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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

09 November 2005

Razor thin econ logic

The New York Times must have what is the thinnest argument ever about taxing the windfall profits of oil companies. Its editorial reads: “A windfall tax is a good idea … The oil companies are indeed reaping profits from hurricanes and other events, and a strong case can be made for taxing those windfalls. But outsized consumer demand made those external events so profitable. To be effective, a windfall tax should be part of a strategy to reduce oil dependence. Such a strategy would depend on reducing consumption” (1).

My 5 Nov 05 post called Windfall Tax on Oil sets out the core of my thinking on this. But I wanted to add a few more numbers and comments.

The current spike in price is largely the result of the reduction of spare capacity: supply pretty much equals demand. Only Saudi Arabia has some spare capacity (about 1 to 1.5 mbd), but this is mainly heavy crude oil that is less attractive. Over the years, OPEC countries have been unable to increase their production capacity; in 1979, OPEC countries could produce 38.76 mbd; today, their capacity is 31.56 mbd (2). This lack of investment explains why prices are so high now and why the fear that there will be an oil shortage weighs heavily on so many people’s minds.

It is also important to remember that international oil companies sit atop 7% of the world’s undeveloped oil reserves; two thirds of the world total is off limits to the majors (mainly because it belongs to state companies with no foreign investment) (2). In other words, OPEC’s production capacity lies very much at the heart of the oil equation. This also explains why the lack of surplus capacity worries so many people.

The last comment has to do with refining since, thanks to Katrina and Rita, it too explains the spike in gasoline prices. This is from the Oil & Gas Journal (26 Sept 05): “In 1983, when refiners worked at an average capacity utilization rate of 72%, the country imported 1.7 mbd of product. Last year, the capacity utilization rate was 93%, and product imports averaged 2.9 mbd” (4). Given that no refinery has been built in America since 1976, it is no wonder that past capacity is reaching its limit.

In other words, the windfall tax does nothing to address the core issues that have led to the price spike. Hopefully public debate will gradually shift to allow discussion of a gasoline tax. But until then, we are likely to see rhetoric unmatched by substance. I very much agree with the words of the Wall Street Journal: “We [WSJ] realize that the Members [of Congress] need someone to deflect public anger toward, and that white, wealthy, male oil executives are targets from central casting. We also assume most Americans are smart enough to realize that no politician ever put gas in their tank or heat in their home.”

(1) “The Windfall Profit Tax,” New York Times, 9 Nov 05 (link)
(2) Kalincki & Goldwyn, eds., Energy Security: Towards a new foreign policy strategy. (Washington, DC: Woodrow Wilson Center Press), p. 79; and EIA (link)
(3) “NOCs 1 – IOCs 0,” Petroleum Economist, April 2005
(4) “Attention to refining,” Oil & Gas Journal, 26 Sept 05
(5) “Beltway oil drill,” Wall Street Journal, 9 Nov 05



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