I am starting a new post for us to talk about various aspects of energy taxation. DI asked a question in this month's T/A thread about the potential impact of Windfall Profits Taxes that are being proposed in the Congress. And by implications what we investors can & should do. Instead of answering him there, I have taken the liberty of starting a new thread because this subject is interesting by itself and we may have many different opinions and viewpoints. I thought it would be a good topic by itself for a thread.

As an introduction, let me say that world nations have always used energy as an easy way to tax their people. Energy taxes are much more in some countries (like the Eurozone) and less in others (like in the US). Many oil producing countries (such as OPEC countries) tax oil producers, but give huge price subsidies to consumers, which sounds absurd & upside down, especially when we are in an oil market that is structurally very tight.

For example, gasoline is priced under a $1/gallon in many Arab Gulf producing countries. No wonder their oil demand is going berserk, with gas guzzling SUVs driven by any citizen that can afford the initial investment. The US craze for SUVs is a big puzzle to me, but hopefully it will not be as much of a craze when gas is at $4 to $5/gallon (cross my fingers on that one).

What some people may not know is how big a slice goes to pay for all the Federal & state taxes. For each one dollar that a consumer pays at the pump, roughly 30% goes to pay for Federal & State govt taxes (direct taxes of 12 ccent/$ of gasoline or diesel plus highway taxes, Royalty taxes to Federal & State Govts & income taxes paid by companies on their profits). This is huge burden. Additionally, any Carbon taxes that will likely be levied in future will only add to this taxation. So, remember that for every one dollar spent, taxes constitute about a third of that take. This is BEFORE any of the new proposed taxes. That is a significant amount going to various govts.

If you think 30% taxes are bad, Eurozone taxes oil at even higher rates. I do not have good figures, but I know that the transportation fuels that we sell here are 150 to 200% higher priced in Europe. All of that "extra" price is because of taxes. Oil & oil products are traded around the world markets for the same prices (for a given quality) before taxes, then to sell in local markets, each country basically slaps on the added surcharge and makes the oil companies pick it up for them from the consumers. This way, the blame for high oil prices goes to the companies, not the govts. Thus, I would hazard to guess that for each Euro spent on diesel or gasoline in Europe, about 60-70% goes to pay taxes. Now, isn't that astounding and outrageous? I think so.

I think there are many other interesting angles on this one, but let me stop here in the opening post. I will come back to answer DI's original question a few posts later. All your thoughts welcome and appreciated .... Anil

I think the Eurozone was actually smart to tax gasoline as they have.  It artificially boosted the price at times when gas was inexpensive, thus encouraging their citizens to value fuel efficiency.  A big part of why they didn't end up with nonsense like SUVs in Europe is because it never made sense financially (another part may be that many European roads are fairly narrow and not especially SUV friendly). 

Charging taxes at the pump is one of the best ways to try to alter people's behavior.  It makes a lot more sense than a "windfall profits tax" which to me is just a ridiculous idea.   

Great thread.  I don't see where there is a benefit to raising taxes on gas/deisel in the USA. The money will just be misused by the government. It will not make anymore energy available nor will it be used to develop any new technology. Mr. Market will take care of things all by himself. If energy is short the price rises and if the price stays high long enough peoples behavior will change to fit the economc circumstances. Simple supply and demand. When the government steps in there are often times unintended consequences and they are usually negative.

pm  

We should tax (import tariff) the heck out of imported oil/gas.  We should not tax domestic production.  Government royalty fees where discoveries are on government land should be kept low to further encourage domestic production.  The goal should be energy independence, not the cheapest possible oil.  Tariff income should be used to subsidize alternative energy projects.  Gasoline taxes should continue and be used to maintain infrastructure. 

We should not tax companies beyond ordinary income taxes.  We should take the barriers to exploration off (other than insuring the environment is protected).  That includes drilling in the Arctic... and offshore Florida.

The companies that find domestic oil/gas should have an incentive to keep doing the things they are doing.  If foreign oil is cheaper than domestic oil, then taxes should be applied to make domestic oil cheaper than taxed imported oil.  The companies that import oil/gas should have a disincentive to keep doing what they are doing.

We should also require that all new electric generation capacity be non-fossil fuels - wind, solar, or nuclear.  There might have to be some allowance for population shifts... but for the most part, I think that goal is achievable.  We should make it more than a goal... it should be a legal requirement.  Long term, oil and natural gas are too precious to use to make electricity.  Electricity should eventually only come from renewable resources, nuclear, and cleaned up coal...  I think that a 20%/40%/40% weighting could eventually be achieved.  That is a doubling of nuclear and a big increase in renewable... but I think we have the technology to do it.  I am not sure how you get it done in a free society.

LNG projects should be shut down.  We have plenty of natural gas in this country.  We can't afford to be importing it, too.

jmho

erryl

DI originally asked a question about new oil company taxes in order to understand the impact on our energy sector investments - if I understood correctly.  Anil said he will reply to this question soon.

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On the pros & cons of fuel taxes ... I had understood that the U.S. fuel taxes paid at the pump are essentially a "use tax".  In other words, the money is used for the construction and maintenance of roads and other infrastructure used by cars.  This seems reasonable to me: those you use the infrastructure should pay for it.

Europe goes a lot further - but I have not yet found a good graphic or table that illustrates the actual taxes and how these are employed by the various governments.  France and Germany tax fuel heavily and invest heavily in public transportation infrastructure.

Given the fact that neither the US nor Europe has a self-sustaining source of oil, it makes sense to me that our governments should have the wisdom to look towards the future and provide for long-term self sufficiency. Therefore I support the high European tax rates on carbon fuels - and much enjoy the high-quality trains and airports.  When the price of oil hits $200 or more those nations that are relatively self sufficient will have a competitive advantage.  Those in denial will have to pay the price.

I already posted this cartoon once, but will post it again because I like it so much:

Or this:

Some interesting thoughts so far in this thread. The higher taxes do tend to put a damper on sales of gas guzzlers (SUVs), but the question is how high do we have to go and why use oil companies as tax collectors for those extra taxes? Collecting those taxes and keep proper track of them takes a lot of administrative work, plus many unnecessary IRS audits and constant bad publicity. We need to find a way to collect those taxes differently than have the oil companies collect them for the govt.

Yes, tax policy can be used to encourage domestic production, however, the legislation needs to be carefully drafted. If it is improperly drafted (which is usually the case), there will be too many unintended consequences that will be very hard to unwind. In addition, if we add stiff import taxes, we will be actively building trade barriers. This means a break away from US policy of breaking down trade barriers. So, how much leverage will the US have in trying to get other countries to break down trade barriers?

Now turning to DI original question: Windfall profits tax: While I think any such discriminatory tax is bad tax policy, there is a reasonable likelihood that it may come to pass in the next year or two. The current proposals suggest all crude price above some threshold like $80 or so should be penalized with a 20% tax. As you know, there are many grades of crude oil produced in the world. Some of the worst quality (and most polluting) kind of oil sell for $30 to 40/B discount to the light sweet grades (the one that is traded on the NYMEX). The unintended consequence here might be that more and more refiners will try to more polluting oils because the tax policy will drive them there. As a nation, do we want to consume more polluting oil?

