It happens every time: Oil prices surge, and governments rush to snatch away the gain. Something else happens every time: Oil prices retreat, and grabby governments wonder where their revenues and oil finders went.
Governments can't seem to resist any significant widening of the margin between oil's market price and its production cost. After price runups of the 1970s, therefore, many countries raised taxes or unilaterally increased takes under production sharing contracts. And when prices dropped in the 1980s they had to reinstate exploration and production incentives-or at least relax disincentives.
AN INEFFICIENT CYCLE
The cycle breeds inefficiency in what should be a continuous process of oil discovery, development, and production. With prices jumping due to the worldwide embargo of Iraqi and Kuwaiti crude, it threatens to begin anew.
Nowhere is pressure greater than in the U.S. Talk of a new "windfall profit" tax has begun. Sen. Robert Packwood (R-Ore.) promises to propose a levy of perhaps 70% on the excess profits, whatever those are, oil companies earn during the current crude price rise-all in the name of consumer protection.
Fortunately, Packwood's folly won't travel far in the Senate. Clearer memories will prevail. The last time Congress protected consumers with a "windfall profit" tax it hoped to net $227 billion in the process. A crude price slump broke the magic money machine-but not before it diverted $77 billion away from U.S. exploration and production, not counting the $100 million/year producers had to spend on related bookkeeping. The costs played a certain and significant, though immeasurable, role in a domestic oil production slide that now makes the U.S. dependent on the world market for half the oil it uses.
Congress won't want to travel back down the "windfall profit" tax road to trouble. It nevertheless continues to consider proposals for an energy tax as a way to reduce the federal budget deficit. And there's new talk of a gasoline tax hike of as much as 50/gal as an element of energy policy; supporters say it will cut consumption. And there's some truth to the claim. Economies certainly use less energy in recession than they do in periods of growth. But how many workers is Congress willing to throw out of their jobs in order to lower gasoline consumption? How can lawmakers who claim concern for consumers consider a product tax hike in the middle of an oil supply crisis?
Consumers need fuel. Economic law says they pay more for fuel, and use less of it, in times of tight supply than they do in times of plenty. This is a time of tight supply. The market has lost 4.2-4.5 million b/d of crude oil and petroleum products from the Middle East, replacement production is slow coming on stream and won't offset all the shortfall, and the high-demand fourth quarter is less than 1 month away. These are good reasons for prices to be higher now than they were before Iraq invaded Kuwait.
DOMESTIC SUPPLIES
In the U.S. and elsewhere, governments should be looking for ways to develop domestic supply, not to punish companies for trading a strategically important commodity in a volatile market. They should remember that domestic supplies shrink unless oil companies replace what they produce. The money for finding and developing tomorrow's production must come from today's margin between production costs and market prices. That's the margin governments so eagerly tax away when prices jump.
They should leave it alone this time. Sensible companies know better than to behave as though oil prices elevated in a disrupted market last forever. Sensible governments should, too.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
