> You could further optimize this by making the tax itself vary inversely with the global price of oil.... Any country could do that on the consumer side to help address volatility.
This is self-limiting! Buyers who are insulated from price changes won't reduce their consumption when the market price rises. And prices are rising because some buyers need to reduce their consumption in order for demand to meet supply. So the more insulating we do, the higher the volatility of the market price becomes for everyone else.
This is particularly the case for oil, where supply is v inelastic in the short term.
A post on the need for a plan to boost domestic production of other key commodities should follow from this post. We produce insignificant quantities of important minerals and developing new mines can take years to decades to permit. The following article has a graphic on uranium production - similar graphs could be created for many commodities.
While it won’t solve today’s problem, why not pull all of the energy components out of Build Back Better out of reconciliation and try to use this national emergency to get 60+ votes in the senate. Progressive Caucus in the House may not be happy, but BBB is going nowhere. Biden could use this as en example of why we (and other western nations) need to spend trillions on energy independence.
People always talk about drilling more wells when prices go up, but a much more responsive policy would simply be uncapping wells that were shut in for being uneconomical, since oil and gas from those wells can be brought to market much faster. The focus of a policy on that premise would be rating existing capped wells by their economic viability and then providing some form of subsidy on a well-by-well basis to encourage them to be brought back into production proactively rather than waiting for a more sustained period of higher prices (which is what oil and gas companies tend to do before uncapping them).
On the subject of increasing production and specifically towards your comment that oil companies have already started drilling the “best wells” so any additional investment would be directed towards less optimal wells:
While that’s obviously true, one data point that is interesting, which was mentioned at CERAWeek in Houston this week, is that if you look at the IRR for oil and gas projects for new investments that have reached FID (final investment decision) there is clearly a higher standard for new oil projects. Traditionally, oil and gas companies target a 15% IRR for new projects and we see that with gas projects that have been green lighted. In contrast, new oil projects are projecting IRRs of 30-40% which is a very high bar, and reflects the uncertainty in future demand and regulatory change. Those IRRs are driven by the financial industry and investors.
An excellent in-depth analysis. I spent the first half of my corporate finance career working for an oil and gas producer (long since swallowed up by multiple mergers). Oil (and natural gas) price volatility is the single biggest obstacle to stable levels of both capital investment and employment. And on the consumer side, who wants to buy an expensive electric vehicle if there’s a decent prospect that a year from now, gasoline will be relatively cheap again? So I think both the price-driven refilling of the SPR and imposing higher (but price-sensitive) taxes on gasoline are excellent ideas.
I don't know the source of those graphs, but they appear to be inflating oil production during the Biden Administration... especially the production today.
This piece frustrates me for the same reasons that many do... in failure to address the nuanced regulatory and policy changes that effect industries.
If you go back to the Trump administration the economy was again humming after the disastrous eight years of Obama where the nuanced regulatory and policy changes had hampered production and growth. Energy increases were needed to fuel that growth. Trump's work to clear regulations and approve permits... along with the release of the clamp of economic uncertainty that followed at least 6 of the 8 years of Obama... got the US to being a net energy exporter. More importantly it established a trajectory of energy growth to fuel American industrial growth.
Biden killed all of that in a year.
The plan to fix what Biden has broken is simple... DO WHAT TRUMP DID.
Sorry if that admission causes anti-Trump snowflakes to melt, but that is exactly the plan needed.
My graphs and comments were about your Obama/Trump comparison on general economic growth and oil production. Your response with a story about current permits implies you can't really defend your Obama/Trump comments.
The argument being made by the API is correct as far as it goes --the total number of available leases is not the entire story. That being said, the "stop picking on the oil and gas sector" attitude doesn't jibe with other parts of the oil/gas story, such as the high permit approval rate environmentalists were complaining about in December.
For the short term in terms of oil availability, this seems like an excellent time to not just do something, but stand there. Oh cosmetic things, like opening the SPR, are fine, if that helps calm the public's nerves. But in terms of opening of new areas for exploration or making drilling easier, then no.
World oil demand is about 100M barrels/day. Russian exports are around 5M. Take those away (or make it appear that that will happen) and surely prices will spike. And it would be great if our wonderful allies in the Persian Gulf stood with the civilized world and opened up the spigots a bit more to make a dent in that 5M barrel hole, but that's not how they roll, and I seriously hope we have some frank discussions with them after this is over.
But the US can make up a big chunk of that just by the magic of the market. US oil production reached a historical peak in February 2020, with 13.1M barrels/day. With COVID, production fell 30% by August 2020. It's now recovered to 11.6M barrels/day (https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart).
That huge runup ending in early 2020 came when West Texas Intermediate prices hovered in the low $50/barrel range. As of this morning, it's $110/barrel. I assume that the 1.5M barrel/day difference between now and two years ago is mostly from capping wells or slowing extraction from working wells. While I'm not a petroleum engineer, I imagine it's not too hard to crank those up again and get that 1.5M back on line fairly quickly. Even more, I assume we weren't producing flat out even at 13.1M/day and with the incentive of a doubled price, we could probably push production from current wells above the historic high, even with no new exploration or drilling.
