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"...a potentially devastating blow to the takes industry."

The difference, though, is that a takes-prophet can profit from takes without profit-taking.

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oderint, dum rideant.

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founding

However you slice the extra tax, the profit from oil production goes down. That will factor into calculations on whether to drill new wells or use the money in another way. And the introduction of any tax will chill drilling since these are multi-year projects and there will be justifiable fear that any WFP tax will be the first, not the last.

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If you believe that the oil situation will get better in a year or two with some sort of deal with Russia, then we should pump as much oil as we can from our existing infrastructure, and the marginal cost matters a lot, but future drilling doesn’t really matter. If you believe embargos on Russia are going to last for many years, then we need to be drilling, and you are right. But it’s probably best to be prepared to be in this for the long haul.

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founding

It doesn’t though. It decreases profit on some fraction of the oil they are already pumping by taxing that chunk of profit, but additional pumps still make just as much new profit with no new taxes.

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I often critique Ezra Klein. I was just listening to his podcast and he was making the point liberals need to figure out how to more efficiently build things. As someone who works in the “building infrastructure” space - totally agree. This is a YIMBY issue but applies to much more than just houses. Our system is mucked up with administrative nonsense that makes very little positive difference to the outcome of projects.

We should be able to build more useful things for less money and faster. Democrats control the administrative state that is mucking up the system. It’s time for them to change it.

Training government reviewers on what is a meaningful comment and what is nitpicking would be helpful. I just spent a year trying to get a federally funded project (supposedly shovel ready) approved for bidding as state reviewers picked its carcass like buzzards making sure every word on every page was properly spelled and punctuated. It’s crazy! All this while we have high inflation. How much did they cost the project? This is happening on projects all over America.

When Ezra was talking about this he sounded like Bill Oreiily. But he’s right.

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State DOT staffing levels need to be justified somehow, lol.

A relative handful of states justify it by actually using their staff to build state capacity, do a significant fraction of design work in-house, and can therefore cultivate the skills and staff to ride herd on even very complex projects and keep the consultants from fucking them over.

Michigan and Minnesota come to mind. CalTrans seems to have learned its lesson with the HSR project on which WSP took them for a ride and is staffing up a bit, positions with real work to do.

On the other hand, you have... NYSDOT is pretty close to exemplary of the "let's do make-work" model.

Their employees therefore all have a vested interest in nitpicking.

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I agree that it can often make sense to do real work (like design or even some construction) in house. I don’t have a government workers are just inferior perspective. Many government workers are very good at their jobs. I think the problem is more systemic. Death by a thousand small cuts.

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Everything is both over and under regulated. Overregulated when civil servants need make-work to justify themselves, underregulated when it might require them to act as an antagonist to motivated and well financed crooks.

For example, you get things like blatant cryptocurrency scams which are allowed to proliferate unchecked because the SEC and international equivalents just aren't bothering. These things are Ponzi schemes, and the cryptocurrency part is just technobabble slight of hand rather than any innovation.

I mean, a scam called Celsius just imploded in the last day or so, and this was the video they used to market the thing, on YouTube since January last year:

https://www.youtube.com/watch?v=bJq_z26wC5E&ab_channel=CelsiusNetwork

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Observer has it right. We regulate the wrong shit in an outright attempt to achieve outcomes really only achievable by spending, and in so doing we make everything worse, both because everything becomes expensive and time-consuming, and because our regulatory agencies are no longer able to address key needs.

In attempting to be everywhere, they are effectively nowhere at all.

The solution isn't to disband the EPA (there are real problems there that it needed to solve and which it is still needed to keep at bay), but to vastly curtail its remit.

I don't expect either side of the aisle to muster the ability or willingness to do that.

The Republicans, were they to tackle the issue, would leave all the useless, corporate-favorable make-work intact. They're not committed to streamlining the regulatory state and freeing markets, only to generating the appearance thereof while allowing politically connected backers to rent-seek. I cannot fathom what it is about the history of the last 40 years that suggests otherwise to you.

Virtually all of the useful deregulation was completed under Carter; Reagan's further “reforms” and those of every GOP president since have merely shrunk state capacity and hobbled a public response to rampant rent-seeking.

The Democrats, meanwhile, so highly value process-orientation that they're unable to do so much as one single thing about which anyone might complain, which leaves *everyone* complaining about *everything* as we see today. All they can do is hand out cash, and be damned to where it goes.

