find that it is very important to properly define terms, especially when debating issues. Here, the legislation defines “unconscionably excessive” with terms like “unfair”, “unconscionable” (isn’t this what we are trying to define?), and “gross disparity.” The courts would have fun with this. “That’s a gross disparity! Gasoline was selling down the street for $0.20/gallon less!

I also find it interesting that biofuels would have been covered.

So let’s set the stage and play this one out. A hurricane is bearing down on the coast of Texas. There is a run on gasoline, as people hoard. The local 7-Eleven would normally respond to such increased demand by raising prices, and forcing people to decide just how much they really needed the gasoline. But, as a result of the new price gouging provision, they don’t raise prices. They simply run out of gas. That is exactly what would happen. Is that preferable to allowing merchants to raise prices? In that case, those who have a critical need can still get it. Those who don’t can wait. But due to the price gouging stipulation, even if you don’t really need it, you can buy it up and hoard it from those who do.

How about a definition of ‘windfall profit’? This one’s a gem:

For purposes of this chapter, the term `windfall profit’ means the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year.

Reasonably Inflated Average Profit- For purposes of this chapter, with respect to any applicable taxpayer, the reasonably inflated average profit for any taxable year is an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average.

Let me make sure I understand this. You are proposing that a publicly traded company – not a public utility, mind you – has an unreasonable profit if the profit increases by more than 10% from one year to the next? Do you hear that giant sucking sound? It is the enormous flood of money out of the energy sector and into other sectors – where a 40% year on year increase in profits is just peachy. Are you people serious?

I think it is inevitable, though, that we will try this experiment once again. I believe Obama will win the presidency, and he is all for it. I just hope he has the sense to pick a running mate who knows more about energy than he does (Hint: Bill Richardson).

Obama says he would impose oil windfall profits tax

RALEIGH, North Carolina (Reuters) – Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans’ pain over high gasoline prices.

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,” the Illinois senator said.

Doesn’t ExxonMobil already pay taxes on their “windfall profits?” Something like $30 billion last year? That windfall belongs to the government, though. I wonder if it is unconscionably excessive?

June 10, 2008 Posted by | energy policy, ExxonMobil, politics, windfall profits | 26 Comments

Tyson Slocum Testimony

Consumer advocate Tyson Slocum recently testified before the U.S. House of Representatives Committee on Transportation and Infrastructure about the record high gas prices. I am going to resist the urge to do a deep debunking, because 1). I have already taken a shot at his credibility; 2). I haven’t slept in 36 hours; 3). Maybe he’s got some good points? 😉

Here is a PDF of his testimony:

Testimony of Tyson Slocum

Among some of Slocum’s findings (and a “few” comments, since I can’t resist):

Public Citizen research shows that oil companies aren’t adequately investing these record earnings into projects that will help consumers, as the five largest oil companies have spent $170 billion buying back their stock since 2005.

I am sure the oil companies will be calling for advice on projects you think deserve their investments. Be sure to keep your list handy.

ExxonMobil, ChevronTexaco, ConocoPhillips, BP and Shell produce 10 million barrels of oil a day—more than the combined exports of Saudi Arabia and Qatar.

So the top 5 have total production greater than the exports of two countries? Wouldn’t you then surmise that these companies are dwarfed by the national oil companies that they must compete against?

While major oil companies haven’t applied for a permit to build a new refinery, a small start-up has: Arizona Clean Fuels.

While they have been fiddling with that permit for close to 10 years now, major oil companies have expanded refining capacity by 2 million barrels. Of course inconvenient facts don’t fit Slocum’s agenda. But do let us know when Arizona Clean Fuels breaks ground on their new facility. However, don’t count on it now given Mexico’s declining production (which is where they were expecting to get their oil).

With nearly $1 trillion of combined assets tied up in extracting, refining and marketing petroleum and natural gas, the big five oil companies’ entire business model is designed to squeeze every last cent of profit out of their monopoly control over fossil fuels.

Hmm, that’s a lot of money tied up. How much would you expect to profit if you had a trillion dollars tied up? Would $100 billion a year – 10% return on those assets – do it? Or would that be a windfall?

Margins for U.S. oil refiners have been at record highs. In 1999, U.S. oil refiners enjoyed a 22.8 cent margin for every gallon of gasoline refined from crude oil. By 2006, they posted a 53.5 cent margin for every gallon of gasoline refined, a 135 percent jump.