In other words, just through market incentives and just here in the US, we could make a huge dent in the Russian deficit. And turning a blind eye toward Venezuelan and Iranian exports to other markets in the world would bring that down even more.
Lots of good stuff in this post on longer-range issues, but otherwise, I'd say let's wait for the market to work.
When you subsidize a good, people consume more of it. Making gas taxes vary inversely with the price of oil would subsidize consumption of oil precisely when the commodity is scarce, further driving up the market price of oil on the world market in a supply crunch and exacerbating the problem.
Just as a very broad statement, it's stupid to fight climate change by making fossil fuels more expensive when you could instead fight climate change by making zero-carbon energy sources less expensive. Instead of increasing taxes on carbon, increase "negative taxes" on zero-carbon energy. This is not a false choice. The current progressive position is to do both, but we should instead do half as much of the former and twice as much of the latter.
No, it is a false choice. When we make a green technology cheaper to the consumer, we must subsidize it. When we do so, we are able to afford less of other things, including carbon energy. This is the same as making carbon energy more expensive.
By way of analogy, suppose we spend our income on buying bread. It makes no difference to us whether the price of bread doubles, or our income is halved. Either way, we are able to afford less.
I just don't understand what happened. I was told renewables were cheaper (with the right regulation policies), scalable, and more sustainable/better for life in the future. Why would we want to double down in the short term when we can use this crisis to expand the path we need to go anyway. Industry resistance to expanding capacity just strengthens the argument.
Our foreign policy and energy policy of the Biden administration seems right out of 1990 George HW Bush playbook. Just need to hire Dick Cheney as Secretary of Defense. I don't disagree that it was a logical set of ideas at the time, but now it just seems like we need different policies for a different time.
It's very hard not to smirk with schadenfreude as high gas prices put the screws to lifestyles I don't agree with.
> You could further optimize this by making the tax itself vary inversely with the global price of oil.... Any country could do that on the consumer side to help address volatility.
This is self-limiting! Buyers who are insulated from price changes won't reduce their consumption when the market price rises. And prices are rising because some buyers need to reduce their consumption in order for demand to meet supply. So the more insulating we do, the higher the volatility of the market price becomes for everyone else.
This is particularly the case for oil, where supply is v inelastic in the short term.
A post on the need for a plan to boost domestic production of other key commodities should follow from this post. We produce insignificant quantities of important minerals and developing new mines can take years to decades to permit. The following article has a graphic on uranium production - similar graphs could be created for many commodities.
https://www.mining.com/web/70-years-of-global-uranium-production-by-country/
I'm trying to remember any effort by a group of national governments to manage the price of a commodity, that hasn't ended in tragedy or farce.
While it won’t solve today’s problem, why not pull all of the energy components out of Build Back Better out of reconciliation and try to use this national emergency to get 60+ votes in the senate. Progressive Caucus in the House may not be happy, but BBB is going nowhere. Biden could use this as en example of why we (and other western nations) need to spend trillions on energy independence.
People always talk about drilling more wells when prices go up, but a much more responsive policy would simply be uncapping wells that were shut in for being uneconomical, since oil and gas from those wells can be brought to market much faster. The focus of a policy on that premise would be rating existing capped wells by their economic viability and then providing some form of subsidy on a well-by-well basis to encourage them to be brought back into production proactively rather than waiting for a more sustained period of higher prices (which is what oil and gas companies tend to do before uncapping them).
On the subject of increasing production and specifically towards your comment that oil companies have already started drilling the “best wells” so any additional investment would be directed towards less optimal wells:
While that’s obviously true, one data point that is interesting, which was mentioned at CERAWeek in Houston this week, is that if you look at the IRR for oil and gas projects for new investments that have reached FID (final investment decision) there is clearly a higher standard for new oil projects. Traditionally, oil and gas companies target a 15% IRR for new projects and we see that with gas projects that have been green lighted. In contrast, new oil projects are projecting IRRs of 30-40% which is a very high bar, and reflects the uncertainty in future demand and regulatory change. Those IRRs are driven by the financial industry and investors.
An excellent in-depth analysis. I spent the first half of my corporate finance career working for an oil and gas producer (long since swallowed up by multiple mergers). Oil (and natural gas) price volatility is the single biggest obstacle to stable levels of both capital investment and employment. And on the consumer side, who wants to buy an expensive electric vehicle if there’s a decent prospect that a year from now, gasoline will be relatively cheap again? So I think both the price-driven refilling of the SPR and imposing higher (but price-sensitive) taxes on gasoline are excellent ideas.
I don't know the source of those graphs, but they appear to be inflating oil production during the Biden Administration... especially the production today.
This piece frustrates me for the same reasons that many do... in failure to address the nuanced regulatory and policy changes that effect industries.
If you go back to the Trump administration the economy was again humming after the disastrous eight years of Obama where the nuanced regulatory and policy changes had hampered production and growth. Energy increases were needed to fuel that growth. Trump's work to clear regulations and approve permits... along with the release of the clamp of economic uncertainty that followed at least 6 of the 8 years of Obama... got the US to being a net energy exporter. More importantly it established a trajectory of energy growth to fuel American industrial growth.
