Friday, February 17, 2006

A windfall for whom?

(Title corrected. Charlie pointed out what I had wondered when I wrote the title, whether to use "who" or "whom." I checked the fast-access alt.english.usage FAQ, which says that "whom" is the usage when following a preposition.)

I'm surprised none of the major blogs, at least that I've seen, have mentioned how the New York Times outdid itself two days ago. As I picked up a copy of the more enjoyable New York Post, I noticed the article title "U.S. Has Royalty Plan to Give Windfall to Oil Companies" in the upper left hand corner of the Times' front page. Like anything else you read in the Times, you can expect it will promote its usual socialist agenda with half-truths, misleading statistics and figures, and outright lies. Here are some excerpts and my commentary:
WASHINGTON, Feb. 13 — The federal government is on the verge of one of the biggest giveaways of oil and gas in American history, worth an estimated $7 billion over five years.
That $7 billion is over five years, and that's for the entire industry, so it's really not as big a windfall as the Times would have you think. It's not even comparable to the huge windfall that the federal government gets in gasoline taxes.

Second, that's $7 billion returned to the private sector, where it can be spent far more efficiently than the federal government throwing it into another unconstitutional program. It doesn't matter that the oil companies will get it, because as I've said before, that money will find its way back to the rest of the economy. It could be a single oil executive who gets every penny, and because he won't just sit on piles of cash, because he must save or spend it, the money flows back to the rest of us.

In fact, it's likely that the oil companies will use part of the alleged "windfall" to develop new oil sources, which will eventually help bring crude prices down. Contrast this with the Democrats' fiscal insanity of "investing" in alternate fuels: if you had $1 billion to invest in increased production, you'd do so much better to put it in oil, not alternative fuels that are far more expensive.
New projections, buried in the Interior Department's just-published budget plan, anticipate that the government will let companies pump about $65 billion worth of oil and natural gas from federal territory over the next five years without paying any royalties to the government.

Based on the administration figures, the government will give up more than $7 billion in payments between now and 2011. The companies are expected to get the largess, known as royalty relief, even though the administration assumes that oil prices will remain above $50 a barrel throughout that period.
Notice that insinuation? The figures were "buried," implying the DOI was trying to conceal the "windfall." We should be eternally grateful, then, that the Times is poring over all these government reports, telling us, effectively, that government is going to return money to us.

Oil companies would have paid $7 billion in royalties, so one might at first think they're getting a deal by not having to pay 10.77% royalties. But the $65 billion is the sale value of the oil and natural gas, not profit, so it's not as if the oil industry will be swimming in more profits. And again, see above for my explanation why you shouldn't fear a company earning more money.
"We need to remember the primary reason that incentives are given," said Johnnie M. Burton, director of the federal Minerals Management Service. "It's not to make more money, necessarily. It's to make more oil, more gas, because production of fuel for our nation is essential to our economy and essential to our people."
I personally disagree with these particular incentives. I agree with Doug Bandow that we should simply sell the public lands to the private sector. Let companies bid against each other to determine what is a "fair price," and ultimately it won't matter if the top bid is $1 or $1 billion. If the federal government "earns" $7 billion, $1 billion or $1 in royalties, we consumers pay it, in the form of higher prices. Besides, the less money that goes to government, the better; that's money that stays with us.
Indeed, Mr. Bush and House Republicans are trying to kill a one-year, $5 billion windfall profits tax for oil companies that the Senate passed last fall.
I discussed the "windfall profits tax," and the economic ignorance of Byron Dorgan and other Democrats, here. The bottom line is that the $5 billion will eventually be passed onto consumers. There is no such thing as a business that pays taxes. Consumers pay taxes for the business.
Moreover, the projected largess could be just the start. Last week, Kerr-McGee Exploration and Development, a major industry player, began a brash but utterly serious court challenge that could, if it succeeds, cost the government another $28 billion in royalties over the next five years.
Yin and yang. It will cost the federal government $28 billion over five years, but that's $28 billion remitted to the private sector, and all automatically, because all involved sellers will adjust their prices transparently. Dorgan's plan to "rebate" the "windfall profits tax" could never hope to work so well.
In what administration officials and industry executives alike view as a major test case, Kerr-McGee told the Interior Department last week that it planned to challenge one of the government's biggest limitations on royalty relief if it could not work out an acceptable deal in its favor. If Kerr-McGee is successful, administration projections indicate that about 80 percent of all oil and gas from federal waters in the Gulf of Mexico would be royalty-free.
The more I hear about oil companies not having to pay royalties, the more I like it.
"It's one of the greatest train robberies in the history of the world," said Representative George Miller, a California Democrat who has fought royalty concessions on oil and gas for more than a decade. "It's the gift that keeps on giving."
But giving to whom? Not you, and certainly not me, but to the federal purse whose strings Miller and others control.

If Miller wants to talk about greatest train robberies Congress is committing, he'll stand by President Bush's side and warn about Social Security's looming insolvency, or Medicare/Medicaid, or the prescription drug bill, or all the pork spending by both political parties.
Republican lawmakers are also concerned about how the royalty relief program is working out.

"I don't think there is a single member of Congress who thinks you should get royalty relief at $70 a barrel" for oil, said Representative Richard W. Pombo, Republican of California and chairman of the House Resources Committee.