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Ugh. That is demonstrably not what was done to the EPA under Trump.

Literally a full half of changes Trump's Administration made to the EPA were specifically to make it easier for point source industrial and generating sites to emit pollutants, either by relaxing restrictions on emissions or by limiting measurement and enforcement.

Their only effect is the lower the cost of doing business for certain industries by allowing them to spend less on emissions controls. Nothing else.

Simplifying environmental review was one of the hundred rule changes proposed, and even that was a relatively limited, ineffectual attempt that wouldn't have done much to streamline permitting, nor to curtail rent-seeking by environmental consultancies.

Even so, if that had been the only rule change I'd have taken it in a heartbeat.

If you stripped out the 20 worst, stupidest changes and pushed the other 80, I'd have taken the 50-odd shitty ones just to get the half-dozen good ones.

But that's not the deal on offer, because the GOP is in no way committed to a market economy and is becoming less so literally by the day.

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It's dead. It was dead the moment it came to the attention of the wider electorate.

It was never sincerely held by more than 10% of the electorate, if that, and disproportionately far from power to boot.

All it's going to accomplish in its death throes is perhaps to destroy the Republic in its flailing.

I agree that it must stay dead and you've seen exactly how much hatred I've heaped on it at every turn.

But there are greater and lesser evils here, and just because this wokeist bullshit is bad doesn't mean it's the only bad thing out there.

There exists a middle ground between "a year of environmental review to install a culvert on the site of an old bridge" and "Air pollution that looks like New Delhi in January".

We *must* find it; if the alternatives are limited to these two, the former is a better option even if it makes everything ruinously expensive, because the latter costs hundreds of thousands of lives annually. I've lived in a country where young children with asthma are sent to poor rural areas to live with grandparents because they can't survive the cities, even though it's economically and socially crippling. I would wish for something else for my child.

The experts, as currently constituted, suck. They're all on a single side of the aisle, scratching one another's backs and generally allowing politics and ideology to cloud the processes of inquiry, skepticism, and science by which we advance and make public policy.

But the complete lack of experts on the other side of the aisle also sucks. You and I both know that the GOP as currently constituted is *not* committed to a measured, effective streamlining of the regulatory state. In power, it will burn down whatever bits of the regulatory state it finds inconvenient (i.e. unprofitable for its backers) without a whit of thought to actual cost-benefit ratios, then leave the ones which are most conducive to rent-seeking intact.

The current options are all unpalatable. We have a process-obsessed party of lawyers and professionals, risk-averse and supremely incapable of implementing necessary change, and a faux-populist party of small business owners, working folks, and capital, entirely divorced from evidence and expertise and increasingly obsessed with the violent seizure of power.

You and I differ only insofar as I think you're being too short-sighted in evaluating which is worse. Wokeism is ruinously unpopular and self-limiting, and its risk-averseness impedes progress, but it's not a threat precisely because of how unappealing it is. Right-populism carries serious risks of evolving into the PSUV and burning the country to the ground.

What's needed is an optimistic form of populism, unbeholden to technocrats and self-interested experts, with a salable vision of a plentiful future and the ability to consider how best to regulate and spend money to achieve a broadly prosperous society which rewards all work and all innovation.

It's entirely up in the air whether either side can evolve into that, but it's very much up for grabs if one can.

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I realize today’s take is about politics, and that politics is about lying, but that graph purporting to show massive windfall profits is ridiculous.

This is what happens when The Guardian is your go-to source for corporate finance information.

Back in 2020, all of the big oil firms took a charge on their balance sheets under the assumption that some of their natural gas assets (the stuff they owned that was still in the ground) would never be developed. I looked up the numbers for ExxonMobil: The majority of the increase to “profits” in the Guardian data is actually nothing more than reversing some of the 2020 charge - an adjustment to their balance sheet to update it to today’s reality. I assume the same is true of the other companies in the graph, but I haven’t checked.

https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/quarterly-earnings/earnings-announcements/2022-earnings-announcements/1q-earnings-release.pdf

https://blog.auditanalytics.com/exxonmobil-impairments-and-the-sec/

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I came to the comments section in hopes of finding someone that asked my question of "Can I see the profit chart over the last 5 years including when demand was way down?" - this was close enough, and better.