Biden killed all of that in a year.
The plan to fix what Biden has broken is simple... DO WHAT TRUMP DID.
Sorry if that admission causes anti-Trump snowflakes to melt, but that is exactly the plan needed.
Real GDP from 2009 until now is a nearly straight line until COVID hit -- https://fred.stlouisfed.org/series/GDPC1
The crude oil graph appears to be taken from the EIA. Displaying it monthy instead of annually makes it look more jagged (https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus1&f=m) , but the general flavor is the same: Large increases since 2009.
Oil imports and exports show similar trends: https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php
There nothing in that data shows a hampering of production and growth until COVID hit. Not everything is about the occupant of the White House.
https://finance.yahoo.com/news/biden-administration-misusing-facts-oil-203140624.html
My graphs and comments were about your Obama/Trump comparison on general economic growth and oil production. Your response with a story about current permits implies you can't really defend your Obama/Trump comments.
The argument being made by the API is correct as far as it goes --the total number of available leases is not the entire story. That being said, the "stop picking on the oil and gas sector" attitude doesn't jibe with other parts of the oil/gas story, such as the high permit approval rate environmentalists were complaining about in December.
https://news.yahoo.com/why-biden-is-approving-public-lands-oil-drilling-permits-faster-than-trump-did-and-angering-environmentalists-215140188.html
Hindsight is 20/20. If we all new this was going to happen at this time, the industry would not have shut down refineries in 2021 (https://www.eia.gov/todayinenergy/detail.php?id=46216), the strategic oil reserve would be filled at just the right moment (https://science.howstuffworks.com/environmental/energy/us-oil-reserves-last.htm), etc. We can't fully prepare for every possible crisis because it's too expensive since most of them don't happen.
For the short term in terms of oil availability, this seems like an excellent time to not just do something, but stand there. Oh cosmetic things, like opening the SPR, are fine, if that helps calm the public's nerves. But in terms of opening of new areas for exploration or making drilling easier, then no.
World oil demand is about 100M barrels/day. Russian exports are around 5M. Take those away (or make it appear that that will happen) and surely prices will spike. And it would be great if our wonderful allies in the Persian Gulf stood with the civilized world and opened up the spigots a bit more to make a dent in that 5M barrel hole, but that's not how they roll, and I seriously hope we have some frank discussions with them after this is over.
But the US can make up a big chunk of that just by the magic of the market. US oil production reached a historical peak in February 2020, with 13.1M barrels/day. With COVID, production fell 30% by August 2020. It's now recovered to 11.6M barrels/day (https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart).
That huge runup ending in early 2020 came when West Texas Intermediate prices hovered in the low $50/barrel range. As of this morning, it's $110/barrel. I assume that the 1.5M barrel/day difference between now and two years ago is mostly from capping wells or slowing extraction from working wells. While I'm not a petroleum engineer, I imagine it's not too hard to crank those up again and get that 1.5M back on line fairly quickly. Even more, I assume we weren't producing flat out even at 13.1M/day and with the incentive of a doubled price, we could probably push production from current wells above the historic high, even with no new exploration or drilling.
In other words, just through market incentives and just here in the US, we could make a huge dent in the Russian deficit. And turning a blind eye toward Venezuelan and Iranian exports to other markets in the world would bring that down even more.
Lots of good stuff in this post on longer-range issues, but otherwise, I'd say let's wait for the market to work.
When you subsidize a good, people consume more of it. Making gas taxes vary inversely with the price of oil would subsidize consumption of oil precisely when the commodity is scarce, further driving up the market price of oil on the world market in a supply crunch and exacerbating the problem.
A common sense energy plan is at the top of the platform on randell.hynes.com
Just as a very broad statement, it's stupid to fight climate change by making fossil fuels more expensive when you could instead fight climate change by making zero-carbon energy sources less expensive. Instead of increasing taxes on carbon, increase "negative taxes" on zero-carbon energy. This is not a false choice. The current progressive position is to do both, but we should instead do half as much of the former and twice as much of the latter.
No, it is a false choice. When we make a green technology cheaper to the consumer, we must subsidize it. When we do so, we are able to afford less of other things, including carbon energy. This is the same as making carbon energy more expensive.
By way of analogy, suppose we spend our income on buying bread. It makes no difference to us whether the price of bread doubles, or our income is halved. Either way, we are able to afford less.
This is some real galaxy brain stuff.
I have been been on Variable Oil Tax island for years, preferably with indexed brackets.
"So I really do think Congress should pass the Risch-Fulcher bill on geothermal permitting"
I'm trying to think of the last time legislation this good emerged from representation from the state I live in...
I just don't understand what happened. I was told renewables were cheaper (with the right regulation policies), scalable, and more sustainable/better for life in the future. Why would we want to double down in the short term when we can use this crisis to expand the path we need to go anyway. Industry resistance to expanding capacity just strengthens the argument.
Our foreign policy and energy policy of the Biden administration seems right out of 1990 George HW Bush playbook. Just need to hire Dick Cheney as Secretary of Defense. I don't disagree that it was a logical set of ideas at the time, but now it just seems like we need different policies for a different time.