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Turning boom into bust

By Alan Caruba
web posted November 17, 2008

Energy is called "the master resource" because every other aspect of life operates off of it. Nations that are rich in energy resources such as oil, natural gas, and coal, grow wealthy.

There is also something called "the curse of oil" because, if the price per barrel drops, the fate of some nations goes with it. This is the case, for example, of the former Soviet Russia whose government collapsed when it could no longer secure hard currency when oil and gas prices fell. Venezuela is an economic basket case these days, having nationalized oil and most of its financial and business sectors.

The history of nationalized oil and gas-rich nations is that they tend not to invest in their energy industries, engaging in more exploration, expanding their capacity to extract their natural resources. We have seen otherwise oil-rich nations like Mexico encounter tremors as in the 1990s when the Clinton administration had to loan Mexico billions to keep it functioning. Now those billions are being spent here to offset the ravages of the mortgage loan debacle.

If Congress imposes a windfall profits tax on the American oil industry, it will quite simply wreck the economy. As my friend, Seldon B. Graham, Jr., a longtime oil industry attorney as well as a petroleum engineer, points out, ""President Jimmy Carter started the ethanol subsidy on November 9, 1978 and signed the oil windfall profits tax on April 2, 1980."

In effect, Carter put in motion an anti-oil industry policy that has existed for over three decades. Why is that a bad thing? The ethanol policy has severely disrupted the price of food worldwide as corn is diverted into fuel. The justification for this is "energy independence" from the purchase of foreign oil, but U.S.-produced oil has always been cheaper than imported oil.

If, however, the government creates conditions under which it is simply too risky, too expensive or prohibited to explore for more oil reserves, obviously oil production declines. There has been a 59% decline in U.S. production since 1980, the year the windfall profits tax was imposed. It was later repealed, but U.S. oil companies have a responsibility to their investors to act prudently and that has driven them to explore for oil outside of the U.S. or, to put it another way, to find foreign oil.

When you add in the idiotic ethanol mandates, you compound the problem. Graham points out that, "After thirty years, U.S. ethanol production was only able to produce less than 3% of our oil demand last year." Moreover, "ethanol cost taxpayers $3.3 billion in subsidies in 2007." Environmental claims that ethanol is cleaner than oil are false. Not only do you get less energy content and poor mileage when ethanol is blended with gasoline, it actually emits more carbon dioxide per mile. "It is absolutely impossible for ethanol to replace foreign oil."

The justification for a windfall profits tax on oil companies ignores, for example, that ExxonMobil, just one of the few remaining oil companies operating in the U.S., pays more than $100 billion in taxes on the average.  Less than 11% of this company's profits come from marketing and refining in the United States and the company recently announced it was spinning off its retail outlets.  Yes, it made great profits in recent years, but it also had enormous, risk-filled expenses. Not every well that's drilled—a costly effort—produces oil.

Imposing a windfall profits tax on ExxonMobil would prompt it and other oil companies to consider moving their corporate headquarters to other more congenial nations. The city of Dubai in the United Arab Emirates has been engaged in a vast office building effort, perhaps anticipating the movement of oil company and other corporate headquarters.

Americans have greeted the expiration of the ban on offshore exploration and drilling with the expectation that American oil would begin to flow and thus lower their costs for this vital national asset. That will not happen if the President or a Democrat controlled Congress reinstates the ban and/or imposes a windfall profits tax.

The city of Houston has been enjoying a boom due to the increase in the cost of a barrel of oil. Even at $80 dollars a barrel, it is enough to have created "its strongest resurgence in more than 20 years" according to a 2007 New York Times article about Houston. "Some energy companies are expanding and putting up new buildings." Others, like Schlumberger and Halliburton, among the hundreds of service providers to the energy industry, have established their headquarters in Houston.

Houston is home to the headquarters of ExxonMobil, ConocoPhillips, and foreign owned companies like Citgo, BP and Royal Dutch Shell also maintain corporate offices there. About half of Houston's jobs, an estimated 1.1 million positions, are tied to the energy industry. The impact of a windfall profits tax would prove devastating to Houston.

Destroying the oil industry in America, a process that has been in place since the Carter administration, has left the nation vulnerable to foreign sources. The U.S. already imports some 70% of its oil. It has caused a significant decline in the exploration and development of national reserves. It would turn Houston's boom into a bust that would ripple throughout the entire economy of the nation. ESR

Editor's Note: "Why Your Gasoline Prices Are High" by Seldon B. Graham ($10.95) is available from Amazon.com.

Alan Caruba writes a weekly column posted on the Internet site of The National Anxiety Center. He blogs daily at http://factsnotfantasy.blogspot.com. © Alan Caruba, November 2008

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