When I first heard about oil tax Prop 87, I found it eerily reminiscent of the stem cell initiative, Prop 71, from a few years back.
Both involved big time Silicon Valley backers, both involved an emotional issue, and both involved the creation of a new state run agency that featured political appointees responsible for a lot of taxpayer money.
The other thing that Prop 87 and the stem cell initiative have in common is that it’s hard for me to be against the issue emotionally, while at the same time opposed to it ideologically.
When moderate swing voters are confronted by an emotional issue that is attractive and promises results far enough in the future that we think of it as long-term investment for our children, it becomes a “Hope Vote.” The hope ignores what the measures is actually likely to do, or not do as is the case here. The fact is that clean energy (alternative, cleantech, whatever you want to call it) doesn’t suffer from a lack of funding, just like stem cells did not, but rather an inconsistent public policy. As much as we would like to believe that Prop 87 will change that, it won’t because it doesn’t deal with the real public policy of energy, consumption, and genuine efficiency proposals.
If you want to debate the merits of E85 versus gasoline or what Brazil is really doing for energy (actual consumption is 50% diesel, 25% gasoline according to the Brazilian government, by the way) then that’s cool, because I’m really interested in fuel cells, hydrogen, cellulosic ethanol, and natural gas. But this debate really isn’t about the issue of the research itself so much as it is about the emotions that the words “oil companies” bring rise to.
The “Big Bad Oil Company” part of the Prop 87 pitch is sinister in the way it’s being sold to voters — if not through outright misleading information then certainly from a lack of information. For example, the Proposition backers say that oil companies - which are bad by the way, didn’t you get the memo? - aren’t paying any taxes on oil extracted from California, but what they don’t tell you is that California drivers are paying some of the highest gas taxes in the country, up to .42 cents a gallon in addition to the .185 cents a gallon in federal tax. Contrast that to other oil producing states and it’s about twice as much.
We are also being told that oil companies won’t be able to pass along the tax increase in the form of higher prices to consumers, but I’ve been sold that bill of goods before. I’m just not buying it this time. Companies can hike their prices, and blame it on something else.
Even if they didn’t pass along the cost, this would be essentially a windfall profits tax. A quick history lesson in windfall profits tax reveals they are disastrous at every turn, because of the nature of commodity markets. In this case, oil produced out of state would be cheaper to extract and ship,and be substituted for California oil in the refineries.
The other fact — that these taxes are deductible against corporate income taxes — means California could very well end up collecting less with Prop. 87 than from current income taxes.
According to the Congressional Research Service, the windfall profits taxes of the late 1970’s and 80’s had the effect of decreasing domestic production by 3 percent to 6 percent, thereby increasing American dependence on foreign oil sources by 8 percent to 16 percent with a side effect of declining, not increasing, tax collections.
That said, I’m not all that swayed by this, because quite honestly I wouldn’t mind paying a little more at the pump to support big ticket initiatives aimed at alternative energy (I really want a nuclear car). My deal-breaker issue on this measure is the fact that yet another state run agency will be created featuring more political appointees and less than transparent oversight, just like the Stem Cell Research Institute.
Tell me, honestly, do you know what they are up to? I don’t and you would have a difficult time finding out even if you did look into it, yet it’s $6 billion of our dollars in play.
In looking at the “state of the State” I find it hard to support the notion that Sacramento can be trusted with yet another agency when they struggle with education, roads (and bridges… Bay Bridge in particular), prisons and law enforcement, and mass transit, and the state has additional real challenges today with border enforcement, drug enforcement, and homeland security.
Maybe my emotional response isn’t about clean energy at all, but rather my lack of confidence in the state to do this more effectively and efficiently than the private sector. While the proponents will say this is about funding the private sector, you really can’t expect me or anyone else to believe that public officials, elected and appointed alike, aren’t go to be all over that money like, well, politicians and pork.
California has real needs involving state infrastructure and education that we are going further into debt on to pay for, these are real needs we have now that are not be adequately addressed.
Lastly, I resent former President Clinton and former Vice President Al Gore flying in and campaigning for these issues by making promises that can’t possibly be kept because they are so ambitious, despite the great sound-bites they offer. By the way, I would bet that the private jets that carry these VIPs into the state burn about 3,000 gallons of jet fuel from the east coast, that’s about 45,000 miles in a Prius and the only intervention from the state on that alternative energy vehicle was some tax incentives and a look the other way on the HOV lane usage.
