Conventional Wisdom
Rising oil prices must be related to the war in Iraq. The only reason the U.S. is interested in the Middle East is because of the oil.
Facts
Global demand for oil in 2008 is expected to top 87 million barrels a day, up 10 million a day from 2001.47 Iraq's production, which was 2.5 million barrels per day prior to the war, was 2.0 million barrels a day when the oil shortages began in 2006, and is now back to 2.5 million barrels per day.48 Clearly Iraq's fluctuation of .5 million barrels per day was a very small factor in determining whether or not the global demand surge of 10 million barrels per day could be met. And any change in overall demand or the price of gasoline at the pump has little to do with the amount of oil being produced in Iraq. Additionally, it is likely that without the invasion, Iraq's production would have continued to decline since under the oil for food program, the supply of cash to Iraq's oil industry was insufficient to maintain its infrastructure.
Insert Chart 10_A (Iraq Oil Production)
Because oil is a fungible commodity which can be exchanged either for currency or for other goods and commodities of like value, it will make its way to wherever it's needed, regardless whether the producer and consumer governments are friendly to the oil-producing country. If, for example, Iran says, "We will not sell our oil to America; we will sell it to China," Then China will simply buy less oil from Russia, and Russia, in turn, will sell more oil to the U.S.
Much of the increase in global demand is due to growing demand for oil in developing countries, including especially China and India. Since 2005, these two countries have accounted for approximately 70% of the increase in energy demand. And the demand is still increasing. The International Energy Agency (IEA) has predicted that world energy needs will increase 55% by the year 2030. According to an IEA report cited in the New York Times in November 2007, net oil imports by China and India are expected to top 19.1 million barrels a day by the year 2030, up from 5.4 million barrels in 2006, and more than the total currently imported by the United States and Japan. By 2030, global oil demand will likely exceed 116 million barrels a day.49
Insert Charts 10_B (Global Oil Consumption)The impact of growing demand in these former Third World economies on the price of oil--and the higher costs of consumer goods in both America and Europe--is simply a fact we will have to deal with in the twenty-first century. According to a report in Time magazine, China's appetite for oil is a direct result of its booming economy and its newfound appetite for automobiles and other modern conveniences. There's no way that demand can reasonably be seen as the reason for our war in Iraq.50
Insert Table 10_D (China Avg. Ann. Imp. of Oil) SOURCE BARCLAYS BANKChina's oil imports doubled in the first five years of the decade and surged nearly 40% in 2004 alone. These increases made China the leading consumer of oil and energy in the East, and second only to the U.S. as the world's biggest customer for imported oil. And there's no sign that these trends will diminish anytime soon. China's industrial base, says Time, is "gobbling up vast amounts of petrochemicals to make everything from fertilizer to Barbie dolls."51
Before Complaining Too Loudly
Americans have enjoyed cheap gas and oil for so long we tend to think the recent rise in gas prices is extraordinary and unfair, and in some ways it may be. But before we conclude that we're being punished unfairly, consider what other countries are paying for gasoline at the pump. A 2007 report from the Reuters News Service showed that American fuel prices--fluctuating around $3.50 a gallon in April 2008, according to the Lundberg Survey of fuel prices-- US prices are among the lowest on the planet.
Large oil-producing countries like Russia, Mexico, and Saudi Arabia pay lower prices than the U.S., the vast majority of nations pay a great deal more than the US for oil. Japanese motorists, for example, were paying more than $4.00 for a gallon of gas in 2007; France and Germany were paying $6.50 and higher; Scandinavian drivers were paying in the neighborhood of $7.00 a gallon; and Great Britain topped the list at more than $8.37 per gallon. No one's happy with high fuel prices, but rest assured, it could be a lot worse.52
Assessment
Much could have been done to reduce the severity of the current oil shortage. Irrational opposition to nuclear energy and Congressional blocking of oil drilling in ANWR (Alaska National Wildlife Refuge) and off the shores (but out of sight) of Florida, California and other states can be blamed for the current shortage of domestic oil production. We can agree or disagree with the priorities here, but the fact is these steps could have averted a crisis that had very little to do with Iraq. Nonetheless, seeking energy alternatives is and should be a national priority.
Conventional Wisdom
The high price of oil and the outrageous profits made by companies like ExxonMobil and others is because of price-gouging at the expense of the American people.
Assessment
Corporate profits get a lot of media attention these days, but what receives considerably less attention are the taxes paid on corporate profits by the oil producers. The fact is, taxes paid by ExxonMobil exceeded $30 billion in 2007, a record by any standard, and a jump even from the $28 billion in taxes the company paid the previous year. In 2006, Exxon paid $27.9 billion in taxes (a tax rate of 41.4%) on earnings of $67.4 billion; and in 2007 the firm paid $30 billion in taxes on $70.6 billion in total earnings.
Insert Chart 10_E (ExxonMobil Tax)You read that right: Just one big oil company, ExxonMobil, has paid an average of $27 billion annually in taxes over the last three years. To put this in perspective, stock and investment analyst Mark Perry observes that, according to IRS data, 130 million tax returns were filed in this country in 2004 (the most recent year available). The total Adjusted Gross Income for the bottom 50% of taxpayers in that year was $922 billion, and the total income tax paid by that group was $27.4 billion. In other words, as Perry concludes, just one oil company pays as much in taxes to the federal government as the entire bottom 50% of American taxpayers--which, incidentally, is 65,000,000 people.53i
Many people now understand that the rush to ethanol was misguided and caused food shortages and price increases. Few realize what Reality Check brings to the surface - that it also cause serious hardships on the less fortunate of the world. Reality Check examines why, as the Economist points out, "corn-based ethanol is neither cheap nor green," and why, as Time magazine states, "biofuels aren't part of the solution at all. They're part of the problem."