Impact of Windfall profits tax on US companies could be nasty. The actual impacts will be extremely dependent on how the legislation is written. Presumably, the domestic production is the only one that could be taxed? If so, oil  exploration here in the US could see a sudden halt because crude oil is a globally traded commodity and if US taxes domestic companies too much, the industry will lay off people here and go to ME or Russia or Asia Pacific and invest money there (assuming they don't follow suit). This could drive the US unemployment up and will actually hurt the US more than it helps. In that sense, the policy will be a bad one. In terms of companies: Many companies that are exclusively US producers will likely get hurt more (like OXY) and international majors may actually be hurt less if their operations are more disbursed across the world (the benefits of diversifying!).

I would think that as a general rule, many of the smaller companies have more US operations and they will be disproportionately hurt more. This is actually the wrong result. You want to help the smaller independents, but the windfall profits tax could discourage that. Lastly, it will actually increase dependence on foreign oil because domestic production will flatten out or decline. Again, these are very dependent on how the taxes are levied and what specific mechanism is used. Anyway, these are my general thoughts. And I am no expert either on taxes or govt policy, so I would encourage everyone's thoughts and comments ..... Anil

Anil -- Thanks.

For purposes of this discussion let's assume this Excess Profits Tax is like the prior one in its provisions.

 A couple of questions if you know: How did the stock price of energy stocks respond at first and over time? In short did it ultimately become a buying opportunity or a protracted Bear market that didn't end until the tax was reversed? Did the US price of gasoline or heating oil rise or fall? In short were the energy companies able to pass on the cost of the tax to the consumer? I believe that the last tax was only on domestic production? Did domestic production fall as a result? Do you know what happened to MLPs as a result of the tax? Did yields fall? Did the Excess Profits Tax last time also apply to Coal and NG or did they gain a relative competitive advantage?

Certainly if we use the Canroy Tax Surprise as a template, Alberta energy production fell, and there has been a flurry of M&A as the weaker providers faltered, some of which is by foreign acquirers. Is that a valid template to look at? Admittedly there were other factors than just the tax destruction.

I am assuming the least impacted would be the global energy service companies such as HAL and SLB since they would simply shift their activity. Using the Canadian experience they had one bumpy quarter as Alberta activity dropped off but by the next Qtr shifted their assets elsewhere. Turned out to be a great buying opportunity.

Slightly OT -- Is it true that Brazil has essentially cornered the market in deep water oil rigs for its new field and that there are essentially none available for leasing? Do you know approx. how many years it takes for a rig to go from design to commissioning? Are the rig manufacturers capacity constrained right now as it is?

 Sorry to be a bother but like you I have been more than 2X energy for 5 years or more (so the stakes are not insignificant) and if there is a sea change coming I want to shift with it.

TIA.

DI

DI: All I have a recollection about the 1980s Windfall Profits tax (WPT) was that it had a very bad effect on oil imdustry employment. Many oil companies that were primarily domestic producers (like Amoco - remember that company HQed in Chicago) laid off thousands of people. They lost so much of their profitability that they could no longer afford to pay enough to retain productive capacity & talent. They ultimately became ripe for a takeover offer from BP - after 15 years. The WPT related fallout almost resulted in making some of the oil cities (Houston, Dallas, Tulsa etc) into modern day ghost towns where inhabitants left their houses as they were, defaulted on their mortgages and turned the keys over to banks, making Texas banks a basketcase for years to come.

The 80s & 90s were very bad "bear" years for the US oil industry. The WPT essentially killed the US independents, the risk takers of the industry. The majors moved on and invested outside the US. Mobil Oil (now part of XOM) invested heavily in Indonesia, the North Sea and Kazakhstan, but the stock prices did not improve much. I remember I bot Mobil stock back in 1984 and it was trading at $22/sh and yielding ~6.5 to 7% dividend. The yield was just a little under the treasury bond yield, which also had a pretty high yield then. As I remember correctly, there was a massive contraction in the oil industry activities, especially on the exploration side. Geologists were losing jobs left and right. However, WPT was one just one of the reasons. The other reason was that the oil price went down from $34/B down to $20/B in a span of 2 years and kept going down. 

Here is an interesting analysis from the govt's stats (The DOE & the Bureau of Economic Analysis). It talks about the 1980s WPT and analyzes it vs what the industry earned in that period. It was a huge burden both on company profits and to  administer it (for IRS). A snippet follows:

• As is also illustrated by Figure 1, during the 1980s the federal government experimented with a new tax intended to limit the “windfall profits” of domestic oil companies. In reaction to the rise of energy prices during the late 1970s and the removal of price controls on the energy industry, President Jimmy Carter signed the Crude Oil Windfall Profits Tax Act into effect on April 2, 1980.

  The tax was technically misnamed because it was in fact an excise tax, not a “profits” tax. The tax was imposed on the difference between the market price of oil and a government-determined base price. For example, a 70 percent tax was levied on the difference between the market price received by oil companies and the average base price of $12.81 per barrel. Independent producers, stripper wells and heavy oils were taxed at different rates.

• CRS also found the windfall profits tax had the effect of decreasing domestic production by 3 percent to 6 percent, thereby increasing American dependence on foreign oil sources by 8 percent to 16 percent. A side effect was declining, not increasing, tax collections. Figure 1 clearly shows that while the tax raised considerable revenue in the initial years following its enactment, those revenues declined to almost nothing as the domestic industry collapsed.

  The 1980 windfall profits tax was also found to be highly burdensome for the industry to comply with and for the Internal Revenue Service to administer, especially in years when no revenue was raised. It seems unlikely that a new tax could be designed in a less burdensome fashion. Tax Foundation economists estimate that U.S. companies currently spend nearly $150 billion annually to comply with the federal income tax alone. Enacting a new windfall profits tax would add an additional layer of complexity to the federal tax system.

The Figure 1 in the article clearly shows that industry profits took a nosedive in mid-80s as new exploration activity dried up in early 80s and showed in profits a few years down the road. The profits stayed low for about 15 years. It also resulted in massive layoffs in the industry and an actual shrinking of exploration activity. The total tax burden on oil companies was huge. In 1980/81, the tax burden was 3 times the industry profits, and by the time the long oil stock bear market ended in 1999 or so, the tax burden was almost 8 to 10 times industry profits.

Of course, the 1980/90s oil bear market was not just because of WPT, but because of a decline in industry profitability, lack of funds to reinvest (due to the high tax burden etc). I am going to utter a question which every investor wrestles with - Is it different this time? Perhaps.

Now to DI's specific questions: I believe that 1980s WPT effects were mixed in with the drop in oil prices because the Saudis opened the taps and flooded the market with oil. Today, the Saudis have a much smaller cushion to do the same. So, we now could have a different effect (when we isolate WPT effect from the effect of lower oil prices) and we could have a much shorter timespan of the dowdraft. And this time, the oil service companies may be able to better survive (and perhaps thrive) in the tough race to find and benefit from more scarce resources.