Like Prop. 71, Prop. 87 is the kind of issue that I wish voters would take the time to understand, instead of voting on the “tax the bastard oil companies” or “it’ll make us more reliant on foreign oil” arguments that either side throws out.
13 Comments
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chad said:
>For example, the Proposition backers say that oil companies - which are bad by the way, didn’t you get the memo? - aren’t paying any taxes on oil extracted from California, but what they don’t tell you is that California drivers are paying some of the highest gas taxes in the country, up to .42 cents a gallon in addition to the .185 cents a gallon in federal tax. Contrast that to other oil producing states and it’s about twice as much.
But…how are these two related? The higher gas prices in CA are due to the additives we require (so I’ve heard). The tax on oil co’s is completely unrelated. Its just making them pay the same taxes they pay in say Alaska or Florida.
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Jeff Nolan said:
you are confusing the price of gas - which is certainly related to the unique blend that California mandates - with the taxes per gallon that the state imposes. You say “its just making them pay the same taxes they pay in say Alaska or Florida” and what I wrote is that when you look at it strictly from a tax standpoint gas in California, on a per gallon basis, is taxed at a much higher rate than states that do produce oil. For example, you reference Alaska which has a tax on gas of .08 cents per gallon on top of the .184 cents per gallon that the Federal government levies for highway construction. In California there is the same .184 cents from the Feds (of course) plus another .18 cents from the state as an excise tax plus another 7.25% use tax, which by the way is applied on top of the other taxes (notice how they are taxing taxes).
BTW, I do want to correct my numbers, I wrote “up to .42 cents a gallon in addition…”, it should read “up to .32 cents…”
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Jay said:
Mr Nolan may be a CEO but his grasp of basic economics is weak. Crude oil is commodity. Taxes on oil production in California or any place else can only effect the market price of the oil if their effect is too significantly reduce worldwide production of oil. The California Engery Commission reports that “crude oil production in California averaged 731,150 barrels per day in 2004, a decline of 4.7 percent from 2003″
Worldwide production in 2004 was 80,198,000 barrels per day (numbers found on BP’s website). California’s oild production is less than 1% of global oil production. BP also reports that global oil production rose by 900,000 barels per day in 2005.
Because production is falling in California, it’s reasonable to assume there’s very limited investment in new wells in the state. Existing wells and even wells that come on this year (due the lag in how long it takes to get oil from a new well) were built with much lower assumptions about market oil prices. No oil company drills a well when oil is $40/barrel with the business plan that the well will be profitable when the price of oil hits $65/barrel. The only wells that will close down will be wells that are no longer profitable due to the tax. However, since the vast majority of wells in CA were constructed under much lower expectatitions of oil prices, this will be very small percentage of production and have zero effect on prices.
It’s possible that future investment in wells that would only be mariginally profitable at $65/barrel could be impeded by this tax. However, the significant volatity in the price of oil means oil companies are not making investment assuming $65/barrel oil. The ExxonMobile CEO has emphasized that investment decisions in new fields will not be made on the current higher market prices.
The comment about the dectability of the Prop 87 oil taxes lowering overall state revenue collection is just bizarre. Deductable state income taxes do lower one over taxation and neither do deductable corporate taxes.
As the for the comments, about whether the money will be spent well that’s a debatable issue. Venture Beat is embarssing itself by print commentary about Prop 87 raising gas prices. There is no reasonable economic arguement that supports that position.
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Mark Wendman said:
“As the for the comments, about whether the money will be spent well that’s a debatable issue.”
Granted there is risk in results of any developmental / R&D type effort, but VC driven endeavors tend to have a profit motive that can assist in attaining useful and productive goals, over a pure public sector effort.
The partnership in funding and managing between private and public sector is a useful mix to assist enabling positive outcomes. As to critieria for the tax money being well spent, I’d guess it is not material if every funded endeavor attain perfect results, but that most materially reduce overall nonrenewables consumption of the state in some useful timeframe.
Some programs, say that might modify automobile designs, will have a longer gestation, even if a larger possible upside. So yes it will be easy to criticize, but I’d estimate that most efforts will be substantive, and have positive outcomes.
