The Biden administration has made no secret of its disdain for traditional oil-derived energy sources, favoring so-called “green energy” alternatives. In fact, on the campaign trail, candidate Biden made it clear that he wanted to end America’s oil industry as it currently exists.
“First, no more subsidies for fossil fuel production. No more drilling on federal lands. No more drilling, including offshore. There is no way for the oil industry to continue drilling, point, end, number one.”
Politifact
On another occasion, Biden’s candidate went so far as to say he would jail the executives of fossil fuel companies.
Over the past year, in an effort to speed up the energy transition to clean energy, the administration has taken additional steps to make it more burdensome and costly for America’s oil and gas producers. Among them-
- Fundamental changes in the lease of oil and gas on federal lands.
- Repealed the methane rules of the Trump era.
- Canceled Keystone XL conveyor
- Appoint decision makers in key federal agencies (SEC, Treasury, FERC) that are opposed to the oil industry. And who wants to promulgate rules that limit their ability to receive funding, or impose heavy penalties, and using extended definitions of carbon impact, make it impossible to obtain permits.
- An attempt to offset carbon prices in a stalled “Rebuild Better” tax scheme.
While the Biden administration has struggled to replace Russian oil and gas since last week’s ban, it has steadfastly refused to consider reaching out to US producers to encourage the development of new supplies. As I said in a previous Oilprice article, the president sent emissaries to Venezuela, openly discussed buying oil from Iran, and tried to convince Saudi Arabia to increase its production. All for no apparent benefit.
On a recent trip to Fort Worth, Texas, to visit veterans at a regional veterans hospital near the center of the oil and gas nation, the president chose not to meet with oil and gas executives to try and bridge the distance between them. In general, Biden’s antipathy towards the domestic oil and gas industry has been called a war on fossil fuels. As the legislation is now being drafted, it appears to be strengthening rather than weakening as gasoline prices in America have in many cases tripled from last year.
Last week, a pair of senators sympathetic to the administration’s goals began drafting a bill that would resurrect a decades-old tax scheme to expropriate what they call “ill-gotten gains” in this era of high prices. Senators Ron Wyden-D, Oregon, and Senator Elizabeth Warren-D, Massachusetts unveiled their proposal that 50% of oil company profits would be divested from oil companies and given to low-income taxpayers while keeping gas prices at or above their . current levels. The Wall Street Journal summed up this Wind Fall Tax-WPT proposal in an article last week:
“The contingency tax proposal shows that Democrats don’t want American companies to produce more oil so that gasoline prices fall. They want higher gas prices, so reluctant consumers are buying more EVs. They can’t say it directly because it would be politically suicidal in an election year when the average gas price is over $4 a gallon, so they do it indirectly through taxes and regulation.”
WSJ
In the rest of this article, we’ll take a quick look at the latest iteration of this idea from the 1970s and 80s and draw some conclusions as to what it might portend in the modern age if it becomes law.
1980 windfall income tax
After the 1973 Arab oil embargo, prices rose to historic highs and fears began to rise that oil companies were making unfair profits. President Nixon imposed price controls on oil in 1974, which led to the era’s famous shortage gas lines. In 1980, President Carter moved with a windfall tax to correct the supply situation but ensure that the oil companies did not make unfair profits. Like most federal interventions in the markets, the WPT did not achieve its goals and led to further unforeseen consequences that hurt American companies. Among its main disadvantages are
- In reality, it was an excise tax paid on the extraction of a barrel of contaminated oil and before any profit was made.
- He created classes of oil domestically because he really just expanded the concept of price control.
CGA
- In addition, it put American production at a disadvantage compared to global sources. Drilling capital ran (North Sea and the nascent Deepwater GoM, which had significant royalty relief) then, and will again be on greener pastures.
- Production went down during the original WPT for many reasons, and it will go down again if this iteration grows legs and goes. Thanks to the rapid build-up of Alaska oil reserves, US production actually increased for a short time during the WPT. However, Alaska oil peaked in 1985, and US production began to slowly decline by the early 2000s, while foreign imports skyrocketed. Then, with the advent of hydraulic fracturing and the rise of deepwater production, US production began to rise to all-time highs.
EIA
The Way Forward for the WPT and the Implications of Its Adoption
This tax proposal will be rejected by every Republican in the Senate Subcommittee on IRS Taxation and Supervision, where, in the normal course of events, it will first be discussed and flagged, and then voted on by the full Senate committee. There are many miles to go before this can be considered, and there are rumors that he has no chance of resigning from the committee. Our view is that the party in power now has another 10 months to give it up, given the bad session and assuming the Republicans regain control of Congress. Otherwise, they have years and everything they dreamed about for decades will pass. It’s a long road with many twists and turns.
We now have some details of this legislative proposal. It will be an administration nightmare, and because it is modeled at higher speeds than the original 1980 version, it will bring back many of the same shortcomings. Like others, this will definitely reduce production and imports to this country. Ironically, he is trying to eliminate the tax advantages that imports had under the old system by treating imports in the same way as domestic production.
Foreign producers are unlikely to allow the US government to make “windfall profits” and adjust their selling prices to include the tax, further pushing up final prices for consumers. Count on it. We have an example to follow.
The Brazilian IPI is a good example. It increases to 55% for imported cars with an engine capacity of more than 2 liters. The noble goal is to protect its domestic production of cars, which coincidentally sell at import prices, raising prices for all Brazilians. Sheiks will do the same to protect their industries. As a result, Americans will have less oil and gas, and this will play into the hands of the green new deal movement by making the end product more expensive.
On the inside, fewer leads will meet the Internal Rate of Return (IRR) and Capital Efficiency Rate (ROCE) thresholds, i.e. a screening where prospects compete for capital, which means they won’t move forward. Capital is not idle. He is looking for a return and will run away. Oil companies that learned the lessons of private equity and venture capital a few years ago will only fund what brings cash flow. Increasingly, they will go beyond our shores to place their capital where it is most valued. Under such a scenario, U.S. production will inevitably decline.
Drivers will pay more. One of the goals of this administration is to make fossil fuels prohibitively expensive to speed up the “transition to renewable energy.” Renewable energy is an empty promise as the world learns daily. This will not prevent the government from spending “confiscated” oil money on “green dreams”, such as “stimulus” checks.
People love stimulus checks and generally love the politicians who provide them. For many with a check in hand, the connection between it and the higher prices of everything is elusive. Hence the current hype about inflation. Injecting $6 trillion into the money supply in a year and a half made this predictable. Now that the stimulus checks are gone and gas prices are at record levels, people are upset and politicians would like to reassure them. With another check.
Your takeaway
As I have noted in previous Oilprice articles, due to underinvestment in extractive energy sources, we are moving into an era of less available and more expensive energy. The oil industry can produce more, but it needs to be stimulated, not oppressed, to do so. It remains to be seen if management can step back from the green energy narrative to engage with manufacturers that supply a large balance of the world’s energy sources. There was some ground for encouragement last week at CERA Week in Houston when some of Biden’s lower-level bureaucrats met with the energy guys. Vinay Tummalapalli, Acting Director and Chief Operating Officer of the US Trade and Development Agency, commented after the meeting:
“I envision this particular situation as a fire in the kitchen helping to finance energy projects abroad. We will extinguish it. It will be repaid. We need to take care of the rest of the things the house does in terms of all the priorities.”
Politico
If you unpack this “verbal salad” of mixed metaphors, then there will be no special reasons for optimism, but at least they talked. Some sort of progress.
David Messer for Oilprice.com
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