Lastly, I have also heard (but do not know for sure) that Petrobras (Brazilian national oil company) has essentially locked up much of the deep sea drilling rig capacity fpr their new find. I have heard (but do not know for sure) that these monsters take special construction and may need 3-4 years to build, depending on how deep they want to go and what the specific geology is. Anyway, I hope that helps ...... Anil

Good points by AKHale!  One quote set my teeth on edge, however.

               "The US craze for SUVs is a big puzzle to me."

Without a SUV, how is one going to take our boat to the lake?  Or to Canada to fish?  We don't have to boat or fish, of course.  There are no boats being pulled by autos in Europe, for instance, so we really don't have to do it either.  Europe has nice soccer fields so maybe we could learn to do that [although my observation was that most of the fields were empty most of the time].

Other then that, great points. 

Thought I'd respond to the Brazil part.

[quote]Is it true that Brazil has essentially cornered the market in deep water oil rigs for its new field and that there are essentially none available for leasing?[/quote]

Yes, Brazil is cornering the market and the few remaining units available are going at much higher rates. 

[quote]Do you know approx. how many years it takes for a rig to go from design to commissioning?[/quote]

No, but it doesn't matter since there's no yard availability before 2011/2012. Supply is very tight.

I'm not convinced that taxing high priced oil is going to be effective. It strikes me as reactionary rather than deliberate. The problem is oil dependence; and a tax will not create more oil.

Here's a site that is interesting reading. It does contain some emotional rantings; but, overall, provides some pertinent information.

http://www.americanenergyindependence.com/aeicost.html

There's no question that the recent runup in oil prices is creating impact on American lives in other areas as well - the displacement of foodstuffs, the balance of trade, the burdens placed on the military, the demeanor of the public, etc. The last clause is the one I find most interesting - are we 'ready for change'? Due to actions - primarily of the foreign oil barons, but also passed along by downstream corporations - unrest is growing. I read somewhere in the linked article(s) that Saudi A. could produce oil at $5 a barrel without suffering a loss - now there's windfall profit!

So, I don't think windfall profit taxes will work. The answer lies in finding a way off the oil addiction entirely. Sorry, Anil, but that's just the way I see it.

As always thanks Anil. The govt stats are informative and for pointng out the differences between the 1980 supply situation and now. Very helpful.

After considering your response it seems I have some research to do. My belief is that some form of WPT is highly probable at least as the election looks now. I am beginning to think that the Canadian tax disruption is a worthwhile template because of its more contemporary setting. There are differences of course but the consequences to the Canadian oil industry is fresh enough to be researchable. Either way the good old days of just overweight energy and buy any energy investment and watch it run may be ending and subsector and geographic selection will become much more critical to success going forward. Many questions to ponder on timing and substance.

On the deepwater rigs I saw this article at Bloomburg. RIG

Thanks again.

Gary: There is no question that talk of WPT is reactionary and that its possible current reincarnation will result in increasing our dependence on foreign oil. And that is wrong policy. Unfortunately, what you call as addition to oil, will not go away by usual measures thought of by congress & the Pols, but by trying to do fundamental research. The primary energy sources are limited to high volume sources and Hydrogen or any other form of fuel, are as vulnerable to scarcity as oil.

Nuclear fuel for example has gone up five fold in price. Solar energy, which people think can be easily harnessed, can be limited by the materials in solar battery that will be required for the huge energy replacement required to break our oil habit. These materials are as vulnerable to scarcity and price hikes as is oil. Sorry, I find it a pipe-dream to talk about "cutting our oil addition", because it will mean a new worse addition to something else for mankind, UNLESS we want to cut our energy use substantially.

Society has come to depend on energy to relieve ourselves of the manual labor and do higher level of (thinking, designing etc) work. So if we want to cut our dependence on energy of any kind, we must start thinking of going back to manual labor and forgetting about the multiplier effect that the use of energy provides us with. Then, GDP will likely shrink and we could have some massive unemployment if we truly cut back on our energy use. So people who talk about cutting our addition to oil must first come to terms with these realities. I also feel that the CEOs of major energy companies are coached a lot better on various issues surrounding energy dependence that many of the blog writers who usally see things in one dimension.

DI: SOme added points and milestones for you to keep in mind. Saudis currently have razor thin spare capacity of less than 1 MMBD (million barrels/day). Saudis are planning to add ~2 MMBD capacity in stages thru 2009 and 2010. So, by the end of 2010, the spare capacity will likely rise to ~2 MMBD (1 current plus 2 addition less 1 MMBD growth in world oil demand). While doubling sounds good, it is still less than 6 to MMBD that the spare capacity was in the 1980s. So it is unlikely that Saudis will have the ruinous policies of opening taps wide this time again. Anyway, I hope this helps .... Anil

I appreciate your analysis of the crude supply / demand balances and the projected impact of a WPT on our investments.  Which is the point of this thread.

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On that "other" subject, I'm not with you.  The US has more than double the per capita energy usage of most European countries according to the IEA. HERE.  Only some of that is related to geography.  I do not accept that efficiency is related to a lower standard of living.

The US also leads in obesity according to the OECD health data and put up mediocre life expectancy statistics. HERE. Which for me are important measures of living quality.  But, I digress.

It is true that alternative energy has its challenges, but it's also true that Americans have an amazing capacity to innovate and solve problems.  Key here will be improved battery technology, alternatives to traditional polysilicone solar collectors, new generation nuclear technology, high mpg cars, etc. Political will and leadership are required. The present administration is Neanderthal in its thinking.

IMHO we have become complacent, thinking that the "free market" will wave a magic wand and solve any issues.  Which is nonsense.  The national impact of this complacency can not be overstated. 

On the WPT, it's no wonder the idea has popularity given little things like Exxon's Lee Raymond's obscene retirement bonus.   I worked for 20 years with a US oil major and can still hear the cynical alternative energy jokes.

Hi Norbert: Thanks for your thoughts.

A little OT: Norbert's comments help me return to the favorite subject of energy intensity. I think that energy consumption per capita (i.e. per person) is not a very useful measure IMHO. Instead, I like to look at Energy Intensity, that is the amount of energy consumed to produce per unit of Global GDP. This way, we take the obvious bias of low energy consumption of countries where people are going hungry and not productive because of that. You can find the energy intensity measure defined and shown here.

This article is about the term energy intensity as used in economics. For the physics concept of joules per square metre, see fluence.

Energy Intensity of different economies The graph shows the amount of energy it takes to produce a US $ of GNP for selected countries. GNP is based on 2004 purchasing power parity and 2000 dollars adjusted for inflation. Source: Energy Information Administration

Energy intensity is a measure of the energy efficiency of a nation's economy. It is calculated as units of energy per unit of GDP.

• High energy intensities indicate a high price or cost of converting energy into GDP.
• Low energy intensity indicates a lower price or cost of converting energy into GDP.