“Venture Beat is embarassing itself by print commentary about Prop 87 raising gas prices. There is no reasonable economic argument that supports that position.”
This I agree with wholeheartedly. The minor tax plus the Prop 87 regulations, tend to indicate that the prices at the pump will still largely remain driven by world and to some extent local market forces and not substantially changed by the apparently “deductable” oil extraction tax.
This stance of fear mongering of possible (insignificant) price rises from Prop 87, taken by opponents of alternative & renewable energy is largely a canard (diversion).
Why people might believe this and hence vote against Prop 87, is beyond reason. Why it is tacitly supported at by some commentary at VentureBeat, I do not conprehend.
The team of Tad and Robert have yet to provide either a coherent comprehensive alternative to prop 87, or for that matter any comprehensive plan to gradually implement cleaner fueling of existing vehicles.
They merely try to pick off relatively minor points of contention, with the hope that this will dismay folks from supporting good policy. And yes they are Oil Industry folks…
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Jeff Nolan said:
How is taking $4b of taxpayer money and putting it in the hands of another agency with little oversight run by political appointees “good policy”? If want to fund alternative energy research then great, take $4b of taxpayer money and make the state an LP in the top 30 venture capital firms in the country who are already funding these companies. Of course, Vinod wouldn’t want that because then Kleiner would have to make public their performance data following Matt’s lawsuit when he was with the Merc.
Now that I have brought up Vinod, I should add that I think he is intellectually honest about this because everything he has done points to a genuine interest in creating energy solutions. Having said that, it’s a little disingenuous for him to say we should use taxpayer money to fund ethanol, among other things, research when he’s made a huge financial investment in an ethanol plant and would gain from that personally. The appearance of a conflict of interest this strong is enough to actually represent one.
Jay, if you think there really is one global price for crude oil you are mistaken. On top of that, the price of a gallon of gasoline is 53% the crude oil itself, the other $1.20 (at current prices) is refining, transportation, taxes, and marketing. If you artificially make CA crude more expensive through a tax then it’s a sure thing you will see more crude coming in from Mexico and declining investment in CA oil fields, which a great many would like but I’m not one of them.
If anyone wants to increase taxes on me, and it will hit all of us despite what any politician tries to say, then let’s increase gas taxes by $4b and create an incentive to conserve while at the same time funding highway improvements and buying polluting vehicles and taking them off the road. Either of these initiatives would have a greater impact on the environment than this initiative, of course we would also benefit from not having the $20b in debt that Prop. 1B is proposing… and if we did that and actually expected our legislature to spend tax revenues from gas and diesel on transportation improvements (like the Feds do) then we wouldn’t need Prop 1A either.
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Jay said:
Crude oil is a commodity. The spot markets for it are exchanges. The prices are published. Nobody cares from a price point of view where the oil for their gasoline come from. If oil is available cheaper (after transit costs) in one part of the world, refiners will buy it and transport it.
I haven’t been able to find any nubmers for investment in new wells in California but I suspect it’s minimal since production is continually falling meaning that investment in new well is not keeping up with wells going off line.
From California Crude Oil Production and Imports - Staff Paper, publication # CEC-600-2006-006 (available at http://www.energy.ca.gov/oil/index.html):
Figure 2 shows a constant decline in onshore heavy crude oil production from 1986 through 2005 of 6.8 million barrels per year, or approximately 3.5 percent per year. Intermediate onshore oil production remained relatively flat. Offshore crude oil
production peaked at 72 million barrels in 1995 and has declined by around 4.3 million barrels per year - or 10.2 percent per year - from 1995 through 2004.I still haven’t heard any reasonable economic argument. There are only two possible ones: 1) existing wells are no longer profitable and are taken offline 2) investment in new wells decreases. As I pointed in my first post, it highly unlikely that any existing wells above a trival percentage were invested in with a price expectation of greater than $40/barrel. Due to environmental regulations in California, I suspect there are very few new projects. Unless you can name some new projects that will not be invested in because of the tax, you are spreading fud.
