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.

---

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