Given that you testified in 2008, wouldn’t that be a relevant data point? What are margins now, Tyson?

Slocum outlines his plan:

Public Citizen has a five point plan for reform:

• Repeal all existing oil company tax breaks, close loopholes allowing oil companies to escape paying adequate royalties and/or implement a windfall profits tax, dedicating the new revenues to financing clean energy, energy efficiency and mass transit.
• Re-regulate energy trading exchanges to restore transparency and impose firewalls to stop energy traders from speculating on information gleaned from the companies’ affiliates.
• Ensure that new powers provided to the Federal Trade Commission to crack down on unilateral withholding and other anti-competitive actions by oil companies and financial firms are effectively carried out.
• Establish a Strategic Refining Reserve to be financed by a windfall profits tax on oil companies that would complement America’s Strategic Petroleum Reserve (SPR), and cease filling the SPR.
• Improve fuel economy standards from the modest increase approved by Congress in 2007 to reduce gasoline demand.

That should ensure cheap energy for all. All this leads me to wonder exactly what kind of expertise one requires to be invited up to Congress to testify. Simply an ability to speak?

May 7, 2008 Posted by | price gouging, Tyson Slocum, windfall profits | 12 Comments

Windfall Profits: A Lesson from the U.K.

Regardless of your position on windfall profits taxes on oil companies, one thing has been demonstrated again and again. Governments consistently fail to accurately anticipate the consequences. As oil prices have increased, governments have seen tax revenues from oil and gas grow significantly. But they apparently believe they know how to deal with a goose that lays golden eggs: Take some food away from that corpulent goose, but expect it to keep laying golden eggs.

The purpose for imposing windfall profits taxes is generally two-fold. First, a government can tell the citizens that despite their inability to control oil and gas prices, they are doing something by “punishing” the oil companies that benefit from these rising prices. Second, they genuinely see it as a rich source of revenue that they can squeeze without consequence. They think the only real people who will be affected are those who are directly involved with oil and gas companies.

History has shown again and again that this viewpoint is inaccurate. That hasn’t stopped recent attempts in California, with Proposition 87, and current attempts in Wisconsin to again try dipping into this “consequence-free” pot of money. While I favor the direct approach – tax oil and gas on the consumption side – recent attempts have focused on taxing it on the production side, while writing into the legislation provisions to prevent costs from trickling down to consumers. I have previously noted the stunning naivety of this approach, and that these attempts are destined for failure.

It turns out that we now have another example to add to the list in which politicians inaccurately gauged the consequences. The story more or less starts right after Hurricane Katrina. U.K. Chancellor and soon-to-be Prime Minister Gordon Brown detailed what he believed needed to be done to bring down gas prices:

Brown calls for oil price effort

Chancellor Gordon Brown has called for a “concerted effort” by oil-producing countries to bring down prices – but is not offering to cut taxes on petrol.

Ahead of expected fuel duty protests, Mr Brown told the TUC Opec countries to produce more oil and refine more.

Mr Brown called for more worldwide investment in refineries and alternative energies.

So, he told OPEC to produce more oil. I bet they got right on that. The last statement is the most interesting, in light of the move that Brown made just a few months later:

Brown doubles North Sea oil tax

Chancellor Gordon Brown has announced a rise in the tax levied on North Sea oil producers in the wake of record crude prices. Under the measure, the government’s supplementary charge on energy companies will rise to 20% from 10%.

Mr Brown also said there would be no further rises in the North Sea oil tax during this parliament.

Meanwhile, the extra revenue raised would be used to “help consumers most affected by the significant increases in global oil and energy prices” such as pensioner households, the government said.

“Governments levy taxes and we will do what we have to,” said a BP spokesman. “But any extra tax that we pay is money that is no longer available for investment in North Sea oil and gas fields.”

So, Brown called for more investment, and then doubled the surcharge (bringing the total corporate tax rate for oil companies to 50%). I guess he thought he would sit back and watch the revenues come rolling in, and then use those revenues to help consumers affected by higher energy prices. But not only do you discourage investment with these sorts of moves, rising oil prices also increase the costs of everything associated with the oil business. I could have told him that while his strategy might work in the very short term, it would certainly be akin to cutting a research budget: Short term gain, with often longer term consequences.

Brown’s reality checks have started to arrive. In a prescient article written in February 2007, Shadow Chancellor George Osborne got to the crux of the matter:

Gordon Brown is squandering North Sea oil assets

By squeezing the maximum amount of tax revenue from Britain’s oil and gas assets, Gordon Brown is putting further offshore investment at risk, George Osborne has warned.