Conventional Wisdom
The oil companies are making unfair profits because of high gas prices. It's time for Congress to enact a Windfall Profits Tax, like they did back in the 1980s.
Facts
A windfall profits tax is a tax levied on domestic oil producers when the price of oil exceeds a certain level. These taxes impact our domestic companies but are not effectively imposed on foreign producers. Over the past five years, Democrats in Congress have repeatedly tried to pass laws imposing an additional 50% tax on the price of oil when the price goes above $40 per barrel. At the April 2008 market price of about $120 per barrel, each barrel sold or refined would be taxed an additional 50% on the so-called $80 "windfall" above $40, or another $40. This tax would be imposed on top of the 35% to 40% federal income tax and other regulatory fees already being paid by the industry. Under those rules why would any company take the risks of trying to find new oil fields?
Public dissatisfaction with the high price of gas may incline some people to believe that it's only fair to stick it to the "big oil" companies by raising their taxes, particularly when some in Congress have said that those taxes could be rebated to the taxpayers. The fact is, higher taxes on gasoline will always come back as higher priced fuels, as well as higher taxes for consumers. At a time when the oil industry is searching for better options and more accessible sources of crude oil, a "windfall profits tax" is the wrong idea at the wrong time.
The last time such a tax was tried in the 1980s, it backfired badly. The new higher taxes discouraged the oil industry from expanding operations or finding new domestic energy supplies, and ultimately led to a surge of oil imports from the Middle East and elsewhere, which led, in turn, to further escalation of prices at the pump. According to a 1990 study by the Congressional Research Service, the windfall profits tax in place from 1980 to 1988 "reduced domestic oil production from between 3% and 6%, and increased oil imports from between 8 and 16%."54 In the end, the tax hurt consumers more than it helped, and the projected tax revenues turned out to be much lower than originally predicted because of the negative impact on production.55
Assessment
A basic law of Economics 101 is that whatever you tax you get less of, and whatever you subsidize you get more of. Another basic principle is that when supply exceeds demand, prices go down, and when demand exceeds the supply, prices go up. The more government penalizes new business development by over-taxing profits, the more it reduces the incentive for corporations in the high-risk energy business to find, refine, and produce more fuel. As in the 1980s, such taxes will have precisely the opposite effect of what has been promised by overzealous lawmakers.
When President Carter signed the "Crude Oil Windfall Profits Tax" into law in April 1980, it was the largest tax ever imposed on an American industry. The money was supposed to be used to develop renewable energy, but the tax failed to deliver. Domestic production dropped by 6% while imports increased from 8% to 16%, until the tax was finally repealed by President Reagan in 1988. According to the Congressional Research Service, Carter's tax raised a total of $40 billion, instead of the $227 billion that had been projected, and generated no revenue at all after 1986, because oil prices fell and production dropped.56
A free-market economy rewards responsible risk-taking, and America's big oil companies are engaged in a high-risk business. Maintaining production facilities, refineries, and pipelines involves enormous costs under adverse conditions, including the demands of exploration, the harsh physical and weather conditions encountered by oilfield workers, and the high levels of security required in many places to ensure that oil pumped from the earth actually makes it to its final destination. Such taxes put American companies at a disadvantage compared with foreign companies that produce and develop oil resources outside the U.S.
Profits from all this effort come only years after the investments are made, and political instability and changing global markets can turn everything upside down in a heartbeat. When members of Congress--or our so-called "consumer advocates"--insist on taking the rewards out of the risks and destroying the private oil companies' incentive to invest, nobody wins except OPEC that would end up controlling a greater percentage of the available supply.
Energy Information Administration, "Short Term Energy Outlook," May 2008. Energy Information Administration, "Oil Market Report," April 11, 2008 Jad Mouawad and Julia Werdigier, "Warning on Impact of China and India Oil Demand," New York Times, Nov. 7, 2007. [http://www.nytimes.com/2007/ Matthew Forney, :China's Quest for Oil," Time magazine, Oct. 18, 2004. [http://www.time.com/time/ Ibid. Chris Baldwin, "You think we've got it bad? Gas prices kick world motorists," Reuters, Apr. 19, 2007. [http://www.usatoday.com/ Steve Hargreaves, "How much Exxon pays for oil," CNNMoney.com, Nov. 6 2007. [http://money.cnn.com/2007/11/ Ibid. Mark J. Perry, "Exxon's 2007 Tax Bill: $30 Billion," Seeking Alpha (Investment Analysis), Feb. 5, 2008. [http://seekingalpha.com/ Walter E. Williams, "Big Corn and Ethanol Hoax," Human Events, Mar. 11, 2008. [http://www.humanevents.com/ Manuel Roig-Franzia, "A Culinary and Cultural Staple in Crisis: Mexico Grapples With Soaring Prices for Corn -- and Tortillas," Washington Post, Jan. 27, 2007. A1. Editorial: "Corn-based ethanol not cheap, not green," The Economist, reprinted in the Seattle Post-Intelligencer, Apr. 11, 2007. [http://seattlepi.nwsource. Michael Grunwald, "The Clean Energy Scam," Time magazine, Apr. 7, 2008. 40-45. Salvatore Lazzari, "The Windfall Profit Tax On Crude Oil: Overview Of The Issues," Congressional Research Service, Sept. 12, 1990.[http://www. Marlo Lewis, Jr., "A Windfall of Bad Ideas," Competitive Enterprise Institute, Dec. 4, 2005. [http://cei.org/gencon/019, H. Sterling Burnett and Christa Bieker, "Taxing Profits, Draining Energy," National Center for Policy Analysis, Brief Analysis No. 549, March 30, 2006. [http://www.ncpa.org/pub/ba/
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