"It was Congress's intent," Mr. Pombo said in an interview on Friday, "that if oil was at $10 a barrel, there should be royalty relief so companies could have some kind of incentive to invest capital. But at $70 a barrel, don't expect royalty relief."
It's unfortunate Pombo doesn't understand basic business economics and practices, like how oil companies and OPEC nations continually invest profits to develop new crude reserves, and how higher prices encourage that greater production. Nor does he seem to understand that when the oil industry does well, it's cyclical (crude was at extremely low prices just several years ago), and its higher profits simply reflect its greater competitiveness vis-à-vis the rest of the economy. Oil and gasoline become more valuable, so people are willing to trade more money for it.
As it happens, oil and gas royalties to the government have climbed much more slowly than market prices over the last five years.

The New York Times reported last month that one major reason for the lag appeared to be a widening gap between the average sales prices that companies are reporting to the government when paying royalties and average spot market prices on the open market.

Industry executives and administration officials contend that the disparity mainly reflects different rules for defining sales prices. Administration officials also contend that the disparity is illusory, because the government's annual statistics are muddled up with big corrections from previous years.
In other words, the Times wants to insinuate some sort of corporate tax evasion, but it doesn't offer a single statistic or measurement -- not even to back its claim of "much more slowly." This is an old tactic of the Times: round things in whichever direction you need, and don't supply figures so people can more easily fact-check you. Look at Don Luskin's attempt to get the Times to admit that Krugman's error about average weekly earnings, which were up 0.5% for the last five years, not "flat" like Krugman had written.
...But the Bush administration did not put up a big fight [opposing royalty relief for shallow-water deep drilling]. It strongly supported the overall energy bill, and merely noted its opposition to additional royalty relief in its official statement on the bill.
How hypocritical of the Times to ignore that many Democrats also supported the "overall energy bill," because it wasn't so much about energy as it was about pork. Biden. Boxer. Clinton. Dorgan. Durbin. Feinstein. Kennedy. Kerry. Leahy. Obama. Reid. All those Democrats voted "yea" on the energy bill, but we'll be driving water-powered cars before the Times will ever admit the strong Democratic support for a bill it criticized Bush for signing. John Corzine and Frank Lautenberg actually voted "nay," but you know, New Jersey politics is known for bribery and other sorts of corruption, so it doesn't need pork barrel spending.
By contrast, the White House bluntly promised to veto the Senate's $60 billion tax cut bill because it contained a one-year tax of $5 billion on profits of major oil companies.
Just in case you missed it above, here again is my debunking of the Democrats' "windfall profits tax" malarky.
The big issue going forward is whether companies should be exempted from paying royalties even when energy prices are at historic highs.

In general, the Interior Department has always insisted that companies would not be entitled to royalty relief if market prices for oil and gas climbed above certain trigger points.

Those trigger points — currently about $35 a barrel for oil and $4 per thousand cubic feet of natural gas — have been exceeded for the last several years and are likely to stay that way for the rest of the decade.
At any price, because, I'll say again, that's more money the private sector keeps, and more money kept out of government's grubby hands.

Yet another reason to sell off the lands and waters once and for all, avoiding any entanglements with price triggers, is the very fact of inflation. By the end of this decade, $35 will not be the same as $35 today, or $35 in 2000.
The biggest reason is that the Clinton administration, apparently worried about the continued lack of interest in new drilling, waived the price triggers for all leases awarded in 1998 and 1999.
This is an early contender for the biggest news "DUH!" statement of 2006. Look at this inflation-adjusted chart, which shows that in 1998, crude oil prices had severely bottomed out. There was a "lack of interest in new drilling" because crude prices were so low that investing in new oil fields yielded very little; there was better profit to make elsewhere.
Last week, the fight broke out into the open. The Interior Department announced that 41 oil companies had improperly claimed more than $500 million in royalty relief for 2004.
Naturally. Like Eliot Spitzer strong-arming UPS about untaxed cigarettes, big government can't stand to see one tax dollar get away. One more time: businesses do not pay taxes. They only pass taxes onto us consumers.
If that view prevails, the government said it would lose a total of nearly $35 billion in royalties to taxpayers by 2011 — about the same amount that Mr. Bush is proposing to cut from Medicare, Medicaid and child support enforcement programs over the same period.
The Times concludes by announcing its agenda: the more money that stays in the private sector, the less there is for government to spend on all its redistributive social programs. Never mind that the "cuts" are actually only decreases in spending increases, but who's counting when it's all paid for by someone else?



Anonymous Quincy said...

Perry - An easy rule of thumb for the usage of "who" and "whom" is where one would say "he", "who" is used and where one would say "him", "whom" is used.

he=who him=whom

Sunday, February 19, 2006 3:51:00 PM  
Anonymous Anonymous said...

Perry, you mentioned the windfall profits and as you know a while back there were some congressional hearings on oil company profits. In your vast resource library do you happen to have anything on the relative profits in various industries to compare the % profits of oil companies with say telecommunications giants, insurance companies, industrial farms, etc?

Back when congress was doing their show and tell on how bad the evil oil companies are I recall they talked about billions of dollars but not % profit. I wondered at the time if the relative profits for a high risk business such as oil companies were out of line with other businesses. The fact that they always referred to it in terms of dollars and not percentages raised my suspicions.


Monday, February 20, 2006 1:05:00 PM  

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