[Editor's note: Robert Rapier, who has wrangled with Vinod Khosla before on these pages, responds to Vinod Khosla's column yesterday supporting Prop. 87]
When I was first asked if I would write a “No on 87″ essay, I responded that I am actually ambivalent about passage. Otherwise, I would build a strong case for a “No” vote. But some of the misleading mud from Prop 87 proponents is being hurled in my general direction. So this essay is to primarily address misinformation in a proposition the L.A. Times has characterized as “deceptively marketed.”
First, let’s get some disclaimers out of the way. I work for an oil company. However, for those of you who read past that sentence; 1). My company does not extract oil from California; 2). My company is not a contributor to the “No on 87″ campaign; 3). I do not live in California; 4). I strongly support conservation and alternative energy; and 5). I joined the oil industry to work on an alternative energy project.
My graduate school studies were on cellulosic ethanol, and I have written positive essays on biodiesel, bio-butanol, E3 Biofuels, sugarcane ethanol, CAFE standards, wind power, and conservation. However, I have also defended the oil industry against charges of price gouging, and I have argued for personal responsibility. I am also a critic of grain ethanol. I am the author of the R-Squared energy blog, and a member of the staff at The Oil Drum. Because I believe we all benefit from open debate, I have given equal time to Mr. Khosla, Prop 87 proponents, and readers who disagree with my position on Prop 87. Twice I have spoken at length with Mr. Khosla on the phone about energy policy, and I believe he would agree that I am not an oil company shill. We found much common ground. I believe we must wean ourselves from fossil fuels before Global Warming ruins the planet, and I detest blood for oil. But I have a few issues with the Prop 87 campaign.
Oil Companies are Ripping You Off
People don’t like to pay higher gasoline prices, especially when they see escalating oil company profits. But focusing on profits instead of profit margins is a silly approach. Would you invest in a mutual fund just because it made a billion dollars last year? You would be more concerned with the return, not the overall dollar amount the fund earned. The 15-20% margins of industries like pharmaceuticals, banks, the computer industry, and ethanol producers far surpass the recent 10% margins (and long-term average of 5-7%) of the oil industry. Oil companies can only dream about the margins of a Microsoft.
Now I know that Mr. Khosla won’t deny that the computer industry, where he made his fortune, or the ethanol industry, which he passionately supports, sees much higher average profit margins than does the oil industry. Are they ripping people off? (Of course the government also makes much more from oil and gas sales than do oil companies). Should Mr. Khosla be vilified because he became a billionaire in an industry with double the profit margins of the oil industry? Do you think Prop 87 mega-contributor Stephen Bing made his fortune on 5-10% profit margins?
Of course nobody would deny that the overall profit of some oil companies surpasses that of Microsoft. That’s because these companies are much larger than Microsoft. They have to be, to compete with the Saudi Aramcos of the world (that dwarf even ExxonMobil). The oil industry spends billions in capital each year. Great risks - personal and financial - are involved. Yet as a result of the “outrageous” 10% profit margins • which primarily benefit Joe and Jane Shareholder • we are “ripping people off.”
Paying Their Fair Share
I wrote at length on this issue in an essay on my blog. Proponents of Prop 87 paint a picture in which oil companies in California are not paying their fair share. They will note that Texas has an oil extraction fee, and argue that California is getting a raw deal from the oil companies. However, oil companies would love to pay the same “fair share” that they do in Texas.
There are a number of ways that states receive revenue as a result of oil and gas transactions. Extraction taxes are but one example. Corporate income taxes are another example. So, even though Texas has an extraction tax of 4.6%, versus none for California, Texas does not charge oil companies a corporate income tax. California charges oil companies an income tax rate of 8.84%, one of the highest in the nation. When times are good, states like California share in the “windfall.” If you look at the entire taxation picture, you find that California already gets a higher cut from oil companies than does Texas. Yet Prop 87 proponents argue that’s not a “fair share.”
Effect on Gas Prices
I can quote many economists and newspaper editorials that detail why Prop 87 will increase gas prices in California. Instead, I will simply tell you why myself. Oil produced in California gets refined in California. Some oil production does not become profitable until oil prices become relatively high. Some marginal producers, when faced with additional costs, simply won’t start up at the same trigger price. That means that at times oil that would have come from California producers, employing Californians, will come from elsewhere. Prop 87 will add an additional constraint on supply. Refiners will make up the difference with more expensive imports. (Contrary to the apparent belief of many Prop 87 supporters, there is not one “world market price” for oil. Oil prices vary greatly based on a number of factors).
So, gas prices won’t rise because oil companies are passing on costs imposed by Prop 87. Gas prices will rise because the supply/demand equation will have been adversely impacted. However, this is what I like about Prop 87. I support higher gas prices because that will spur conservation.