Addtionally, all the anti prop 87 folks never give a number the claimed gas price increase. I suppose you can argue that if oil production falls by a tiny percent, there will a fraction of penny increase in the world wide price of oil and thus a even smaller of a fraction of a penny in the price of gas. Though no one would ever be able to measure it as there many more significant factors in volatility of both oil and gasoline prices. WIthout a number for a price increase and a confidence interval to go along with it, these scare tactics about gas price increases are intellectually dishonest.
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Robert Rapier said:
Addtionally, all the anti prop 87 folks never give a number the claimed gas price increase.
I am not an anti-prop 87 person, but I have predicted that the price increase will be at least $0.05/gallon. I have also argued that it would have been far more efficient to have just raised gas taxes by $0.05/gal, but I was told that the stealth method was the only chance it had of passing. But I have no problem with gas prices increasing. I favor higher gas taxes. I just have a problem with naive arguments, and suggestions that oil companies will be breaking the law if prices go up. Do prices not go up and down now? How on earth could someone prove their case? If Prop 87 crimps supply, prices will go up. Simple as that.
Regarding the economic argument, I received an e-mail a few days ago that pointed me to an essay by Stanford Professor Paul Romer in which he put forth his argument for why gas prices won’t increase. Here was my response, to which the guy never responded:
I can tell without looking at Dr. Romer’s CV that he has never done any economics for the oil industry. His fundamental assumption is wrong:
“The market for oil is global, and the price of oil is set by global supply and global demand.”
I suspected at this point there was going to be a problem. Oil prices vary enormously in different areas based on oil quality, seasonal demand, local logistics, etc. There is not a “world price of oil.” This is probably the single most common error that I see in these analyses.
“If the price of oil delivered from a local producer was more than P*, she wouldn’t buy any.”
That’s ludicrous. That presumes that price is the only thing that matters to the refinery manager. If Dr. Romer had ever run a refinery LP, he would see how absolutely wrong his assumptions are. Perhaps Dr. Romer could do a bit of homework and show the actual price for oil produced in California, versus, say West Texas Intermediate. That might reign in some of those unrealistic assumptions that went into this analysis.
I won’t go on. I have seen enough to know that Dr. Romer, who may be renowned, is outside his element here. Actually, I could do a very similar analysis to show why a hurricane in the Gulf of Mexico will have a minimal impact on oil and gas prices. After all, there is plenty of global supply to fill that shortfall, therefore prices won’t go up. So why did they?
I am sure that you are also aware that scores of economists have come out and stated that Prop 87 will increase gas prices. In fact, I am sure far more have agreed that prices will go up than those who think prices will go down.
My prediction is on record. If it turns out to be wrong, by all means contact me, blog about it, whatever. However, if it turns out to right, don’t forget about that either.
Cheers, Robert Rapier
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Jay said:
Mr Rapier,
I’m glad to see you have number but you’ve given no details on how you’ve arrived at that number and what your confidence interval for that number is. $0.05 is such a small number, it’s highly likely that even you have a valid analysis the 95% confidence interval would include 0 invaliding claims of gas prices increasing.
On the issue of LPs, the LP needs to be re-run to come up with a different conclusion. Neither you or I can make an accuruate prediction on how refinery costs will change due to changes in the input. You’ve also failed to describe what the changes inputs will be.
California oil prouduction is on a steady decline with or without Prop 87. I’ve have never seen analysis but any economist that says gas prices are rising due to the approximately 4% annual declines in CA oil production. Refiners will substitute oil from outside CA if supply from CA goes down. There may be substitution costs but to claim those are signifcant requires evidence rather than assertion. In the abscense of specific evidence, claims of prices increases from an unspecified drop in production from a economy that produces less than 1% of world oil are completely without merit. It also bears pointing out that it should be easy for you to prove that transportation costs of outside oil are significant by showing a differential in gasoline prices at the pump between states that do produce oil and those that don’t.
The other glaring flaw in your analysis the assumption that an increase in the cost of inputs to the refinary will raise the cost of gas. To verify this assumption, you would need to show that the refinaries would lower production due the increase cost of inputs. The claim that all costs get passed along to consumers is false. The only way this happens is if the increased costs lower production. If all gallons of gasoline that are produced are still profitable at with the increased cost of inputs there will be zero drop in production. New refinaries are not being built in California due to enviromental concerns so their is no issue with decreasing investment in refining capacity.
