You think deepwater drilling is a result of market demand? Think again! by Gene DeNardo
(libertarian)
Tuesday, May 18, 2010
Oil and water don't mix, but oil and subsidy do. We have been told our insatiable desire for the products of crude are the reason we must put up with millions of gallons of oil spilling into pristine ocean waters. In reality, we don't know that. We have no idea what amount of the resource we would actually consume if the socialized costs went away and the real cost presented itself.
We have also been told that we must drill mile deep wells far out at sea to satisfy this desire, even though such enterprise is the most costly, risky and environmentally dangerous. Yet, few of us are aware of the congressional bill of 1995 entitled "Deepwater Royalty Relief Act". [link edited for length] This bill exempts firms from royalties on wells drilled deeper than 200 meters on Federal Outer Continental Shelf Lands.
Before we delve into the "tax" slant of this subsidy, we need to address the "level playing field" aspect. Anytime that one economic activity is assessed a fee and a competing activity is exempted, firms will flock like geese to the exempted activity. If you exempt royalties from deep wells, earthen wells go up in cost and become less competitive. By this action, we have socialized the drilling of deepwater wells.
The tax break aspect is also devious. A royalty is by no means an "income" tax [which this author is vehemently opposed to]. Royalties are a form of land fees. It is a charge for the use of land or resource. It is the payment for the use of in the case of land or extraction in the case of resources, of that which the user had absolutely no hand in the production of. No one "makes" land or "produces" crude.
A royalty is a salute to the fact that once land and/or resource become scarce, there is no way to avoid monopoly. A royalty is the market value of the right to monopolize a resource. Using the resource to fund government is one way to return that value to those who cannot monopolize a resource. Another way is to directly return the royalty to the population that is most affected by the loss of that resource. The Alaska Permanent Fund [link edited for length] is an example of a combination of the two.
Since ownership of the resource is a monopoly and since much of the resource is owned by government, the royalty should be priced in the manner of monopoly. It should be calculated what amount of resource should be marketed in order to obtain the combination of highest price and greatest sales volume. At that point, the total amount of royalties will be the highest and benefit the true owners of the resource, taxpayers, the most.
Every dollar below this point is an extra dollar contributed to the cause of the user. This is also due to monopoly economics. Since oil prices are reflective of world monopolies of the resource, whether government of private, "donating" permits or exempting royalties always diverts capital directly to the user of the resources, large mega national corporations. There is no motivation, economic or otherwise, to price oil below the market, so any dollar that is not collected as royalty by the government is a dollar of profit to the extractor of the resource. Exempted royalties never transfer into lower oil prices.
The current permit process system that our government uses with our resources is to auction out far more resource use permits at costs far below market value than are necessary to meet demand. Because of this, great amounts of resource land are held by resource companies, but remain unused. In fact, most of this land is used to borrow capital on the "future value" of the lease. This is an obvious sign that the "price' of the permit is far too low.
The "rent" on these resource lands is so low, often only a couple of bucks per acre, that firms will hold these lands just in case the resource price skyrockets. If it does, they are guaranteed huge profits; the difference between the sub market cost of a monopoly item and the selling price. You can find this difference by examining the quarterly reports of any major oil or natural gas corporation.
This profit is socialized profit. It is the difference between what our government should have received for the resource and what the resource firm actually sold the resource for minus the cost of extraction and marketing. This isn't the payoff for risk, as the firm has been exposed to very little risk. When you can obtain rights to a resource for virtually nothing, and gain from the ability to obtain cheap capital from that resource during your tenure as "right" holder, any further gain from actual extraction of the resource is pure gravy. This gain itself isn't "wrong" or "evil", the wholesale lowball distribution of the resource by an agency entrusted by its citizens to safeguard and market that resource in a way beneficial to the citizens is the crime.
There is a third method usually espoused by Libertarian sorts. The public ownership of these lands and resources should be privatized. That is already being done with the present system. The mega nationals who end up with the resource permits at giveaway prices have no need for the land or well site other than for extracting either capital at low cost or the actual resource.
For all practical purposes they obtain "title" to the property and can do whatever they wish with it. The fact that the "window" of time may be ten years is irrelevant; all property ownership is timely. As they say, "time is of the essence". Nothing lasts forever, including property title. What is relevant is whether the permit holders have enough time to accomplish what they wish to accomplish. Obviously, they do or they wouldn't commit to the process.
But, there is way that resource lands could be justly appropriated. Of primary importance is who holds title at present. We have no choice but to dismiss past thievery as we don't have to go back too far to find land theft and fraud in our history as a nation.
Land and resources that are under "federal" ownership are owned by all the citizens. They are not managed that way, but unless we live in a totalitarian state, and the jury is out, federal lands are our lands.
If we all own these lands and resources, there is no reason we couldn't all be deeded the same. It would make no sense to deed a resource in which the value of the resource isn't yet determined, so only resource land that has been studied and a value has been reached should be deeded. Others can be studied or held as they are now, until value has been reached.
We need only reach an aggregate value for the resources being deeded and then divide the aggregate value by the total number of citizens. All citizens will receive their fair share of the value by deeded title to a resource that is most closely located to their present address. The title could be freely marketed however they wish.
The resources could be divided up in whatever size the smallest possible development occurs. For instance, if one oil well can extract a certain field of crude, then that well would have however many owners equal the total value of the extracted crude divided by the standard appropriated citizen amount.
At this point, the market can come into play. The groups of citizens that own the specific resource properties can do with them what they wish. They can decide in whatever manner they agree upon as to how to manage or sell the property. A basic framework can be established, such as using a "simple majority" as the minimum agreeable condition, but after that, the groups should be free to act as the wish and agree to. Maintaining the smallest possible ownership groups will simplify matters and also extract the most beneficial price for the owners; since small resource properties will attract multiple competitive buyers. There is no reason that can't develop the resource themselves, if that is what they wish to do.
By the way, there would be no income tax on the transactions. We already own the resources, we have paid for them many times over, and there is no "profit". We would be barely breaking even!
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