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Sunday, June 22, 2008

Two Zingers Regarding Oil Companies

OK, I realize I am not the most unbiased commenter on this, but c'mon, the recent talk about oil companies is just plain dumb. Even if the Democratic charges were true, then their policy recommendations would be terrible.

CHARGE #1: Oil prices are really high because oil companies are making outrageous profits.

RECOMMENDATION #1: The feds should levy a windfall profits tax on oil companies, and that will bring prices under control, ultimately providing relief at the pump to motorists.

This is crazy. If oil companies can set whatever price they want, in order to achieve a profit objective, then a new tax will just be passed on to consumers. Once you admit oil companies can't simply pass on a tax and make the same profits as before, then you are forced to admit that maybe right now they are not "manipulating" oil prices either.

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CHARGE #2: Oil companies already own leases on federal land on millions of acres that are not producing oil or natural gas.

RECOMMENDATION #2: The Republicans should not be allowed to allow oil companies to lease larger tracts of federal land that is currently under moratorium.

This is crazy. Why would oil companies be lobbying to acquire leases on property they didn't plan on developing? And OK suppose they are doing this (perhaps to lock out competitors). Then isn't this the best of all possible worlds for environmentalists?? The oil companies want the ability to send a portion of their profits to the federal government, and we are confident that they won't do any drilling. So why not take their money? The beaches are safe, right? You can't spill oil if you're not producing anything on the newly available federal lands.

BTW for a more complete response to CHARGE #2, see IER's piece and API's. This stuff is ridiculous. Oil companies are hated so much that the weakest of criticism sticks. Now even Republicans and WSJ pieces are saying things like, "A windfall profits tax is not likely to reduce prices much," as opposed to, "WHAT??! In what school of economic thought does raising taxes lead to lower prices?!"

8 comments:

  1. I'm with you, Bob. The sheer nonsense and naked pandering by COngresscritters and MSM is nauseating.

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  2. I might add, I have heard exasperated oil people try to respond to the "you aren't drilling on already leased land". The oil guys are shouted down when they try to explain that they cannot get permits ot drill on the land they have leased.

    Another argument that bothers me is that "if we drill in ANWAR or off shore it won't produce for 5 or 10 years...and that won't help gasoline prices today".

    Well, OPEC does manipulate supply and historically has driven the price up as high as they can by restricting supply and then when the US invests in other production they increase supply and tank the oil price to make the new projects unprofitable. So, for this reason, and for the likely forward looking prices plans to drill would likely lower todays oil prices.

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  3. Dr. Murray Tyson8:57 AM

    2+2 never equals 6.

    I will go to the grave believing this.

    ReplyDelete
  4. Yeah you're right about the time issue, Pepe. If we all of a sudden know that there will be an extra million bbls/day in 10 years, that will lower the futures price. (I don't know if they have 10-year oil futures contracts. But suppose they did.)

    And then, as we know from our study of quantitative finance, because of arbitrage the lower futures price will lead to a lower spot price.

    Physically, what happens is that producers right now with excess capacity (basically Saudi Arabia) ramp up production because on the margin, the lower futures price has now rendered current production more profitable than it was before the news.

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  5. I couldn't agree more. Ahhh, quant finance, those were the days.

    Do you know of any really long dissertations I can read about the importance of time in economics?

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  6. Pepe said:

    Do you know of any really long dissertations I can read about the importance of time in economics?

    Are you making a joke? If you are referring to my dissertation, the joke fell flat, since I barely remember what my dissertation was about.

    If you are serious, I think Hicks and Shackle are your babies.

    ReplyDelete
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