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Jun 14, 2022·edited Jun 14, 2022

As I understand it, oil industry internal projections show worldwide demand peaking in the next couple of years, then declining after that. I'm sure oil execs are well aware of recent technology gains in EVs and heat pumps, as well as the ever falling cost of renewable energy.

I wouldn't be surprised if the switchover to EVs for passenger transport (including PHEVS) happens much more quickly than expected (constrained mostly by supply in the short term). I think it's likely to play out the way flat panel displays replaced tube TVs. In that case, it only took about 8-10 years for 90% of new sales to switch over to flat panel.

With heat pumps, the newer hyper-heat technology works efficiently down to minus 4 Fahrenheit. In the northeast, heat pumps are now much cheaper than oil on all but the 10-12 coldest days of the year. With rising natural gas prices, heat pumps will become more competitive in many more places. South of New England, the heat pump case is even stronger.

Long story short, the economic case for substituting EVs for ICE cars and for heat pumps for oil and gas heating is robust and getting stronger. On top of that, renewable electricity generation is getting rolled out like gangbusters. All of this will have a dramatic impact on O&G demand and that's the main reason O&G execs are reluctant to spend a lot on new capacity.

Personally, I don't think one-off changes to the tax code at the margins are likely to change the math very much. Perhaps direct subsidies could work, but I doubt there's enough dem support for much of that and anyway, none of it is likely to have an impact for at least a couple of years.

By then the problem is likely to have abated due to demand falling.

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How many beers did you have in Denver last night? Increase the corporate tax code complexity to level out the profits in the oil industry? Hand the revenue raised back to the industry (laundered through DC of course) in a process sure to be corrupted by lobbying and rent seeking? Do you have a family member who is a tax accountant or a bigwig at an energy lobbying group?

IMO, this article is as bad as yesterday’s article was good. 👎

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While a windfall-tax-funded subsidy may spur domestic investment in oil and gas production in the short term, I think this approach will only weaken medium and long term investment due to the punitive messaging around the windfall tax. I.e., we’re further doubling down on “signal[ing] a desire to deter investment in U.S. oil and gas production.”

And I think Republicans will continue to attack us on this front. They will keep highlighting our general hostility to our domestic fossil fuel industry and explain that as the reason that no one wants to invest money into new domestic oil and gas projects. With gasoline prices on voters' minds, I think that will be devastatingly effective in electing Republicans.

Building off yesterday's post, “The case against restricting domestic fossil fuel supply”, I think we Democrats need to recognize that an adversarial stance towards the domestic oil and gas industry is a poor approach to addressing climate change. While we should remain committed to the green transition, we should be clear that this is a transition and during this process we need stable energy prices. And we should prefer domestic fossil fuel extraction and refining satisfies a substantial share of the global demand because we can minimize their environmental harm beyond carbon emissions through stringent regulation that is not practiced in other countries.

While vilifying oil and gas companies may please certain climate activists, this is a counterproductive approach towards achieving the green transition and further it alienates voters who are being financially squeezed by high and volatile energy prices. We instead need some sort of holistic energy plan that combines policies for accelerating the green transition with healthy respect for a robust domestic oil and gas industry that is necessary throughout this transition.

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founding
Jun 14, 2022·edited Jun 14, 2022

Spur inflation with too much stimulus. See gas prices go up. Raise taxes and spend more money. The Republican ads will write themselves.

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But the republicans ads will say we need more stimulus. Look at DeSantis down in FL - we need stimulative tax cuts to boost the economy….

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I don’t believe Republicans have an actual plan for how they want to address inflation. Instead, I think they will just attack whatever Democrats do as being inept or counterproductive. Therefore I think we should focus on strategies and messaging that minimizes the strengths of the Republican counter messaging. I don’t think we’ve landed on a good strategy yet and hence we’ve given Republicans a lot of great material to work with.

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“WASHINGTON—Congressional Republicans are beginning to detail their plans to combat inflation and soften its impact on households, indicating some tax, trade and regulatory policies they might pursue if they take control of the House and Senate in this fall’s midterm elections.

