9,000 Permits, Windfall Profits Tax, Keystone XL, And Russian Oil

The U.S. imports oil from Russia and OPEC because their oil cheaper and more competitive than oil supplied by North Dakota, Texas, Louisiana, Alaska, Oklahoma, and California. Now, with the oil market in turmoil, and oil prices as much as double the price last year, U.S. political leaders are going back to their playbooks of bygone eras. Some members of Congress think that oil and gas (natural gas, not gasoline as some believe) is as simple as pouring M&Ms out of a bag. It isn’t. Someone had to plant, harvest, and refine both the sugar and cocoa for the M&Ms. So, while it is a target rich environment for folks like Stephen Colbert, a review of these claims and complaints without rancor or ridicule suggests that only one of the proposals is likely to make a difference.

One claim coming from Washington is that the oil industry has stockpiled 9,000 approved permits to drill, and that the industry is somehow withholding this oil from U.S. citizens. This claim is a false equivalency. Permits are not equal to barrels of oil. The complaint is the same as accusing Ford Motor
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Company of stockpiling steel and tires instead of producing vehicles. Ford Motor Company cannot double the production of F-150 trucks overnight. The oil industry takes years to undertake seismic analyses of rock formations miles below the surface and not every oil well is created equal. Some end up not producing or produce so little a company cannot viably continue to operate the lease. Federal acreage is not where the vast majority of domestic oil and gas drilling occurs. Scheduling capital equipment and labor is not trivial, and many federal leases—with their associated permits to drill—are tied up in litigation causing the oil companies to develop other acreage in the meantime. Last week, the Baker Hughes rig count totaled 663 total rigs working—and estimate just one well per month per rig—in the U.S. This is up from a low of 247 less than two years ago when the industry was hemorrhaging capital and labor. Add in the finance side of the house under fire from amorphous ESG standards that have forced investors to withdraw capital from oil companies. Wall Street is not inclined to provide new financing for what may be a short-term market dislocation.

A couple of senators have dusted off the idea of a Crude Oil Windfall Profits Tax to prevent oil companies from profiting off the spike in crude oil prices. In 2006, the Congressional Research Service, the nonpartisan research arm of the Library of Congress, studied the effectiveness of the windfall profits tax of the 1980s. The study found that the windfall tax revenues were offset by correspondingly reduced corporate income taxes. The study also found that domestic oil companies cut back their development projects and that the nation increased our dependence on cheaper supplies of foreign crude. Imposing a windfall profits tax today would also change the game for investors who committed capital under a presumably stable set of laws in our capitalist society. Russia, Venezuela, Mexico, and Israel are notorious for changing the game to increase taxes or simply nationalize assets after the U.S. oil companies have spent billions to develop oil and gas projects.

Others decry the cancellation of the Keystone XL pipeline as a critical shortcoming. The U.S. imports daily from our closest ally Canada more than 4 million barrels per day. During the brouhaha over Keystone XL from 2008 to 2022, other pipeline companies successfully expanded throughput into the U.S., and Canada continued to send oil into the U.S. by the more hazardous rail system. Crude-by-rail can be readily expanded especially at higher prices.

Some complain that the current administration has removed some federal lands from drilling. This has been a recurring theme since 1931. Lest we forget, the Trump administration removed very promising offshore oil areas along the coasts of Florida from leasing. On this issue, there is plenty of blame to go around.

The administration has made inquiries of Iran and Venezuela to increase production. Iran has no apparent excess capacity. We can expect that because during the prior time when sanctions were imposed on Iran, that oil made it to the world market albeit at a discount. (When the previous set of sanctions were lifted Azerbaijan’s oil production oddly dropped 500,000 barrels per day.) Venezuela will be no help. The nation has failed to reinvest in its oil industry for decades and cannot scale up production.

OPEC has refused to ramp up production and stated that they do not see the Russian invasion of Ukraine as a long-term disruption to supply and demand fundamentals. Maybe so. The unfortunate resurgence of COVID in China may prove OPEC correct on the supply side and perhaps in expecting demand destruction—just not from Europe and just not due to the war.

What can work? For many years, my colleagues and I have argued for the reimposition of President Dwight D. Eisenhower’s oil import quota to provide stability and security to the U.S. economy. Eisenhower saw the threat to our national security that would develop if we became dependent on cheap supplies of foreign crude. Without oil, no nation can project an effective military. Without secure supplies of oil at a steady price, a nation’s economy is at peril. When President Richard Nixon, who had been vice president under Eisenhower, removed the restrictions, OPEC nations undercut the U.S. oil industry and then whipsawed the world oil market with an embargo while the U.S. industry could not pass along the price increases due to Nixon’s wage and price controls. Volatility is not a friend to the U.S. consumer nor to the U.S. oil industry. Without a clear view to earning a return on capital, the U.S. oil industry shrank until hydraulic fracturing developed economical supplies at prices set by OPEC. And then as the 2014-2016 oil price war demonstrated, what OPEC giveth, OPEC can also take away.

The U.S. and Canadian oil industry has and will have a hard time competing against Russia and OPEC for cheap supplies of oil during peacetime and economic equanimity. The higher domestic price of oil brought on by the imposition of an import quota is cheap insurance. It would build GDP by reducing imports, expanding employment, and providing a very great incentive to accelerate the adoption of low/no emission vehicles. The way to go forward is to go back to President Eisenhower’s import restrictions.