Predictions
I will go out on a limb here, and make some predictions that will be pretty easy to validate.
1. Proposition 87 will pass.
2. The gasoline price gap between California and the rest of the country will increase by at least $0.05/gallon next year as a result.
3. California oil production, already in decline, will see a much sharper decline next year as higher costs cause marginal production to shut down.
4. Longer term, the $4 billion dollars extracted by this proposition (at the expense of oil company shareholders and consumers) will result in underinvestment in California oil production, leading to more serious supply problems in the future. Ironically, these supply problems will drive up the price of gasoline, which will cause people to conserve. As a result, conservation, which could have been achieved by just increasing the gas tax by a nickel, will be the key measurable from the passage of Prop 87.
I invite your disagreement, but not rabid froth and hate mail. I get enough of that already.
14 Comments
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Jeff Nolan said:
Robert,
I compliment you on how “fair and balanced” you have been in this debate, I wish the broader political landscape could have this depth of discourse with the courtesy you display. -
CaliforniaConservative.org said:
As we gear up to give our recommendations for the upcoming election, we are definitely going to highlight this essay.
Excellent analysis. Not just because we agree and stand against Prop. 87, but because you have addressed this issue with intellectual rigor and fairness.
As the prior commentor observed, we also “wish” more of politics would find this “depth of discourse.” However, the problem is that the ‘average voter’ doesn’t read as deeply or critically evaluate the election decisions.
Do people value the liberty for which our forefathers died by really taking seriously the privilege to vote as afforded by our democracy?
To put a spin on Chevron’s old ad slogan: People don’t.
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Eli Gal said:
I agree with your prediction that propoistion 87 will pass by all the “do good” and minded people of California. “Punishing” the oil companies for outragous profits in just an icing on the cake.
Most of California’s oil fiels are dwindling and requiring investments, such as EOR, to allow them to continue to operate. With proposition 87 such investments are less likely. With less domestic supply and higher demand for foriegn oil, the price of oil will rise and our dependency on foriegn oil will increase was well.
The reduction in consumption of oil need to come from “sin tax”. Taxing gas at the pump with as much as $2-3 per gallon in a tax neutral scheme would reduce consumption, lower the price of crude oil and would keep our planet cleaner.
Finally, a prediction of my own. Nothing good will come out of the billions collected by proposition 87. It will be money wasted on useless work. There is a lot more private money, some was raised by Khosla, chasing good ideas and renewable energy projects than there good ideas to go around. -
In Palo Alto said:
Thank you for writing your thoughts. I have followed the debate vs. Vinod and find myself agreeing with you more than Vinod. I hope you are not disheartened by froth/hate-mail - - you are doing a great job at educating the rest of us on a critical debate that impacts the future of all of us.
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adrian said:
yep, the $4 billion will be completely wasted. as a matter of fact, we should rely on private money for everything, including pharma basic science research. That would certainly leave me with extra dollars in my pocket! no?
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William Jolitz said:
How naive. Do the research. California is the only oil producing state that DOESN’T tax oil companies for pumping the stuff out of the ground or beneath the water!
Why can’t we do a tax like Louisiana or Texas or Alaska, and put it to good use. How ironic that California is more conservative on taxes than Louisiana, Texas, and Alaska.
Oil isn’t forever - why don’t we start thinking about our kids for once?
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Robert Rapier said:
I have done the research, Bill. It would appear that you are the one being naïve. In fact, I specifically discussed the tax situation in this essay. Did you read it before commenting? I have gone into more detail on the tax situation in this essay on my blog. What you have done is take a single tax, out of many, and used that to declare that “California is more conservative on taxes than Louisiana, Texas, and Alaska.†Sorry, but that’s just not correct. Here is what three of your own newspapers – of the many who have endorsed a “No†vote on 87 – have written about the tax issue.
From an Oakland Tribune editorial on 10-25-06:
Right now, California’s tax rate for oil is in about the middle among oil-producing states. The new tax proposed by Proposition 87 could make our tax the highest in the nation and force some smaller oil companies to cap their wells, reducing the 630,000 barrels a day we produce.
From a San Francisco Chronicle editorial on 10-9-06:
The seemingly nonstop succession of pro-87 television ads presents the measure as a matter of fairness: Unlike most oil-producing states, California does not impose a severance tax on the extraction of oil. The claim is accurate, but missing context. The tax burden on oil producers here in this state is comparable to others when income, property, sales and other taxes are added.
How about the L.A. Times on 9-26-06:
Proposition 87’s backers are equally disingenuous in suggesting that oil companies are getting a free ride in California, given the absence of an extraction tax. Oil companies are hardly undertaxed here; most states that have extraction taxes don’t charge California’s steep corporate income taxes.