Many factors influence an economy's overall energy intensity. It may reflect requirements for general standards of living and weather conditions in an economy. It is not atypical for particularly cold or hot climates to require greater energy consumption in homes and workplaces for heating (furnaces, or electric heaters) or cooling (air conditioning, fans, refrigeration). A country with an advanced standard of living is more likely to have a wider prevalence of such consumer goods and thereby be impacted in its energy intensity than one with a lower standard of living.

Energy efficiency of appliances and buildings (through use of building materials and methods, such as insulation), fuel economy of vehicles, vehicular distances travelled (frequency of travel or larger geographical distances), better methods and patterns of transportation, capacities and utility of mass transit, energy rationing or conservation efforts, 'off-grid' energy sources, and stochastic economic shocks such as disruptions of energy due to natural disasters, wars, massive power outages or unexpected new sources or efficient uses of energy may all impact overall energy intensity of a nation.

Based on the energy intensity measure, US seems to be in the middle of the pack. US has a lower (meaning better) energy intensity than Norway, Netherlands, Iran. However, it is less efficient than Germany, UK, Japan & India. It is about par with China, thus suggesting that even this measure may have some inherent bias. However, I find it a better measure than energy consumption per capita. So, it is true that US has some ways to go before it can claim to be in the top quartile on energy intensity. I think improving energy efficiency and energy intensity is the best way to reduce energy dependence. The alternative fuels such as those derived from biofuels are just a mirage.

For example, hydrogen is a complete lost cause because in producing fuel hydrogen, you lose roughly half the energy in the processing. That is energy efficiency of hydrogen as a transportation fuel will always be less than hydrocarbon fuels (which do not carry this large an efficiency loss). And "Hard Stops" (thermodynamic limitations) eliminate the possibility of improving the hydrogen production technology thru innovation, unless we have nuclear fusion based "free" energy to break water into hydrogen and oxygen. If we have unlimited "free" fusion energy, then we won't want to even bother with hydrogen and just go straight to using electricity so generated!

We instead need to focus on improving the most inefficient links in the chain : Motive power for transport (avoid the Internal Combustion Engine which has less than 20% energy efficiency) and the generation of electricity. Anyway, I think I have digressed enough from the original thread. JMHO .... Anil

More on our completely OT - but very interesting - subject:

I think that Anil makes some profound points.  Among my favorites:

• the folly of alternative fuels that require large resource inputs to produce;
• the inefficiency of the internal combustion engine;
• the importance of energy efficiency (buildings, transport methods & patterns, "off grid" sources, etc);
• the importance of keeping our eyes on future technology breakthroughs: fusion?

I am fascinated that Germany - thanks to government policy - has the world's largest solar presence.  And it's cloudy much of the year.  Individuals can install systems and feed power into the grid.  Solar, wind, and nuclear should not be underestimated, IMHO. 

Short-term my biggest gripe is specifically the US's oil addiction.  Our per capita usage of OIL is extremely high (see HERE) and our administration's policies have only encouraged more consumption of oil.  We're using money we don't have to pay for this madness.
 

For those of us concerned with oil stock price performance (part of DI's original question), here is a nostalgic visit to the year 1980. You would want to read the article named "Deja Vu 1980". A few snippets :

• Instinctively we sense a potential two-thirds gain in stock price for our oil and gas buy recommendations by November 2008. It actually happened at a similar time 28 years ago when our twenty buy recommendations gained a median 68% from April 30, 1980 through November 30, 1980 (see charts).
• Like today, most of those stocks were already in a steep uptrend after having scored handsome gains. Like today, 1980 was an election year, oil price was advancing strongly, Iran was the U.S. Government’s nemesis and inflation was raging.
• Unlike today, the U.S. Federal Reserve Bank was raising interest rates that ultimately drove the stock market and oil stocks to the low of August 1982, in the second year of a new president’s term.
• We believe the historical parallel justifies maintaining and possible increasing commitments to our buy recommendations while keeping a wary eye out for signs of a peak should steep increases actually occur. Finally, good news for energy in 1980 was also good news for stocks as the S&P 400 Industrials advanced 34% during May through November.

So, my view would be to keep a wary eye out on the charts for any blow-off top on Oil Stocks, but hold on until that blow-off top comes about .... Anil

I would like to mention in favor of the longer term oil bull case. This is from the professional journals I read every day (today's Oil Daily - available by subscription only). It talks about how the Russian state control has hamstrung the state oil giants. Here are a few quick snippets :

• Former Russian energy official Vladimir Milov, a prominent critic of the current
  administration in Moscow, told the New York Energy Forum Thursday that it is
  policy, not natural declines, that is hampering output of both oil and gas, and
  may cause problems for power.
• In 2004, he said, 11.5% of oil production was in state hands and 88.5% was
  private. By 2007, the ratio was 39%-61%. Milov, like others, expects the ratio to
  move further in favor of the state.
• State-private combos and joint ventures are also falling victim to what Milov calls
  “management paralysis,” where sophisticated technical input from a company like BP will, for example, have to go through Gazprom senior staff and often ends up strangled in red tape.

Another interesting fact mentioned in the article was that many regional oil producer companies in Russia, under the state control, received only $35-50/B revenue for their oil when current oil prices exceed $100/B. This means there is hardly any incentive left to look for & to stream new, more expensive oil, at least for those oil companies receiving less than half the market price. I believe this Russian example is typical of the changes that accompany a major ownership change from private companies to state controlled oil companies. Thus, this may apply more widely to all the resource nationalist countries state oil companies such as Ecuador, Venezuela etc.

I would hazard to guess that upto one quarter (25%) of the world oil supply could be hamstrung by such policy inaction, making the bull case for oil continue at least for a few more years. As a result, I would hold on to my energy overweight. One may want to review the portfolio for a little bit of reshuffle, but I think even the International majors will continue to benefit from the lack of non-OPEC production growth ... Anil

Just to make the case in favor of raising gas prices at the pump, I think it is a much more logical approach than a windfall profits tax.  With high oil prices, the problem we're looking at is consumption being too high.  Production already is clearly not high enough or oil would be cheaper in the first place. 

I know some will say we shouldn't tax either, and that is a fair viewpoint, but if we're going to tax anywhere we should do it on the consumption side, not on the production side, which is what a WPT is basically going to do.  Raising the price of gas should, in theory, eventually reduce consumption, which should reduce demand for oil and reduce the price.  Also, one good thing about taxing at the pump is that it is fairly easy, with the infrastructure already in place, and it will fall equally on both domestic and foreign producers (while a WPT would only hurt domestic producers). 

The extra tax could be funneled to public transportation, which is much more energy efficient, and which has languished over the years and could use a boost.  But even if the money is just wasted on a black hole like ethanol at least it would be targeting the consumption side. 

That said, we may be a little bit late to the party to try to constrain consumption through this manner.  Europe has had high gas taxes for decades now and have had plenty of time to adapt.  You can't just slap on a heavy tax and expect it to have an impact over night.  Not to mention, I highly doubt that Americans will accept higher gas taxes since we seem to believe that cheap gas is an inalienable right.  We can, however, easily be focused on bogeymen such as oil companies which serve as convenient scapegoats for current problems.   

