Topic: The Environment
A Budget Compromise that Could Drill California California Republicans should trade a new oil tax for a new offshore oil lease. They are broiling over the proposed oil severance tax, and coastal dwelling Democrats are reeling over a single new oil lease that allows not even one new oil rig to touch California's shining seas. Be Americans: make a deal!by Paul Benedict
(libertarian)
Thursday, June 25, 2009
California must return to its roots to continue its liberal lifestyle. Historically, California's dreams were not built on gold, nor on platinum s, but on gushers of crude. Once a net exporter of oil, California now imports more than 40%. California's oil production decreased dramatically in the 1950's. It was during this period that, via the Submerged Lands Act, the federal government granted California increased jurisdiction over its coastal waters. The tendency to regulate oil production and refining out of existence accelerated after the Union Oil spill in 1969. In 1995 the California Coastal Sanctuary Act basically shut down new offshore oil drilling in California controlled waters. Despite great progress in safe drilling, under Governor Gray Davis historic leases were not renewed, reducing offshore production even more. As a result, estimates of untapped oil under the direct control of the State of California now run as high as a billion barrels. Even more conservative 1995 estimates put offshore California Oil reserves as high as 750 million barrels.
As long as California remains a net importer of crude oil, a severance tax on oil is only a VAT tax on every Californian. The California refineries will mark up their prices by a multiple of the oil price increase. The sate and federal governments will then get more cents per gallon from every Californian. The goods transported by truck will increase by yet another multiple. The same forces that want oil out of California are in favor of a severance tax on oil. The severance tax will not bridge California's budget deficits; it will deepen California's insolvency.
However, should Governor Schwarzenegger allow the severance tax of 9.9 % on newly leased oil production, the equations change. The increase in oil supply will reduce the price refineries pay despite the increase in taxes. The increased production will allow oil companies to increase net profits despite their per unit declines in profit. If the Democrats will allow the Governor's proposed offshore drilling at Tranquillon Ridge, the Republicans and the Governor should allow the severance tax on new production.
Even without repealing the California Coastal Sanctuary Act, much of the 750 million to a billion barrels of oil sitting off the coast may become accessible. If Lt. Gov. John Garamendi is correct, "new leases off the Mendocino Coast, the Orange County coast, as well as the Santa Barbara coast" could result from the precedent set at Tranquillon Ridge.
The impact on California's fiscal issues would be immediate. The leases at Tranquillon are 1.4 billion over fourteen years. The additional restoration work, land grants, and funds for Santa Barbara County promised by PXP bring the total revenues for the state to over two billion dollars. (For those who accuse Californians of being too soft on "Big Oil", compare this leasing price with the federal government's Alaskan lease to Shell). This is what PXP is willing to pay for the rights to extract about 105 million barrels of oil. If the 1 billion in new oil is extracted at these rates, it would mean twenty billion dollars in leases alone. If one considers the 10% tax on a $70 price per barrel, the new drilling is worth another 7 billion. Depending on the jurisdictional battles over state and federal waters, there may be as much as another 10 billion barrels of oil for Californians off the coast. That's potentially another 70 billion in tax revenues and another two hundred billion in leasing revenue. None of these figures include the immense supplies of natural gas that will be leased, taxed, and used in California even as oil resources are discovered and drilled.
If you are a liberal legislator you should say, "That's enough to float my entitlements for another generation!" If you are Joe Californian you ought to see the stimulating effect of this much available energy on the state economy.
The best way to ban oil is to use it all up, so, if you are an environmentalist you should say, "The sooner we burn this stuff the better!" In 2008 the state's offshore seabed produced 37,400 barrels of oil per day, while federal offshore tracts produced 66,400 barrels of oil. We'll never rid ourselves of big oil! At that rate your children will be facing the same environmental evils. Offshore oil is a ticking time waiting to spoil the pristine wildlife sanctuaries environmentalists have always treasured. End it now. Use the oil!
Even without the deleterious scheming of greedy, profit hungry capitalist oil companies, the oil just beneath the Santa Barbra Canal is seeping to the surface on a continual basis.