Your prediction will be difficult to validate since the volatility of gasoline prices far exceeds $0.05 which is what I find so infurating about these claims that gas prices will rise. Any increase will be in the noise compared to the huge volatility seen this year alone with prices at the pump fluctuating between $2.35 and $3.25.
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Robert Rapier said:
In the abscense of specific evidence, claims of prices increases from an unspecified drop in production from a economy that produces less than 1% of world oil are completely without merit.
You are falling into the trap of “it’s a world market.†California crudes trade at a substantial discount to WTI. If you shut some of those producers down, there is no telling what your next best option is. If it is Saudi crude, refiners will pay quite a bit more than they do for California crudes.
It doesn’t take a huge supply/demand imbalance to have a very large impact on prices. We saw that with Katrina.
The other glaring flaw in your analysis the assumption that an increase in the cost of inputs to the refinary will raise the cost of gas. To verify this assumption, you would need to show that the refinaries would lower production due the increase cost of inputs.
Well, the first wasn’t a glaring flaw. It is based on first hand knowledge of how refinery economics are actually done. This is what I do as part of my job. I am not simply speculating here. What refineries do, and again this is not mere speculation, is that they don’t produce full out when margins get thinner. You can see that with the refinery utilization numbers published each week by the EIA. When margins are good, utilization is high. When margins start to thin, as they have done recently, utilization drops.
Your prediction will be difficult to validate since the volatility of gasoline prices far exceeds $0.05 which is what I find so infurating about these claims that gas prices will rise.
I have proposed a way to do this. All we have to do is watch the 4-week running average, and compare California to a state like Texas. My prediction is that they gap will widen in January. But again, I don’t care. I hope they rise by $0.50, because this will encourage conservation.
Cheers, Robert
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Charlie Peters said:
The $0.51 per gal. corporate welfare to the oil refiners for adding 5.6% ethanol to California gas is about $500,000,000.00 per year.
The ethanol may add over $1.00 per gal. to the gas profit in California.
That may be about $100 billion in oil profit from California motorists.
The science is interesting but so is the money.
A $4 billion Prop. 87 oil tax may add $40 billion in oil profit.
Charlie Peters
(510) 537-1796
Clean Air Performance Professionals -
Tony Troutman said:
“The “Big Bad Oil Company†part of the Prop 87 pitch is sinister in the way it’s being sold to voters — if not through outright misleading information then certainly from a lack of information.”
This was one of the worst parts of the pro-Prop 87 campaign. The fact that they purposely ignored is that “Big Oil” is currently in the lead on most alternative energy, and is already putting more money into research for alternative energy than any of its competitors.
BP and Shell are the No. 1 and No. 2 producers of solar panels in the world. Shell is the largest refiner of biodiesel in the world. Chevron is the world’s largest producer of geothermal power. Shell is currently near production of a patented process that will produce cellulosic ethanol at prices that will likely bankrupt the currently government-subsidized producers of corn ethanol and may even be competitive with the Brazilians (who are taxed to keep them from importing ethanol that would undermine the corn-ethanol producers). Shell is the second largest producer of wind power in the United States. Shell is currently the world’s largest seller of hydrogen for transportation fuel. Why should these companies be penalized to help their competitors by a tax on their oil production. It didn’t make sense, and it still doesn’t.
BTW Florida has no oil production to speak of. Alaska oil production is taxed much differently than most of the US because most of it is on either Federal or Native land. All oil on the West Coast is more expensive than the Midwest because there are no oil pipelines to the West Coast from the major oil producing areas of the US like the Gulf. California’s oil market is isolated from competition from oil produced in most of the world due to lack of infrastructure, and shipping costs. Most oil on the West Coast arrives by tanker and enjoys a higher price than much of the world just because of that fact. Reducing local production (taxation of marginally productive wells would cause most stripper wells to be shut-in) would have certainly caused oil prices for West Coast oil deliveries to rise and reduced the supply of oil available to California refineries.
In case you don’t believe oil companies pay their fair share of taxes, consider that the second largest source of income into the Federal Treasury, behind the IRS, is the Minerals Management Service which collects royalties on US production from oil companies.
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Nat said:
I am for holding the businesses accountable.
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Charlie Peters said:
A Background Research Paper on Corn Ethanol