I'm not saying definitely that either side of the equation should be taxed, but a WPT seems like just about the worst possible way of applying a tax.  Unfortunately, it's also probably the idea with the most public support. 

Anil - in general, I agree with most of what you say. (And to reitterate, a tax - in my view - would be futile on a scarce resource; it would just get passed on to the consumer and make the situation even worse. An alternative - price controls - would be disasterous). But, getting back to the addiction, yes, any of the options you mentioned would help. For instance, cars that get 100 mpg using advanced technologies would help; use of advanced LED's for all illumination needs would help; nuclear and coal would help; solar and wind likewise; geothermal and hydro; etc. And I have no objections to synfuel - but not from food sources. And, while there is the danger of price gouging with those energy resources as well, those resources are not in unfriendly hands; and those resources are open to market competition. Whereas I cannot just start drilling in my backyard and hope to find oil!

I have no dispute with the fact that we need energy. While I enjoy gardening, I don't want to have to raise my own corn and wheat, nor read by candlelight. This is not a quick fix, to be sure. But I believe we must head in that direction as quickly as possible. For the short term - next 5 years or so - oil interests will keep the upper hand. But the more actions they see from others - actions that will signal the passing of their dominance - perhaps the more sane they will be regarding monopolistic pricing. Those in the oil commodity can make good profits - and that is what is happening now. Oil at $200/barrel by year end is not out of the question; but the harder it gets, the more opportunity there is for alternative developments.

Here's an interesting read on some developments:

http://www.metimes.com/Business/2008/05/15/the_worlds_biggest_clean-energgy_project/3552/

for all your responses and thoughts. This is such a big and all encompassing subject (taxes & energy) that there are bound to be a lot of opinions on it. However, I see a bit of a consensus emerging :

• Our (Mankind's) energy dependence/ addiction (I call it requirement) is direct result of global economic progress and to cut back on that requirement by edict will result in economic hardships,
• The oil requirement can be lowered by improving energy efficiency in every part of the energy chain, not just transportation fuels,
• Added energy taxes do not seem like a good idea, especially if they just add to general revenue (like in Eurozone) and don't give incentives or improve energy efficiency
• Added taxes may only make sense if specifically directed to finding true alternative energy sources,
• Lastly, we hope that OPEC will not mess this efficiency drive by opening the taps wide, right?? ..... Well ....

Now, all we need to do is to find a volunteer to take these consensus findings to the pols and get them on board to draft proper resolutions to take care of this relatively straight-forward problem without the obfuscating legalese and bureaucratic obstacles. Do we have someone who can do that? ...... Hmmm ..... Volunteers come forward please ... Anil

Sorry for the sequential posts. This is such an important subject that I think it is worth continuing this "monologue", for at least bringing out what I see as naive efforts by our elected leaders. Congress seems hell bent on finding a scapegoat for the Oil Heat generated by the public. This is clear from the recent Oil Daily snippet below (with help from a hedge fund manager to support their allegations about rampant speculation in commodity markets):

• Masters (A hedge fund manager who testified) said index speculators provide “zero benefit” to futures markets because they buy contracts and then roll their positions by buying calendar spreads. They never sell, so they only consume liquidity. He likened it to a “virtual hoarding” where the institutional investors are basically “buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits.” He also said he does not trade in commodities or the comm Index funds.
• Members of the Senate Homeland Security and Governmental Affairs committee were certainly listening and used the forum to criticize CFTC Chief Economist James Harris for failing to recognize and police speculation in futures markets.
  “You monitor, you study, but you don’t do a darned thing about it,” said Michigan
  Democrat Carl Levin.
• Congress recently passed a law to increase oversight of electronic over-the counter (OTC) exchanges like Intercontinental Exchange (ICE) (OD May 16,p1).

IMHO, there is a definite need for us regular folks & investors to make the case to our leaders in congress that the more they intervene in markets, the worse off the general public will be. Alas, with political winds sweeping this country, it seems like it will fall on deaf years ... Anil

Anil - good post. Coincidently, on CNBC today, there was a guest that stated that today's oil prices and trend has ceased having any relationship ofl fundamental valuations and into the world of momentum speculation - investors doing what you talked about. These prices will impact not only consumers but refiners who must buy and process the resource.

For some reason I am having flashbacks of Enron manipulation and trading. Funny how the same old, same old keeps becoming the new deal.

I enjoyed this FT video on "Commodity Speculation".  HERE.  It's obvious to me that we are witnessing the interplay of supply and demand, not the effects of speculation.

It's one thing for a country to adopt a serious energy policy that will serve national interests over the long term.  This might include many things:

• Use taxes on consumers that are applied to infrastructure and alternative energy development;

• A national program on nuclear so we get the benefits of standardization (the French model);

• The idea to permit individuals to invest in solar or wind power, then selling the power to a regional grid (the German model);
  

• Directed subsidies for key research, such as to solve the battery problem;

• Higher tax rates on low mpg cars; subsidies on efficient cars (French model);

• City driving fees (London model, Bloomberg trying to implement for NYC);
  

It's quite another to micromanage individual companies.  The Senate hearings are just theater.

--- 

One area where I do want the government to be very present lies in regulation of the financial industry.  Excesses in this area lie at the heart of our current troubles.  Adam Smith made it very clear that regulation and capital markets go hand-in-hand.

Norbert - I heard him say it was both. In any case, I agree with your recommendations. But, I believe it's the emerging markets who are using all "our" oil. (I will forward your suggestions to Jia Qinglin if I can find his email).

In any event, there are many dollars (investors, pension funds, etfs, etc.) chasing the oil barrel. And there are many who have oil contracts they want to sell to them. That is, of course, supply and demand also. But, given the known and emerging supply of oil, and the relative global use of the resource, the price has climbed geometrically. I believe it is more than just normal price increases. It's looking like the proverbial tight squeeze. And, it is starting to impact the global economy.

Gary et al: There seems to concerns regarding speculation in oil markets. However, in all markets, not just oil, don't we invest with the sole purpose of making money? Chasing oil barrels in commodities markets has the exact same goal - so why is it so bad? I am not defending speculation per say, but saying speculation is at the heart of many investing activities! So why do we single out oil barrels? What determines a normal price rise of oil (vs abnormally high?). I have been in the oil business for a long, long time and have still not figured out what is "normal" price rise and what isn't.

Speculation in futures markets does serve a bigger purpose. They allow producers of commodities to hedge their bets and get a guaranteed price (return) on their future product. The futures market started in Aggie commodities a long time ago when farmers wrote committments on "chits" with their brokers, who then traded those "chits" with buyers (flour mills etc) to guarantee them future supply when the crops came in.

The oil futures market works the same way. Producers may have a project coming on line in 2-3 years and they want to get some sort of guarantee of the price of oil. So they go to the futures market where a broker (JP Morgan, Goldman etc) buy this future commodity for a specific price and then perhaps sell this "chit" to a refiner who needs to hedge his purchases. Anyway, this simple model has gotten a lot more complicated, but still it is the hedging of price risk that is facilitated by the futures markets .... Anil

Anil - yes, we invest to make money; and, yes, ag futures have been used a long time to stabalize the ag sector. And I guess that's all work ok so far.