Sen. Chuck Grassley (R., Iowa) on Tuesday is proposing to adjust a tax-code provision for inflation and reduce some taxes on investments. Meanwhile, Republicans on the House Ways and Means Committee are outlining their anti-inflation agenda, calling for rescinding unused federal spending, reducing regulation and negotiating new trade agreements.”

https://www.wsj.com/articles/gop-offers-tax-trade-policies-aimed-at-combating-inflation-11655222400?mod=hp_lead_pos10

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OK, let's get the disclosure out of the way; I've been a Chevron shareholder for about a decade and have owned Exxon until exiting four years ago. Throughout this time, I have seen profits get whipsawed for the simple reason that oil companies do NOT control the price of their product. The world market for oil does. I've seen earnings years when both Exxon and Chevron barely eked our a profit. The CEOs did not moan and groan but continued to run the companies the best they could.

Americans, to be blunt, suffer from the delusion that gas should be plentiful and cheap. Right now America is self-sufficient in energy, there are no lines for gas (and I've been through both of the supply crises). Would a windfall profits tax impact the current supply situation? Unlikely unless the companies just stopped pumping oil and gas which clearly would be problematic.

I keep returning my favorite hobby horse, implementation of a national VAT. If we are taxing 5% of sales across the board, clearly more money will come from $100/barrel of oil than $50/barrel. You don't even need to consider a windfall profits tax as the sales tax just makes more money at the higher price point. Occam's Razor in action !!!!

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Of the 200m plus registered vehicles, well more than 190 million are gas-powered. Of course EVs will and should replace the existing fleet but between now and perhaps a decade from now it's unconscionable that Ds or anyone should think voters/consumers should pay high gas prices. Punishing our people isn't necessary to cause electrification of transportation and will only undercut the popular support for the switch. The same is true of electricity, another commodity rising too rapidly in price that will be decarbonized rapidly if Senator Manchin agrees soon. Nor is there any reason why the price at the pump or the meter cannot be capped or reduced now. Any government intervention in the supply chain for gasoline or electricity can be done on a buy high/sell low basis in order to reduce consumer price. Roughly $10b/month of such government spending would bring gas prices to $4/gallon. Electricity prices vary much more by state than gasoline but the same order of magnitude of spending would bring them down too. I'd prefer that oil and gas firms be obligated to invest in domestic extraction and LNG at huge, breakneck pace or be taxed, but one way or the other we have to aim for and get true carbon independence because otherwise foreign oil producers again and again will use this tool to disrupt our decarbonization and much else about our policies. For the record, as FCC chair I can report we successfully price regulated cable in 1994; everyone's prices went down about 5% and we broke the back of two decades of price increases at rates far above GDP growth. And cable was not a commodity. The industry persuaded Congress in the 96 Telecommunications Act to take away the FCC's power in this respect.

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"anyone should think voters/consumers should pay high gas prices."

Doesn't matter what anyone thinks, or whether it's "unconscionable", there are no future technological advances or market shifts coming to drive the price back down. The companies invested in shale and tar sands have scaled as far as they care to and now wish to profit from their investments before they depreciate to a fraction of their current value as the energy paradigm changes.

Short of just handing out third-world-style fuel subsidies, we can expect to pay well over $4/gallon in the US for gasoline going forward.

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Introducing ad hoc "one time" taxes to claw back profits you deem unreasonable is the worst version of populism. Predictability is very important to business investment. And if you do it once, it seems pretty certain you'll do it again.

Additionally, this policy would further highlight the animus that the democrats have towards fossil fuels specifically. Why not a one time tax on people who have profited from unreasonable real estate gains? Or own a fertilizer factory? Or futures contracts on lithium ore? But no, it is oil companies specifically. All the normies who already suspect that the hill staffers secretly enjoy the $7 gas price as they ride their Volts and scooters will see exactly what is going on.

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I am constantly struck at the sheer pointlessness of ESG investing. What is the point of not investing in oil companies if your government proceeds to subsidise oil production, and goes down on bended knee to Saudi Arabia to increase production? What did you gain, other than a poorer pension fund performance that you will no doubt want the government to put right when you retire?

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Jun 14, 2022·edited Jun 14, 2022

I don't have strong feelings on the tax part, honestly, but sinking any resulting money into production would be a loser, politically. You can't increase domestic production enough between now and the election to move prices substantially, which means that you are just creating a situation where the big oil producers will pocket the gains and continue to support the GOP.

I would prefer to make a deal with Iran for a large-scale lifting of sanctions, but that's partly because I strongly want to see a return to the JCPOA framework and think that ultra-hawkish Iran policy in general has been really dumb (I would defy you to show me what, precisely, we have "gotten" from hawkish Iran policy). But that's probably also a political non-starter.

