Arguments Against Prop 87 (Oil Severance Tax) Crumble Under Analysis--Even That of a Conservative Economics Professor

The $0.51 per gal. corporate welfare to the oil refiners for adding 5.6% ethanol to California gas is about $500,000,000.00 per year.

The ethanol may add over $1.00 per gal. to the gas profit in California.

That may be about $100 billion in oil profit from California motorists.

The science is interesting but so is the money.

A $4 billion Prop. 87 oil tax may add $40 billion in oil profit.

Charlie Peters
(510) 537-1796
Clean Air Performance Professionals

“The Market for oil is global, and the price of oil is set by global supply and global demand”

Yet gas prices vary quite significantly from location to location. Why isn’t the price the same everywhere?

California produces less than 1% of all the oil produced in the world

Yet California oil production supplies about 37% of the State’s demands. So I fail to see how a tax on oil production IN California would NOT have a disproportionate effect on California.

Regarding Chevron’s “admission” that they would keep levels current.
I would think someone as intelligent as you would be familiar with the scientific method. Certain variables are kept constant to show how some outside factor would affect other variables.
The “current production” he’s talking about in this hypothetical is the constant variable. This is to show us that the 200 million drop in profits would most likely attributable to Prop 87, if other factors stayed the same.

Maybe you’re perfectly fine with sticking it to them. That’s fine. Go ahead and give your sarcastic “boo-hoo, poor rich oil execs”, but it’s a bit insincere for someone of your level to conclude that he LITERALLY meant they would keep production the same.

Alan,

Explanation of global market. Chevron pumps at a variety of costs, and sells all oil at the current world price to refiners, say $60. If they refine their own, $60 is the opportunity cost so they'll account for it as if they sold it to their refinery at market. Say the tax is added at 2.6% . All oil that cost them less than $58 is still profitable. If they do shut down a few wells, they will buy replacement from Canada, Alaska and Mexico at essentially $60 and some people who would have bought from those sources buy instead from the Middle East etc. It works just like if you ladel some water out of the side of a pond; other water shifts over in a cascade until the surface level, representing oil price, is again level.

First order principles suggest a 2.6% tax added to 1% of the world's oil would boost prices by a twentieth of a cent per gallon worldwide. But in this world, it's in the Arab region that the price is really set. They curtail production to set the price based on maximizing profits against the demand elasticity curve, not on costs. OPEC effectively covers the shipping cost, because they're balancing what they can milk, at point of destination.

Proposition 87 will push down on both the price and California consumers' costs, though, because of its measures to increase efficiency and develop alternatives. Its research initiatives are meant to be leveraged, and surely will be. Recently OPEC agreed to take several million barrels a day offline to hold the prices up at $60. If research efforts let us competitively make biofuels etc. in large volume, then the effect of the OPEC measure is undone, plus OPEC has given up business and market share.

Prop. 87 will especially dampen the enthusiasm of its price (and military) hawks because if they do push the price way up one season, it greatly increases the amount of money automatically spent on the remedial measures of more alternatives and efficiency advance, just when the market is receptive to change.

Also, OPEC's power is due to the expensive remaining reserves after we've sucked the free world's oil as dry as we have, and each barrel we suck out of California's reserves makes what's left even weaker as a counterweight to OPEC. So the scrape-the-barrel-more-desperately default (the "No On 87" option) is shortsighted and backfires in the years ahead.

So the reasonable expectation of Prop. 87 is to push prices down far, far more than it could theoretically hurt. Never mind all the other costs of oil. Proposition is a consumer protection measure. Happens to help the world even more than California, as a bonus.

Romer's analysis was sent to me earlier this week. My response:

I can tell without looking at Dr. Romer's CV that he has never done any economics for the oil industry. His fundamental assumption is wrong:

"The market for oil is global, and the price of oil is set by global supply and global demand."

I suspected at this point there was going to be a problem. Oil prices vary enormously in different areas based on oil quality, seasonal demand, local logistics, etc. There is not a "world price of oil." This is probably the single most common error that I see in these analyses.

"If the price of oil delivered from a local producer was more than P*, she wouldn't buy any."

That's ludicrous. That presumes that price is the only thing that matters to the refinery manager. If Dr. Romer had ever run a refinery LP, he would see how absolutely wrong his assumptions are. Perhaps Dr. Romer could do a bit of homework and show the actual price for oil produced in California, versus, say West Texas Intermediate. That might reign in some of those unrealistic assumptions that went into this analysis.

I won't go on. I have seen enough to know that Dr. Romer, who may be renowned, is outside his element here. Actually, I could do a very similar analysis to show why a hurricane in the Gulf of Mexico will have a minimal impact on oil and gas prices. After all, there is plenty of global supply to fill that shortfall, therefore prices won't go up. So why did they?

I am sure that you are also aware that scores of economists have come out and stated that Prop 87 will increase gas prices. In fact, I am sure far more have agreed that prices will go up than those who think prices will go down.

My prediction is on record. If it turns out to be wrong, by all means contact me, blog about it, whatever. However, if it turns out to right, don't forget about that either.

Cheers, Robert Rapier

“Prop 87 will push down the price and California consumers’ costs, though, because of its measures to increase efficiency and develop alternatives”

This argument is based on the premise that we all have as much confidence as you that your ideal goal will actually be accomplished. Even if it does, there’s no guarantee it will be in the next 10 or 20 years.
A sincere argument would be that this is a long term goal that would be worth the trade off of a few years of higher prices. (And even that is a subjective matter of preference, rather than an objective fact in favor of 87)
You seem to paint of awfully rosy picture, but remember
• There’s no such thing as a free lunch.
• Anything that sounds too good to be true probably is.
• ..And other clichés that fit the situation.

“Pop 87 will especially dampen the enthusiasm of its price hawks, because if they do push the price way up one season, it greatly increases the amount of money automatically spent on the remedial measures of more alternatives and efficiency advance, just when the market is receptive to change.”

Maybe I’m missing something. Doesn’t prop 87 tax oil PRODUCTION, not on profits or the price at the pump? So how would higher prices cause more money to be spent on “remedial measures? Particularly if the higher costs cause production to decrease as well as scare off new production and exploration from being invested in.

I’ll leave you alone for now PL, but just some general points.

We act as if this all about (not literally ALL, so save it!) sticking it to the big rich oil companies. Well what about the “alternative energy” companies? Aren’t they in it for profit as well? The commission that prop 87 will create will just be a mechanism for a bunch of politicians to dole out favors to these various companies, in hopes for support (i.e. campaign contributions) later down the line.

We also act as if the oil companies’ opposition to Prop 87 is some sinister plot that has us rubbing our chin saying “hmmm, why would THEY be against it? what’s their REAL motive? What would they have to gain?)
Its simple. Prop 87 would TAKE MONEY FROM THEM. Whether you like the oil companies or not, is anyone reading this that incapable of understanding their motivation?

If oil is being pumped in California, doesn’t that mean that some people are employed in the oil production business? Never mind the fat CEO, but what about the guys on the line who could lose their jobs if production is cut back. What about future jobs that won’t happen because new exploration will be reduced?
This would especially hurt the smaller oil companies (no, I’m not saying their mom and pop operations, but they are not on the level of the Exxons and Chevrons) who won’t be able to absorb the increase costs.

"This isn’t the only claim of the oil companies that is showing to be false."

Indeed. The no on 87 commercials in my opinion crossed an ethical and truthful line that needs to be addressed.

I believe the no side could be sued with an actual chance of winning back all the money that was spent by the yes side.

-Alessandro Machi

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