Big Oil’s scheduled for a session in the hot seat in the Senate tomorrow. The rhetoric may soar and the charges will definitely fly, but it’s anyone’s guess what catalysts will spawn in the proceedings.
One can only hope that the Senate has studied and learned from the past on the subject of incentives and the blunt tool of taxes. Imposing punitive taxes as a means to promoting a secure and stable future of energy supplies is a bit like raising levies on developers in and around New Orleans as a tool for insuring against the next natural disaster.
This much, at least, is clear: some in the world’s greatest deliberative body are burning for new laws that force oil companies to cough up more taxes as penance for the record profits of late.
The oil industry is no stranger to inside-the-beltway chatter and the ebb and flow of government efforts to penalize the world’s biggest business. And that’s what irks some in the petroleum game. “I, for one hope that the industry’s response [in tomorrow's Senate hearings] will include a ‘We told you so’ component,” Bob Landreth, regional director, Texas-Permian for the Independent Petroleum Association of America, told the Midland Reporter-Telegram today. “In 1999 in congressional testimony, when the industry was being dismantled by a brutal market share fight among OPEC producers that drove the price oil down to $9 a barrel, we said then that the fallout from that fight would eventually be $45 oil. Unfortunately, we missed it on the low side.”
In the same article, Morris Burns, executive vice president of the Permian Basin Petroleum Association, charged that the huge windfall profits of late in the oil industry are in part a reaction to drilling restrictions, which artificially crimp supply. “We can’t drill on the East Coast, we can’t drill on the West Coast, half of the Rockies is off limits, we can’t build any new refineries,” he said.
Politics, not geological access, will be in the driver’s seat tomorrow when the oil hearings convene in Washington. That’s largely because the party in charge at the moment is feeling the heat to do something, anything in regards to high energy prices. Never mind that the government’s been largely asleep at the switch for the better part of the last 30 years on the matter of a national energy policy. All the oversight and errors of the past can be turned around with one quick windfall profits tax, or so some think.
Indeed, that mindset is generating calls for “action” in the GOP ranks, inspiring Republican, Sen. Judd Gregg of New Hampshire, for example, to jump on the Democratic bandwagon that’s pushing for a windfall profits tax on the oil business. “Republicans are trying to get in front of this issue because it is clearly an anchor around their ankles at the moment,” Marshall Wittmann, a former Senate Republican aide now with the centrist Democratic Leadership Council, told the LA Times today. “There’s no doubt that the high gasoline prices are contributing to the low popularity numbers of both the president and the Republican Congress.”
That’s setting the stage for a legislative reaction, say oil industry representatives. “We recognize that high earnings reports and high prices puts a lot of pressure on lawmakers to show they’re taking action,” Sara Banaszak, senior economist with the American Petroleum Institute, explained in a Journal News article today. “Letting markets work isn’t always perceived as action, so we recognize there’s a lot of pressure on lawmakers right now.”
In any case, the stakes are high, and getting higher. With global production capacity tight, the potential for tapping vast new supplies in doubt, and demand continuing to grow, this isn’t a good time for major policy mistakes on the energy front. The risk of a mistake may be rising, however.
History, as always, offers a bit of a guide. Neil McMahon, who heads up oil analysis at Sanford Bernstein & Co. in London, yesterday penned a research report that reviewed the last time windfall taxes were used to punish the oil business in 1980-87. The results were pretty ugly:
“With the high prices in the 1980’s there was not much more the US producers could do,” McMahon wrote. “Rapid exploration and development were happening not just in the Lower 48 of the US, but also in Alaska and the North Sea, and drilling activity had reached frenzied levels. However, although the oil price remained high during early 1980’s drilling activity, oil production dropped rapidly as taxes set in and marginal investment slowed.”
In the here and now, McMahon thinks a windfall profits tax would have little beneficial effects for consumers. “Today, we believe that even a small increase in taxes would have a large negative impact, driving the price of crude and natural gas higher, not lower. Additionally, the production from the basins in the U.S. is now more sensitive to changes in crude and natural gas prices, and we would argue that with increased taxes decline rates in these basins would accelerate, increasing the U.S.’s dependence on foreign oil and gas imports.”
The prospect of a new disincentive for the oil industry could hardly come at a more inopportune moment. A new report from the International Energy Agency warns that large amounts of investment are needed to satisfy rising demand. Roughly $17 trillion in new investment is needed by 2030 to keep crude and other fuels flowing from the ground to consumers. Perhaps the Senate will consider what legislative policy change, if any, would promote such a massive spending program. Hope, in short, springs eternal at CS.