Notes on Obama’s $10-per-barrel Oil Tax, Part 2: Ceteris Ain’t Paribus

We looked at the first red flag that Obama’s new tax proposal isn’t the result of deep thought and study in the previous installment, Math Are Hard. All things being equal, ceteris paribus as the economic wonks say, 32 billion barrels a year times $10 is a $32 billion shot in the arm for renewable energy.

But ceteris ain’t paribus. The tax would kill the domestic oil and gas industry overnight. (I get it, that’s the point, but that’s not the way it is being sold to the American public.)

Oil is a commodity. The US makes about 10% of global production, and there is a current oversupply. We cannot affect the global price. That means that any special tax imposed on domestic production is effectively a reverse tariff; the main beneficiaries would be countries like Russia, Saudi Arabia, Iran and Venezuela. Since nothing would curtail US consumption, foreign countries would enjoy a sudden windfall at US producers’ expense.

The proceeds of the tax would supposedly benefit renewable energy sources. Renewable energy does not compete with oil, it competes with natural gas, primarily in electricity generation.

American oil companies are currently struggling financially. The rig count is down 68% since November 2014. With the prospect of $10/bbl tax looming in the future, however the cockamamie thing may be staged in, the rig count will go to zero. There will literally be no incentive to drill wells.

Aside from drilling new wells, at $30/bbl many producers are already having difficulty justifying production of existing wells. Wells are said to be at their “economic limit” when revenue from production cannot pay the direct operating expenses of production — royalties, severance taxes, labor, transportation, utilities, maintenance, insurance, etc. etc. An additional $10/bbl would be the end of the road; hundreds of thousands of wells would cease producing. As for indirect charges — overhead, capital cost recovery, etc. which are components of corporate net income — it would be a financial bloodbath on Wall Street. Watch out for your 401-K.

I’m kind of annoyed that the immediate reaction of the industry associations — namely API and IPAA — is to oppose the tax because it might cost drivers 25 cents on a gallon of gas. I understand that they have to have a consumer-friendly, 25-words-or-less argument, but to me it is ineffective. The average person at the gas pump would pay say, $1.75/gal vs $1.50/gal today; he was paying that just a few weeks ago, and he felt pretty good about it when he did.

Domestic oil and gas, from 2009 to 2014, was the gift that kept on giving for the Obama Administration. When literally every other segment of the economy was dead in the water, the only bright spots were in Texas, North Dakota and elsewhere in the oil patch. Obama did nothing to cultivate, encourage or support it. He demonized fossil fuels and the entrepreneurs who made the Shale Boom happen. In the end, he took credit for it. Now he wants to kill it, and make us even more dependent on foreign oil than we were to begin with.

Just unbelievable.

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