Accusing the Treasury of failing to understand that the UK Continental Shelf is a mature resource competing for investment in a fiercely competitive global market, he went on: “They don’t recognise that investment in the North Sea cannot be taken for granted when there are potentially more profitable opportunities in West Africa, Mexico or Brazil.

In short, Gordon Brown risks denying future generations the benefits our generation has enjoyed from the North Sea. He’s more interested in cash today than investment tomorrow. The result is that Britain’s North Sea inheritance is in danger of being squandered.”

Last week, the treasury announced that things weren’t working out as forecast:

North Sea Revenues Drying Up

Source: Daily Mail; London (UK)

Publication date: 2007-03-22

BRIAN O’CONNOR

The Treasury is nursing a Pounds 5bn shortfall in North Sea oil and gas revenues after a sharp rise in tax rates failed to bring in the targeted result. North Sea revenues for 2006/7 were only Pounds 8bn, against a projected Pounds 13bn. Though North Sea production is declining, the fall cannot be explained by this alone. The UK Offshore Operators Association (UKOOA) says the Treasury did not foresee that a rise in crude oil prices would be followed by a sharp rise in costs as the industry scrambled for drilling rigs, skilled workers and specialist equipment.

Surprise! Thus is the short-sightedness of our political leaders.

Brown has admitted that things didn’t work out as planned, but blamed “factors outside the government’s control”:

‘Brown playing games on oil’

Falling North Sea oil revenues will force the government to borrow more than expected, it emerged today, drawing accusations of “panic” from opposition politicians.

Gordon Brown argued in an interview that borrowing remained on a downward trend but added: “What has changed our forecast is what happened to North Sea revenues.”

Mr Brown said North Sea oil revenues would be £5.5bn lower than expected for 2007/08 but argued that the reduction was due to factors outside the government’s control. “That’s no fault of the government. It’s lower production from the North Sea. We have to take that into account,” Mr Brown told the BBC’s Today programme.

No fault of the government? Again, read George Osbourne’s words above. Investment in the North Sea is affected by the tax rates. You have taken money away that could have gone into new investments and diverted it. So, even though North Sea production is in decline, these policies will accelerate that decline by discouraging new investments.

As I said, I support higher gas taxes. That is not my issue at all. My issue is that these politicians have an incredibly naive view and believe they can increase these taxes with no fallout on anyone but the oil companies. Time and time again they see this as a quick fix to budgetary issues, while pandering to a constituency outraged at higher energy prices. It’s just that it never works out they way they thought it would. But I’m sure that won’t stop them from trying again.

March 25, 2007 Posted by | gas tax, politics, price gouging, United Kingdom, windfall profits | 10 Comments

Windfall Profits: A Lesson from the U.K.

Regardless of your position on windfall profits taxes on oil companies, one thing has been demonstrated again and again. Governments consistently fail to accurately anticipate the consequences. As oil prices have increased, governments have seen tax revenues from oil and gas grow significantly. But they apparently believe they know how to deal with a goose that lays golden eggs: Take some food away from that corpulent goose, but expect it to keep laying golden eggs.

The purpose for imposing windfall profits taxes is generally two-fold. First, a government can tell the citizens that despite their inability to control oil and gas prices, they are doing something by “punishing” the oil companies that benefit from these rising prices. Second, they genuinely see it as a rich source of revenue that they can squeeze without consequence. They think the only real people who will be affected are those who are directly involved with oil and gas companies.

History has shown again and again that this viewpoint is inaccurate. That hasn’t stopped recent attempts in California, with Proposition 87, and current attempts in Wisconsin to again try dipping into this “consequence-free” pot of money. While I favor the direct approach – tax oil and gas on the consumption side – recent attempts have focused on taxing it on the production side, while writing into the legislation provisions to prevent costs from trickling down to consumers. I have previously noted the stunning naivety of this approach, and that these attempts are destined for failure.

It turns out that we now have another example to add to the list in which politicians inaccurately gauged the consequences. The story more or less starts right after Hurricane Katrina. U.K. Chancellor and soon-to-be Prime Minister Gordon Brown detailed what he believed needed to be done to bring down gas prices:

Brown calls for oil price effort

Chancellor Gordon Brown has called for a “concerted effort” by oil-producing countries to bring down prices – but is not offering to cut taxes on petrol.