So that brings us to what you I think you should actually spend the money on, which is efficiency upgrades to existing technology. I am a historian of technology, among other things (check out my article on space-based solar power!), so I think of "efficiency upgrades" in an extremely broad sense. Sealing someone's house is an efficiency upgrade. Switching from an older, less fuel-efficient car to a hybrid is an efficiency upgrade. Replacing old oil heating furnaces is an efficiency upgrade (and switching them away from oil is an even bigger one).

This kind of program, pursued aggressively at scale, gets you a lot of bang for your political buck. It supports domestic economic activity. The people who end up with (subsidized) new stuff are flatly better off. The people who are hurt are already making windfall profits and not investing that much, so not much loss there. And going forward, you are in a better position in terms of the next big technological shift in energy production and consumption, away from fossil fuels, which is already progressing faster than people generally realize--honestly, it is outrunning some of the most optimistic projections from back when I started working in this area fifteen years ago in the aughts.

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If this was 2015, I would heartily agree. However, a focus on technology upgrades at a time when demand is already high and supply shocks are a significant cause of inflation suggests that this will simply make many of those issues worse.

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I understand the argument (and like I said, I'm happy to increase supply via Iran), but you can't move supply with capital investments in the short term, and you can't solve any of your structural problems by moving supply in the long-run. So it looks like wish-casting to me. I'm sure drillers and frakkers would be happy to pocket your money, but it's going to be a long walk for short drink of water, in policy terms.

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I think Matt's article from yesterday was spot on. Democrats have been pushing to lower US production for years and often describe oil from fracking or from Alberta as especially "dirty." The reality is that oil produced in the US and Canada is likely to be far cleaner than what is produced internationally and we should be focused on making improving the glide path for electrifying instead of pushing oil production overseas.

Regarding Iran - they are going to obtain a nuclear weapon regardless of what we do - its simply a matter of how long. The incentives for their leadership are simply to strong to be ignored. The only question is whether we try to delay is some (through JCPOA or sanctions), or attempt rapprochement - but I think either of those is mostly doomed too. There are no good solutions for the US with Iran - only bad to disastrous ones.

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What I fail to see is how Iran having a handful of fission bombs is disastrous, except from a blame-game domestic politics angle.

Who cares? They're far less likely to use them than the DPRK, either on their neighbors or on the US. I just don't care to spend time or money deterring them,

My sole concern would be that the Saudi state will collapse sometime in the next half-century and it will surely feel compelled to build its own nuclear weapons in response. Those will be a pain to round up when they collapse.

But we already have that problem with Pakistan, which is going to shatter when Afghanistan melts down sometime in the next decade.

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And for anyone who is wondering whether this works, I would point you to the experience from the late '70s and early '80s. The energy price collapse of the early '80s was partly a story about new supply coming along, particularly from hard-to-reach spots like Alaska and the North Sea, but it was also a story about a big drop in energy demand generally. That was some government policy (such as the new CAFE standards) and plain old consumer response to the price hikes and supply disruptions of the '70s (Energy Crisis, oil embargoes, etc.).

Demand destruction via technological upgrade is a thing. It works.

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Jun 14, 2022·edited Jun 14, 2022

This probably won't work to increase production for reasons others here describe. What will work better are two things I mentioned on yesterday's post. One is the Biden admin should start signaling to Wall Street and investors that it is okay for new production to begin happening. Currently, as MY wrote, Wall Street is pushing oil companies to maintain "capital discipline," paying off debt and returning money to shareholders. They aren't investing in more production because Wall Street has been told oil is a dying (and evil) industry, and is responding accordingly. But this would hurt Democrats with their base, so other thing the Biden admin can do is begin paying oil companies directly to bury CO2. Right now, really the only CO2 being buried is through "enhanced oil recovery" processes, and there isn't a lot of it. If it was set up as a long term government program (which it should be) it would signal to Wall Street and oil companies that they would still have a market in 10, 20, 30+ years, and would probably invest more in production right now.

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If inflation is such a dominant concern among voters, then student debt cancellation becomes even more of a terrible idea, both in terms of its actual impact and in terms of the optics.

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Taxing an industry your base wants to eradicate will not encourage production.

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