But, the energy sector is experiencing significant price increases; and I guess the futures market there is responding to some uncertainty - maybe the global 'peak oil' scenario? As I understand it (and that's probably very little), oil may 'spike' today due to temorary shortages (in production, natural disasters, etc.), but futures will normally reflect a return to 'normal' - (and I don't have an answer to your question on what 'normal' is). But, checking this site:

http://quotes.ino.com/exchanges/?r=NYMEX_CL

shows oil contracts out till next year as not declining! At least, that's how it looks to me. Whether or not those prices are justified - or merely speculative based on our old friend 'fear' , I don't know. But, as was talked about in prior posts, energy is an essential need for human activity, as is food and water. (In fact, the caveman had little else and managed to evolve to the levels we find ourselves today :-)). As basic needs, those things are more important than health, education, safety, technology, and whatever else. In deed, all else follows on the stabalization of those basic human needs. We may have ways to deal with shortages in our modern society; but remember Katrina - even here, wiping away all vestages of modern society, people hurt - and die.

IMHO, I just feel these resources should deserve special attention rather than just be profit centers. I can make profit in a lot of other areas. But I also feel that our business and political leaders should be more active in dealing with the reality of where we will get those resources should the 'peak oil'scenario be real. Tomorrow will be here eventually.

The oil futures market also allows buyers to hedge fuel costs - at least it did.  Air France / KLM did that in a big way and it helped them turn in excellent profits.  Are they buying future-dated delivery of fuel now - at these prices?  Could be ... don't know.

I still think it's primarily about supply and demand.  Look at this report: the IEA is about to cut its oil supply forecast!  Read HERE.  IMHO, the "speculation" thing is a sideshow.  If supplies were not so tight the high prices could not be maintained.

My opinion is that once we get consensus that "peak oil" is behind us and that demand is exceeding production, we'll see more of what we're observing now:  fireworks.  It's going to be a challenging adjustment for those countries highly dependent on oil.

Gary: First of all, let me clarify what I am saying - Peak Oil theory or not, the reality on the ground is that non-OPEC producers are producing as much oil as they can, demand keeps rising and OPEC has a tight control on production, refusing to raise production (other than token 300,000 B/D that Saudis promised). So with demand growing, the marginal barrels (last 1000 bbls that a refiner buys) are being bid up.

If there is limited supply of bread, and there is a bidding war in your neighborhood, with person A offering $2 for the last laof, person B offering $4 and person C offering $8, the bread loaf will sell for $8. The next shipment of bread that arrives will then be priced at $8/loaf, won't it? Is that "Abnormally" high price? Yes, it is. But is it economically justified in the shortfall scenario? Yes. So, I think I am talking about economically justified price of oil, not morally justified or whatever.

Another point: I am not sure why oil is any different from bread loaf example I gave above. When you say these necessities are different, are you saying that the govt should somehow "regulate" the price of oil AWAY from its economically justified values? Such things will have dire consequences. If the price is not reflective of limited supply constraints, we will see the demand rise even faster and the oil addiction will grow. We see this in many OPEC countries where prices are kept artificially low thru subsidies (Saudi gasoline prices under $1/gallon), resulting in huge demand growth (double digit growth rates) for oil products. This is the wrong direction.

If you levy big taxes (A La Eurozone), economic activity will get hit in a bit way (truck & rail diesel requirements are huge in this country). So it will come back to bite either as inflation or as recession. Is that what we want? Some things for us to ponder ..... Anil

Norbert - yes, when 'peak oil'  is real, considering the snail's pace we're experiencing in developing alternative sources, we will see fireworks - probably worse than we're seeing today. And if those who know are already looking at the bottom of the barrel, today's prices might be justified - if for nothing else than to motivate quicker progress in developing alternatives. But we surely have enough global oil supply for the next 5-10 years anyways - even without looking at the dipstick. So the recent doubling of oil prices might be a bit premature. And even though oil producer states might have motives to maximize their sales of the 'family assets', I still feel there is a significant speculative component to the price increases.

Today's prices are already starting to impact our way of life; but nothing like no oil at all would. I look forward to reading the November report from IEA. Maybe it will be an 'Al Gore' moment.

I wanted to mention a few things about longer dated futures. The futures curve plotted against time (1 thru 60 months forward) for oil has just turned pretty flat to slightly contango (meaning longer dated futures price is hgher than nearer month price such as month 2 is higher than month 1). This curve is generally in the opposite direction (in backwardation or M1 is higher than M2 and so on).

The recent flippping of the longer term curve is not necessarily a confirmation of the peak oil theory. We will not know for sure on that for a few more years after the fact. Instead, it just confirms my comment that the market now sees OPEC as NOT opening the taps going forward, thus in the longer term, it perceives a tighter supply/demand balance than in the more recent months. My takeaway from that is that at these prices, OPEC is either unwilling or unable to raise production. I would suggest the latter because they have NOT been reinvesting those profits at a big enough pace to replace the natural declines that happens in all oil fields. Just my take on things .... Anil

There seems to be a common confusion about resources "in the ground" and the resources here and now. The difference between them is the production capacity and availability of equipment, talent and skillsets to do it. Their is shortage of rigs, manpower & the right skillsets in the industry today. Rig rates have zoomed 400%. Is that "Reasonable" ... no. But economically justified - Yes. But without rigs and skillsets and manpower, resource in the ground does not get exploited.

Saudis supposedly have 250+ years of resource in the ground (at a rate of ~10 MBD or million B/D). However, their max production capacity is just 10.5 MBD. All that 200 years of production CANNOT come out at the same time. These reservoirs will permanently lose more than half the recoverable oil if production rates are not properly "managed" meaning kept at reasonable levels. Venezuela lost 400,000 B/D of capacity permanently because of Chavez directed edicts to produce at higher rates than the geology allowed. So, the problem is production available daily, NOT the resource in the ground ..... Anil

Anil - good questions and examples. But, while you may get a person to pay $8 a loaf, there will statistically be far fewer of them than those who bid $2 or $4 a loaf. So when the next shipment arrives, maybe the $8 a loaf guy doesn't need anymore. Prices should drop - unless the bread maker decides they don't want to make any more bread until the price he wants is met. Same with oil/OPEC. Is that a free marketplace? Seems a little monopolistic to me.

I don't favor government taxes, controls, or freezes per se. I do favor a fair trading environment, and regulations to preserve that. I do favor anti-monopoly laws. I also support a Fed that protects the value of the dollar and fights inflation. On the issues of energy, food, and water I support government funding and oversite of R&D and startup businesses, with the government(people) recovering a share of future profits.

Gary: Thanks for your comments. I think we are both in agreement ... added taxes are bad UNLESS they are directed towards specific Alternative energy projects. There is also no question that oil market is not fair, however, that is a global reality, unless developed nations decide to bulldoze their way into the OPEC cartel and destroy their oligopoly, there will not be a "fair" market.