Ahead of expected fuel duty protests, Mr Brown told the TUC Opec countries to produce more oil and refine more.

Mr Brown called for more worldwide investment in refineries and alternative energies.

So, he told OPEC to produce more oil. I bet they got right on that. The last statement is the most interesting, in light of the move that Brown made just a few months later:

Brown doubles North Sea oil tax

Chancellor Gordon Brown has announced a rise in the tax levied on North Sea oil producers in the wake of record crude prices. Under the measure, the government’s supplementary charge on energy companies will rise to 20% from 10%.

Mr Brown also said there would be no further rises in the North Sea oil tax during this parliament.

Meanwhile, the extra revenue raised would be used to “help consumers most affected by the significant increases in global oil and energy prices” such as pensioner households, the government said.

“Governments levy taxes and we will do what we have to,” said a BP spokesman. “But any extra tax that we pay is money that is no longer available for investment in North Sea oil and gas fields.”

So, Brown called for more investment, and then doubled the surcharge (bringing the total corporate tax rate for oil companies to 50%). I guess he thought he would sit back and watch the revenues come rolling in, and then use those revenues to help consumers affected by higher energy prices. But not only do you discourage investment with these sorts of moves, rising oil prices also increase the costs of everything associated with the oil business. I could have told him that while his strategy might work in the very short term, it would certainly be akin to cutting a research budget: Short term gain, with often longer term consequences.

Brown’s reality checks have started to arrive. In a prescient article written in February 2007, Shadow Chancellor George Osborne got to the crux of the matter:

Gordon Brown is squandering North Sea oil assets

By squeezing the maximum amount of tax revenue from Britain’s oil and gas assets, Gordon Brown is putting further offshore investment at risk, George Osborne has warned.

Accusing the Treasury of failing to understand that the UK Continental Shelf is a mature resource competing for investment in a fiercely competitive global market, he went on: “They don’t recognise that investment in the North Sea cannot be taken for granted when there are potentially more profitable opportunities in West Africa, Mexico or Brazil.

In short, Gordon Brown risks denying future generations the benefits our generation has enjoyed from the North Sea. He’s more interested in cash today than investment tomorrow. The result is that Britain’s North Sea inheritance is in danger of being squandered.”

Last week, the treasury announced that things weren’t working out as forecast:

North Sea Revenues Drying Up

Source: Daily Mail; London (UK)

Publication date: 2007-03-22

BRIAN O’CONNOR

The Treasury is nursing a Pounds 5bn shortfall in North Sea oil and gas revenues after a sharp rise in tax rates failed to bring in the targeted result. North Sea revenues for 2006/7 were only Pounds 8bn, against a projected Pounds 13bn. Though North Sea production is declining, the fall cannot be explained by this alone. The UK Offshore Operators Association (UKOOA) says the Treasury did not foresee that a rise in crude oil prices would be followed by a sharp rise in costs as the industry scrambled for drilling rigs, skilled workers and specialist equipment.

Surprise! Thus is the short-sightedness of our political leaders.

Brown has admitted that things didn’t work out as planned, but blamed “factors outside the government’s control”:

‘Brown playing games on oil’

Falling North Sea oil revenues will force the government to borrow more than expected, it emerged today, drawing accusations of “panic” from opposition politicians.

Gordon Brown argued in an interview that borrowing remained on a downward trend but added: “What has changed our forecast is what happened to North Sea revenues.”

Mr Brown said North Sea oil revenues would be £5.5bn lower than expected for 2007/08 but argued that the reduction was due to factors outside the government’s control. “That’s no fault of the government. It’s lower production from the North Sea. We have to take that into account,” Mr Brown told the BBC’s Today programme.

No fault of the government? Again, read George Osbourne’s words above. Investment in the North Sea is affected by the tax rates. You have taken money away that could have gone into new investments and diverted it. So, even though North Sea production is in decline, these policies will accelerate that decline by discouraging new investments.

As I said, I support higher gas taxes. That is not my issue at all. My issue is that these politicians have an incredibly naive view and believe they can increase these taxes with no fallout on anyone but the oil companies. Time and time again they see this as a quick fix to budgetary issues, while pandering to a constituency outraged at higher energy prices. It’s just that it never works out they way they thought it would. But I’m sure that won’t stop them from trying again.

March 25, 2007 Posted by | gas tax, politics, price gouging, United Kingdom, windfall profits | 20 Comments