Furthermore, neither is your statement California is not the only oil-producing state without an extraction tax. It seems you have been sipping the Kool-Aid, and failing to do your own research.
About the only thing you did get correct was your statement that oil won’t last forever. That’s true, which is why I have spent many years (and continue to do wo) working on and promoting alternatives. You read that part too, right? Or did you simply read the title, and decide to grace us all with your wisdom? Again, I am not suggesting that voters should vote no, but they should certainly be more informed that you seem to be.
Cheers,
Robert Rapier
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Lin Khoo said:
I agree with your argument Robert, and thoroughly enjoy your discourse with Khosla on these matters. The key thing about Prop 87 to me is not that it will raise gas prices (of course, it will, that’s the whole point!), nor is it meant as a “punishment” to oil companies, but the KEY to Prop 87 is the fact that it will place economic pressure on consumers to use less and thus, push for more innovation and development in alternative, renewable energies.
If you survey all countries in the world, there is a clear and obvious correlation, with almost no exception, between high energy prices and the level of technological advancement in a country. Many countries with rock-bottom gas prices (Saudi Arabia, Nigeria, etc.) also have some of the lowest living standards.
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Daniel said:
Instead of letting some new government beauracracy pick winners and losers, the most effective solution to reduce our dependence on fossil fuels is to institute a carbon tax and let the market pick winners and losers.
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William Jolitz said:
Bob, I’m flattered by the honor you do me of directing the ideological noise machine at me. Yes, I read the papers.
I feel your pain. If you don’t deliver the votes, you might become superfluious, as another will fill your seat. You might win this time, but in the long run, the free ride will come to an end.
Yes, you can channel the anti-tax cause, because most don’t know what a carefully fine grain job the oil companies do of market pricing, such that they can determine the price flexibility at any point in their distribution network. Nor do they have access to financial reports, which show an astonishing ability to bear a tax, and yet sill have massive profits.
Truely, I do understand the inability of a public corporation to afford to invest heavily in long term energy technology change that doesn’t bring with it dependable short term profitability so necessary to maintain dominance. So much so, that we even have to consider forcing change with a proposition, because of the entrenched greed affords no other alternative - even for collective good.
30 years of occasional involvement with oil company executives I know is hardly naive of the business. Yet it is naive to presume that all taxes are injurious. Personally, I don’t think many taxes are effective. But with energy monopoly, they are the only game for change.
The irony of this is that in the end, the oil companies may be the ones that profit most off of such a tax. For they are still dominate in the energy sector, meaning that they still will be the foremost acquirer of developed new energy resources, if for no other reason than diversification.
The market cannot pick winners and losers if its window is a few years. You need something else to shift the industry base. Only subsidies, with all their downsides, can provide alternatives to blind monopoly. Look at what happened to american car makers - there’s what will happen to the oil industry, if only left to market forces. We’ve been down that road before.
And as to loss from government, narrowly focussed big industry also digs huge financial holes. We need thousands of start-ups here, and this seems like the best way to get them.
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Jon Stewart Fan said:
I support a gas tax, but you’re right Mr. Rapier the marketing for this campaign is super shady. It’d be nice if we could have favourable policies enacted with transparency and facts. But the oil industry is hardly a weak opponent for a lobby initiative. I’m not sure if I can really blame Khosla for resorting to the almighty Spin machine to beat them. But he’s certainly not being straight with us.
And Mr. Jolitz, do yourself a favour and stop digging. The hole is big enough as it is.
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El.presdiente said:
I can’t believe this is really still an issue. We are one of 2 countries not signed on the Kyoto treaty, and CA has made some good strides lately inspite of government policies. The issue is not oil prices in the short term, it is that of the long term. If we dont start getting alternative energies, we WILL be spending more in the near future as oil prices will continue to climb. Investments into new industries will generate thousands of new jobs and pump the economy. The gains of alternative energy are far greater than the possibility of increased gas prices (which according to the law may not be passed to consumers in any way, shape or form. If they could pass it on, why spend $100 mil+ from oil companies to defeat it?). Global warming is a far greater issue than the even debated $0.05 increaase of CA gas prices compared to the Nation.
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assasain said:
El.presdiente 11.8.06 | 12:17 am
“…(which according to the law may not be passed to consumers in any way, shape or form…”Reading comprehension please! it isnt being passed on, prices will go up because of myriad other factors. Those factors do not equate to “passing on.”
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assasain said:
i do believe in alternative energy though and did vote for 87!! and i do think that the likely increases in gas prices will spur consumer conservation. (…although i did detect just a hint of sarcasm in Mr. Rapier’s “Predictions.”
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