The Biden administration has made no secret of its contempt for traditional petroleum-derived energy sources, preferring instead so-called “green energy” alternatives. Indeed, during the election campaign, candidate Biden was vocal in his desire to end the oil industry in America as it currently exists—
“Number one, no more subsidies for the fossil fuel industry. No more drilling on federal land. No more drilling, including offshore. No ability for the oil industry to continue drilling, period, end, number one.”
On another occasion, candidate Biden went so far as to say that He was going to put fossil fuel CEOs in jail.
Over the past year in pursuit of their goal of forcing an energy transition to “clean energy,” the administration has implemented additional steps designed to make it more difficult and expensive for America’s oil and gas producers. between them-
- sweeper changes to Oil and gas leasing on federal territory.
- inverse Trump the age of methane Rules.
- Keystone XL pipeline canceled
- Appointing decision makers in key federal agencies (SEC, Treasury, FERC) who take positions against the oil industry. And who wants to pass regulations that impede their ability to get financing, or impose harsh fines, and by using expanded tariffs for carbon impact, make it impossible to obtain permits.
- Attempting to introduce carbon price offsets into the stalled “Build Back Better” tax scheme.
Even as the Biden administration scrambled to replace Russian oil and gas after their ban last week, it vehemently refused to consider reaching out to American producers to encourage the development of new supplies. As discussed in the previous oil price article, the president sent envoys to Venezuela, publicly discussed buying oil from Iran, and tried to get Saudi Arabia to increase its production. All to no clear vain.
On a recent trip to Fort Worth, Texas, to visit veterans at Virginia Regional Hospital, near the heart of oil and gas country, the president chose not to meet with oil and gas officials to try to bridge some distance between them. In general, Biden’s antipathy toward the domestic oil and gas industry has been described War on fossil fuels. With the legislation now in place, it appears to be ramping up rather than taking away as America rolls back gasoline prices, which in many cases have tripled from last year.
Last week, two senators sympathetic to the administration’s goals began crafting a legislative proposal that would revive a decades-old tax scheme to seize what they call “illegal” gains from the current high-price era. Senators Ron Wyden-D., Oregon, and Senator, Elizabeth Warren-D., Massachusetts unveiled their proposal that would strip 50% of oil companies’ profits, deducting them to low-income taxpayers while keeping gas prices at or higher. current levels. The Wall Street Journal summarized this windfall tax proposal in an article last week—
The windfall tax proposal shows that Democrats don’t want American companies to produce more oil, so gasoline prices are going down. They want higher gas prices, so reluctant consumers are buying more electric cars. They can’t say this directly because it would be political suicide in an election year with an average gas price above $4 a gallon, so they do it indirectly through taxes and regulation.”
In the rest of this article, we’ll take a quick look at the recent iteration of this idea from the ’70s and ’80s and draw some conclusions about what it could portend in the modern age, should it become law.
The sudden profit tax of 1980
In the aftermath of the 1973 Arab oil embargo, prices rose to historic highs and fears began to rise that oil companies were making unfair profits. President Nixon introduced oil price controls in 1974, which led to the era’s famous gas lines of shortages. In 1980, President Carter took steps with the windfall profit tax to remedy the supply situation while ensuring that the oil companies did not generate unfair profits. As with most federal intervention in the markets, the WPT failed to achieve its goals and produced more unintended consequences that hurt US businesses. Among its main drawbacks-
- It was actually a selective tax due upon production of the affected barrel of oil, and before any profits were made.
- It created categories of oil domestically, in effect expanding the scope of pricing thinking.
- Moreover, it has hurt US production versus global sources. Drilling capital (North Sea and emerging Deepwater GoM which had a major impact on ownership) fled then, and will once again return to greener pastures.
- Production decreased during the original WPT for a variety of reasons, and will decline again if this iteration grows and walks. Thanks to the rapid build-up of Alaska crude, US production actually increased for a short period during the WPT. Alaska’s oil peaked in 1985 although US production began a slow decline into the early 2000s while foreign imports rose. Then, with the advent of fracking and the rise in deep-water production, US production began to rise to an all-time high.
The way forward for the WPT and the implications of passing it
This tax proposal will be opposed by every Republican, in the Senate Subcommittee Tax Supervision and the IRS, where in the normal course of events they will first be discussed and coded, and voted out of committee to the full Senate. There are miles to go before it can be considered, and There is a scuttlebutt He has no chance of getting out of commission. What we’re assuming is that the ruling party now has 10 more months to pass, if you count the lame-duck session and assume the Republicans will regain control of Congress. Otherwise, they have years and they will go through everything they have dreamed of for decades. It’s a long road with lots of twists and turns.
We now have some of details of this legislative proposal. It would be a management nightmare, and because it was built at higher rates than the original 1980 version, it would bring back many of the same flaws. Like the other, it will definitely reduce production and imports into this country. Oddly enough, it tries to remedy the tax advantage that imports enjoyed under the old system by treating imports like domestic production.
It is highly unlikely that foreign producers will allow the US government to reap a “windfall” and will adjust their sales prices to include the tax, raising final prices for consumers. dependable. We have an example to go with.
Brazilian IP is a good example. Its volume reaches 55% on imported vehicles with an engine capacity of more than 2 liters. The noble goal is to protect their domestic production of cars, which are incidentally sold at import price levels, driving up prices for all Brazilians. The elders would do the same to protect their industry. The result would be less oil and gas for Americans and would play directly into the brochure of the Green New Deal movement, making the end product more expensive.
On the domestic side, fewer leads will meet the thresholds of internal rate of return (IRR) and capital efficiency rate (ROCE), the scrutiny under which potential customers compete for capital, which means they will not progress. Capital is not idle. She seeks to return and will run away. Oil companies, having learned the lesson of private equity and venture capital a few years ago, will only finance what their cash flow will bear. They will increasingly look beyond our shores to spread their capital where they are most valued. US production will inevitably vanish in this scenario.
Drivers will pay more. One of the administration’s goals is to make fossil fuels more expensive to speed up the “transition to renewables.” Renewable energy is a hollow promise as the world learns on a daily basis. That won’t stop the government from spending “confiscated” oil money on green dreams, like “stimulus” checks.
People love stimulus checks and usually like the politicians who give them. For many who have a check in hand, the link between it and the high price of everything is elusive. Hence the current hype of inflation. The $6 trillion injection into the money supply in a year and a half made it predictable. Now, with stimulus controls gone, and the price of gas at record levels, people are alarmed, and politicians want to calm them down. With another check.
As I mentioned in Previous oil price Articles With less investment in primary energy sources, we are moving into an era of less available and more expensive energy. The oil industry could produce more, but it should be motivated to do so, not harassed. It remains to be seen whether the leadership can step back from the green energy narrative to engage with producers who provide the great balance of the world’s energy resources. There was reason to be encouraged last week in A week’s walk in Houston, when some of Biden’s lower-level bureaucrats met with energy workers. Vinai Thummalapally, The Acting Director and Chief Operations Officer of the US Trade and Development Agency commented after the meeting-
“I envision this particular situation as a fire in the kitchen, which helps fund energy projects outside. We will put it out. It will be extinguished. We need to move forward with dealing with the rest of what the house is dealing with in terms of all priorities.”
If you decipher the ‘power of words’ from the mixed metaphors, it doesn’t reveal much reason for optimism, but at least they spoke. progress of some kind.
By David Messer for Oilprice.com
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