The reality on the ground is that there are parts of the oil market that are "fair" ... traded markets in the west ... A futures market must have a buyer and a seller for every contract and thus as long as 2 consenting adults agree on that contract, who are we to decide what is "fair". If you are implying collusion among oil companies or brokers, that is extremely difficult in today's regulated environment where Oil execs can go to jail even for crimes committed by juniors. It is unfortunate that the abuses of a few bad apples like Enron have unfairly tainted this generally straight-forward industry.

On my bread loaf example, it was meant to illustrate a supply constrained world in which demand (3 people needing bread) exceeded supply. That is close to where the oil situation is - perhaps the following comments from a Barclays Global Analyst report might shed some light on the commodities & oil situation:

***** A snippet from Barclays report ****

First, there is no evidence that price rises have been less in commodities which are
difficult or impossible for investors to get direct exposure to. For example, some of the
strongest price rises have been seen in the minor platinum group metals and specialty
metals, steel and also some agricultural products such as rice with no or limited
exchange-based trading. Second, the diversity of price performance across
commodities has been so strong as to belie the idea that there is any rising tide of
investor money that is strong enough to raise all ships.

Over the past year, nickel prices have fallen by 53%, but tin prices have risen by 71%. Heating oil has risen by 100%, while gasoline has only gained 41%. UK natural gas, (which is not in the main indices), has risen by 167%, while US natural gas (which is part of the indices) has risen by 47%. That degree of divergence in relative price movements is so large, and so correlated to relative fundamentals, as to suggest that pegging commodity price rises to such generalised non-fundamental factors as investor flows or exchange rates does not have much explanatory power to offer.

****

Hope that helps ..... Anil

I'm not sold that "speculation" is adding any significant cost to the price of oil.  That is the line that we've been fed for the past 5 years now, and it's long since gotten stale.  What I see is a bunch of people frantically grasping for straws in an attempt to explain why things aren't really the way they are.  At some point this denial will give way, and at that point we can hopefully focus on real solutions to the real problems, and stop wasting effort in a pointless attempt to find a quick, easy and painless fix. 

I think it's clear that the vast majority of the increase in oil can be attributed to supply and demand issues.  If a lot more oil is not going to become available soon, then this is just going to keep getting worse going forward.  Once people and politicians start talking about real solutions, and we start to address the source of the problem, then maybe we'll see oil prices come back down.  As long as we're stuck spinning our wheels, blaming speculation, oil companies, and a number of other boogeymen, we're not going to get anywhere, and oil prices are generally going to stay high or keep going up. 

Agreed.  And one more point on speculation is that it goes both ways.  Speculators just follow trends and are perfectly happy going both long and short. 

I do think it's possible for speculators to exaggerate price swings short term.  But the futures market also helps growers, miners, airlines, etc - they can hedge some or all of their product / purchases in order to manage business risk.

I hope that McCain and Obama find the courage to tell voters the truth this year.  We have an extremely serious challenge ahead of us.  The Fed's effort to stimulate the economy with rate cuts is backfiring - look at the strong inverse correlation between the USD and WTIC.  America will came out of this mess a stronger country once it has solved its problems; but a dependence on oil is not fixed overnight.

Fantastic thread which I had somehow missed; thanks all  especially Anil.

I have only a few observations to add: first, I can see quite a lot of behavior change here in Ct already in response to the price rise; I would guess the same is at least possible elsewhere. Lots more commuting by train to New Haven and NY--the parking lot for the commuter train is more crowded every week. Noticeably increased use of golf carts, which are legal on the roads in my town, for local shopping. The boat industry--a big slice of the local economy--is going through the usual disruptions with zero sales of big gas guzzlers and increasing interest in sailboats. 

In the last few days I've seen a story on the great increase in repossession of big power boats as well as one on the dramatic drop in the value of second hand SUVs and pickup trucks.  So change is happening in response to the price rise.  I'm of the school that thinks we'd be a lot better off if we'd driven the change earlier with more taxes at the pump like the Europeans but there's no point in looking backwards and increased taxation now seems unlikely, to put it mildly.  Let's just hope we can avoid the WPT. 

To go back a week--there are LOTS of boats in Europe, Mike--try the East coast of Spain if you doubt me.  Smaller, it looked to me like there was a higher ratio of sail to power, and fewer of them being dragged around the roads for every use.  But still, lots of boats.    

I doubt we can get back to sensible energy policy until the campaign is over but Obama's refusal to back the gas tax holiday is a refreshing sign.  

As for me, I'm on my way to buy a comfortable bicycle with panniers for local errands.

DrH   

In Scandanavia, you have wind power making up a meaningful portion of their power needs and you have lot's of bikes on the streets... and you don't see as many over-weight (like me) people on the street.  Their standard of living doesn't seem to be suffering from a lack of arab oil.

The problem in this country is that we do what is cheap and most profitable too often, instead of having poilicies that lead us to what is right and sustainable.

How much wealth should a company that "discovers" oil in a tanker from the middle east have?  We should be rewarding those wild catters that find oil and gas here at home.  Let's open up all areas for looking for it... and enforce our envirnmental laws against those that don't do it right.  Let's tax the barriers to domestic production (cheap imports of oil that we can no longer afford because of what it is doing to the dollar).  A barrier to domestic production is cheap imports.  Currently, there is no price to pay for importing it.

We need more tax money for infra structure... we also need to help private enterprises develop alternatives to foreign oil... and we need to be smarter about how we do that (corn based gasohol is stupid)... it doesn't mean that we shouldn't do it, just do it smart.

The biggest disadvantage domestic companies have is subsidized (or no) health care abroad... it isn't decent wages here.  BUT we need to stop blaming others and start solving our other problems.  There hasn't been a lot of that happening in the last 8 years.  It is rediculous to say that the free market solves everything and to just keep going down this crazy road we are on.

erryl

 Nagorak, DrH and others: Thanks for your comments. There is no question that we are seeing the impact of high oil prices. We see it with SUV sales going down, Ford guidance suggesting it won't be profitable till 2009 because of stalled SUV sales etc. I think the fuel economy standards need to be tightened  more quickly.

Erryl: I agree with many of the things you suggest. While a tax on imported oil could work, a better idea would be incentivize domestic production by giving domestic oil production a tax rebate (or royalty rebate or something along that line), so it will not run afoul of our fair trade policies. Until recently our oil policy was to help support the mideast and buy cheap oil from them (which has now been trashed after Saudis refused to raise production even after pleas from Prez). That was one policy which kept the smaller wildcatters from surviving. They are the ones who generally have better success at finding oil than big players. 

There is also the myth that having large swaths of wilderness being kept "Wild" is somewhow good for the country. What the public does not know is that the leading enironmental groups such as Sierra Club actually produce & sell oil from their own lands. This helps a base revenue for these groups. They actually produce oil in a much more haphazard and unsafe way than most oil companies. So, bottom line is that even environmental groups need to extract resources in a managed way. So why keep much of the resources locked up under different pretexts? I am all for proper and environmentally safe oil production and use with proper regulations, but apply them equally to everyone.