The oil on the beaches of Oxnard, Ventura, and Santa Barbara is not because of Exxon. Some estimate that in the 40 years since the Union Oil spill of 1969 nearly two million barrels of oil has seeped into California's coastal waters. Extracting the oil in Santa Barbra's coastal region has the potential to protect the environment. The seepage is well documented. Newer underwater mapping technologies have brought increasing evidence of the sustained environmental hazard the untapped offshore oil presents. The tar on the beaches will not go away until the oil beneath the surface has been removed. Perhaps, Oh Environmentalist, the removal of oil is part of man's Divine purpose on earth!
Energy wealth is the outer wall of the human sanctuary that is the modern world. This was once America, a place where compromises were made and everyone was a winner. California's legislators need to be Americans and cut this deal.
Update 6/29/09:
California’s State Assembly has again passed the 9.9% severance tax. The governor should demand that Democrats accept the PXP 100 million a year lease to drill for offshore oil from previously existing offshore rigs. Otherwise, the severance tax serves as a new VAT style, cap and trade style sales tax on every Californian.
Note: PXP claims it will probably only be able to access about 105 million barrels of oil. Over the next fourteen years, the odds are good they will learn how to access much more than this. Their lease terms will look better and better. That’s why the state is well served (no pun intended) by applying an oil severance tax to this agreement.
Update July 1, 2009
There seems to be some buzz in Sacramento about adding a severance tax on new oil production to balance the budget. That is of course, a measure meant to encourage Democratic environmentalists to allow new production. A horse trade is what is needed. The coffers of California need new oil lease dollars yesterday. There may be more production on tap than Tranquillon. (See: California’s Untapped Oil Beckons Occidental’s Irani), but the new leases money needs to be spelled out along with the issuing of the severance tax.
If Republicans need to trade the 9.9% tax on all production, it is still worth doing to get Tranquillon done. Why? Because California is $ 24 billion in debt (and climbing). But if much of the historic production comes from privately owned land, the 9.9% tax could reduce production in the short term. Privately owned oil rights are part of the property’s value. Hence, production on privately held lands may be subjected to a double taxation, a property tax and a production tax. Since the land rights don’t sunset, the motivation to produce less to avoid higher taxes may be significant. A Democrat-Republican compromise on taxes and drilling should include specific exclusions
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After finishing this article and browsing a few in your backlog, I've come to the conclusion that you really deserve a circulation greater than Nolanchart.
The idea you put forth, while not new, certainly bears repeating. But, alas, remains unlikely by a long stretch. Old Arnie, the "environmentally progressive" will most certainly VETO any budget with such a provision, even with Democrats and Republicans did get around to this. He has stressed his desire several times now for a "cuts-only" budget as well. Any chance of this happening is remotely slim.
good article, Paul. You are right in that a "tax" on incoming oil is simply a sales or import tax. "Severance" or royalties are a form of "land fee" which is the best way to return revenue and eliminate income or product tax.
We are always better off if we tax what isn't produced by anybody rather than what is. No one 'produced' oil deposits whereas a gallon of gas is a product.
The resource [severance or royalty] fee should be as high as the market will bear, as any discount simply shows up on corporate profit sheets. If the current fee doesn't justify the lease, then a good investor holds the resource until the market meets his price. In other words, the government doesn't need to set a severance tax, it can be auctioned and if the reserve isn't meet, the lease can wait. this, of course, is NOT the way government does business presently.
What many don't realize is that a good part of our "debt" is our Federal agencies inadequacy and deliberate underpricing of our vast resources over two hundred years. This "discount" has been collectively distributed to those the Feds desire to advantage.
Posted By: Paul Benedict
Date: 2009-06-25 16:12:20
Hi Gene,
Yes, I found the seeming inexpensive lease of the federal lands in Alaska peculiar. (Linked above: Shell Is High Bidder to Drill for Oil and Gas Off Alaska) It's not like the national government doesn't need money!
Perhaps the artic environment and the distance from markets reduces the prices that oil companies are willing to offer, but the lease amounts are, it seems, decimals of what California is getting.
It really is similar to what the Federal Reserve does, but with the resource instead of money!
The State collectively manages the resources, by insuring the supply or amount of the resource offered is always very high [offering mass acerages like the Pennsylvania sized alaskan field, when a high percentage of currently leased fields are inactive] and depresses the rates [royalties, rent, etc.] and then offer the auction to selected traders [ oil giants].
If it were truly our property [common ownership] the price would be market related and would need to satisfy our common preferences concerning the transaction, not the government and the resource corporations. It doesn't take a genius to know what these oil fields will be worth in ten years.
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