The only point I am not sure I agree on is added taxes to create more infrastructure. We already have many use taxes for targeted for road improvements etc. I feel we are misusing the current taxes. We just need to refocus these taxes properly. Perhaps a small duties on imported oil to help keep that part of oil at a disadvantage may not be bad. But, I do feel we need to worry about not raising the total tax burden. Being smart about taxes is good.

One example was Singapore: They limit the number of cars on that island nation and anyone buying a new car has to "bid" for a COE )"Certificate of Entitlement"). COE is bid freely, up or down. The revenues from COE are kept by the Singapore govt and these are huge. The bigger cars get less number of entitlements per month allowed, so their prices are bid up quite high. So, Toyota Corrolla which sells for $20K in the US, sells for $50K in Singapore (it must be even more by now), the $30 K being the revenues for Singapore govt. A BMW 3 series car that may have a $40K tag here, may sell for the equivalent 3 times that. And the premium for it keeps going up (more demand as people in Singapore got more wealthy). This is not added tax on anyone that does not want that car. The same could work here, meaning you must pay for your luxury! These revenues then can be directed towards improving infrastructure.

Anyway, this has been an excellent, multi faceted discussion. Thanks guys ... Anil

I would agree that the current gasoline taxes, which are supposed to go to infrastructure, should be adequate.  I only mentioned it, because I don't think that the tariff I propose can replace the current taxes.

I don't think that incentives to domestic production would be a good replacement for the tariff, because I think that there is a need to fund alternatives to oil.  I doubt that even nuclear will thrive again without some form of guaranteed market price for the power. When all of the nuclear plants were built, a state regulator was promising to let the utilities recoup their costs.  In the absence of that guarantee, there is unlikely to be many new nuclear plants built.  They are just too risky to build in light of uncertain demand and price.  A government incentive/price guarantee will be necessary.

Renewable energy is even more likely to remain more expensive in the near term than "cheap" arab oil and government subsidies will be required, at least until the technology is perfected and a larger scale of production is achieved.  To accomplish these things, you need more taxes, not less.  I think you do that by taxing the bad behavior you want to discourage.  Importing too much oil and nat gas is just as dangerous to our well being as smoking and drinking too much (and eating fast food).

If big oil can't lower itself to finding oil in this country, then big oil needs to get smaller and small oil and nat gas companies should get bigger.  Their choice!!!!

I, like George Soros, am not a believer in the free market's ability to provide a sustainable solution.  It is up to governments to regulate and direct outcomes that are in the public's best interests.  Arab oil may remain the cheapest fuel, but it is not in the country's best interests to keep going down that path.  Eventually, the dollar is destroyed and our country will face economic decline...

erryl

Some additional musings ...

Everyone here seems to agree on the importance of greater efficiency and on aggressive, innovative action to implement alternative energy sources.

The Singapore idea is very interesting.  The French have something that heads in that direction:   individual tax credits for clean cars.  Here's a LINK. 

Where I disagree very strongly with Anil is here:

There is also the myth that having large swaths of wilderness being kept "Wild" is somehow good for the country.

I am of the opinion that this is one of America's great strengths.  At the risk of sounding like a Sierra Club spokesman, large, open, wild spaces are an essential part of the America I love. It's what I miss in Asia and Europe.  Our country's strength is not all about energy.

That doesn't mean that oil extraction from places alike ANWR can not be done in an environmentally-responsible way using new technology and with the on-site cooperation of independent environmental experts.  Large bonds would have to be posted to pay for any failure to comply with environmental rules.

I could support ANWR and other development under these tight conditions and in conjunction with aggressive policies on MPG efficiency, CO2 emissions, investment in alternative energy, etc.  Everyone will have to compromise.

However, I worked for 20 years with one of the U.S. two oil majors (it starts with a "C"), so I know something about their priorities.  I've never been to Alaska, but have spent a lot of time on the ground in the Niger River Delta and had endless discussions with petroleum engineers in the US and in Nigeria.  The oil companies have made a mess in the delta area.  Don't ask about the safety of the offshore piping ...

I really think our options are fairly limited in the U.S. based on what our citizens are willing to accept.  Whatever the merits, I don't see a higher gas tax flying, nor do I see a surcharge on buying cars to be accepted.  People in the U.S. are too accustomed to the idea that they are free to buy whatever they want, with no limitations.  This sense of personal freedom (or entitlement) is good in some respects, but can be very bad in others.  This is a broad generalization, but people in other countries, such as those in Europe, seem more willing to accept a greater degree of personal inconvenience for the greater public good. 

Unlike Singapore, our economy is very consumer oriented, so our government is less willing to do anything that would reduce consumption of any item. Even

Big business also has way too much lobbying power with the government, which will hinder any attempts to make any changes.  Part of the problems our automakers currently have is, ironically, due to the fact that they continually lobbied to keep fuel economy standards low, so they wouldn't be pressured to sell more fuel efficient vehicles.  Rather than try to compete with foreign automakers on technology, they just litigated and lobbied to make it so they could keep selling the same old, low gas mileage SUVs. That's a large part of why they have been caught so flat footed now with higher gas prices. 

I hate to say it, but I'm not really that optimistic about our ability to adapt to higher oil and gas prices with sensible government programs.  People will adapt as they are forced to adapt-- for example, smaller cars are more popular again and SUV sales are plummeting-- but as far as additional government incentives go, I am not convinced they are going to happen. 

I'm always amazed that in these discussions, no one posts the obvious solution.  I'm assuming for the purposes of my post the question is "How to reduce  foreign oil dependence."

The obvious, but partial, solution is to tax oil.  What's missing is that the oil tax, whether a "cap and trade" or "carbon tax" or some other lame brained idea, would spin our economy into stagnation at best.  All taxes are like adding weight to a race horse. The more weight, the slower, on average, the horse will run.  So the solution is not to raise taxes but to transfer taxes!

For example, if we transfered the current SS and personal income tax to an oil excise tax, it would increase the cost of oil by about $7/gal. at the current consumption rate.  The excise tax would be automatically adjusted to oil consumption. The net effect of the tax would be much higher because the tax would make plug-in vehicles economic,  RV's would be junked, people would move close to jobs, and in a hundred myriad ways, the oil consumption be reduced.  If the oil consumption was reduce was 50%, then the excise tax would increase $14/gal.  It would be revenue neutral.  All this is inflation adjusted of course.  Oil is price elastic, but it takes 10 years to fully play out since people have to change their way of life.  For example, a remote house that is heated by oil [or lpg which is fungible with oil], would probably be abandoned or torn down or replaced with a house that is super energy efficient.  The point is that the effect of a high oil price takes time to play out.

This would not affect our economy except is salutary way since an excise tax is cheaper to collect.  Our economy would remain just as prosperous.  The weight on the horse would remain the same. 

For all those who doubt the wisdom of free enterprise and profits and wish for or expect intelligent direction from the government, I think that "Gasohol" is the best answer.  Nothing else needs to be said.  Profit motive is now pointing us in the direction of least and most efficient cost, and that direction is oil!  The profit motive cannot take consideration catastrophic or malicious future actions.  But add $7/gal to the price of oil and watch how fast the profit motive changes everything.