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back to article Windfall taxing big oil: how to make the gas crisis worse

There's something about the oil business that turns even intelligent people into frothmouthed loons: they're raping the planet, shafting Joe Sixpack or, from the other side, insisting that the drill in every back yard is the very definition of America. I realise that in the middle of an election that the small still voice of …

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There's some merit, but missing info

There's some merit to what's being said. The government getting involved in the market is one sure way to disrupt it and it can cause some problems.

However, I think some points are being missed.

Of the legislation I read, a tax on windfall profits is in the works. However, the tax seems to be graduated so it's not an across the board tax increase on all profits. Addtionally, the taxation is geared to help spur exploration and more drilling. Companies like Exxon are doing very little drilling ... they have no incentive to with high prices. Some are doing it. A lot are focusing on stock buy backs and paying huge dividends. If they invest more profits in exploration, drilling and alternative fuels, they can avoid a lot of the tax.

Is it the right answer? I don't know. However, I know what's happening isn't working either. Points about speculation making the market crazy and breaking things are valid too. Gotta wonder how much FUD is spread about by both sides.

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Recent new article

"That means consumers will now pay £28.45 for an average basket at Asda (up £6.37 on last year) according to the report, £29.67 at Sainsbury’s (up £6.18) and £29.90 at Tesco (up £6.29).

However, the fact that the price of essential commodities has rocketed in price by up to 118% in just six months ought to worry consumers more, according to experts.

Between February and August 2008, for example, the report shows bread has soared by 27% in Sainsbury’s (from 59p to 75p), and by 22% in Tesco and Asda (from 59p to 72p).

A (500g) bag of fusilli pasta from Tesco has risen by 41.8% (from 55p to 78p), while the supermarket has also imposed a staggering 118.9% hike on the cost of Basmati rice (from 90p to £1.97 for 1kg).

Asda, meanwhile, has raised the price of its pasta by 27% (from 55p to 70p) and the cost of rice by 52.6% (from £1.14 to £1.74); while Sainsbury’s has hit customers with a 17.9% hike on pasta (from 67p to 79p) and a 51.2% increase on rice (from £1.25 to £1.89)."

So all you windfall profits folks think this is just cost of liviing going up or we should be taxing the crap out of these corporations for their markups, too? Why aren't you talking to your government about the sorely underinsulated housing you got and why it costs so bloody much to heat it, eh? I'm sure that's all someone else's maximising their profits...hell, tax them, too!

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@Everyone...

It is strange to see SO many people talk about the oil companies and how much POWER they have to manipulate the oil/gas prices. If this is actually true, then explain ONE THING to me:

Why in the HELL didn't they USE this power back in the 1980's when oil was around $10/barrel and they were going broke????

I lived in an oil town during that time. It was no picnic for ANYONE working in the oil industry (or in an oil town) during those times. That went on for a couple of decades until the recent spike in oil prices brought things back to life in these oil towns.

Of course, the true answer (and the one a lot of folks don't want to actually talk about) is that they DON'T have this magical ability to control oil prices. The global oil market does that. And as large as each oil company is, there are WAY too many of these huge oil companies playing in the global market for a few of them to actually "manage" the oil prices.

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Windfall roulette

This article, while flawed, makes a valid point or two. The most valid is the idea that a Windfall Profits Tax is wrong-headed. I must say I am disappointed by Sen. Obama's political position as I expected more, but it seems his advisors are stuck in the 1970s. My brother, an oil man (mostly gas) for 30 years, made the point that we are all victims of our experiences. We all grew up with the eco-nightmares of oil spills off the cost and the Exxon Valdez, but the technology is much safer these days and faster. Sen. Obama's position is one that stinks of fear as does Sen. McCain's. Both are afraid to face the real issue, and it is costly, and painful. I've advocated this position for years, raise fuel prices. The "free" market economies of the world know only one sure behavior modification tool, price. Regulations are a failure for the most part as people either ignore them or find a way around them. Price works as world consumption declines and US consumption declines. If you raise the price artificially then you can drive down consumption even further. Try this: http://www.nytimes.com/2008/08/10/opinion/10friedman1.html

One poster claims there are great economic barriers to getting into this and I can tell you my brother has suffered from one of them. It takes a lot of capital to get started. He and his partner took years to raise about $30 million to drill a bunch of successful gas wells. They had a great track record, met all their profit mile stones, scoped out the property, but needed $500 million to get the job done. No one would lend it to them. While he's not suffering, he could have been a whole lot wealthier, and I could have been borrowing a few bucks now and then. ;-)

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Actually some common sense!

Taxes are just a cost of doing business, passed on to the final consumer. How much of the price at the pump is taxes? Quite a bit! Everybody has their hand out for a tax here and a tax there. Any "windfall" will be seen at the pump as well.

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@RRRoamer

No leverage.

Now oil has passed its peak whilst demand continues to grow, they have leverage.

That's not to say that is how it IS, but it is how it COULD BE.

Ergo your question was worthless rhetoric.

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Coat

Hugo (or is it Ceaser) Chavez has it right

We should just take over all the oil companies equipment and make it state run. It's a utility, take it away from the oil companies. Then the government could run it at the break even point or even a loss.

We'd see cheaper gas then!

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Too Much Profit?

Soo.... Where does one draw the line of "too much profit"? I for one (living in a free nation, free market), enjoy the possibility of being able to make as much money as I want from my business. This doesn't mean skipping out on my responsibilities (standard taxes) by any means. However if they take "excess" profits from one company, what's to stop them from taking that from my company? Is oil special just because it's somewhat necessary now (hasn't always been necessary, probly won't be forever)?

My arguements generally fall back to private businesses vs corporations. Corporations such as Exxon Mobile have a responsibility to shareholders for solid profit margins, in this case shareholders are mostly pension funds. However some sort of social responsibility encouragement (worker development, infrastructure improvements) would be far more beneficial than a windfall tax giving people another $1000 to spend on gas.

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Anonymous Coward

it's all relative

"Yes, it's true that Exxon's recent quarterly profits were, at near $12 billion, big. It's also worth noting that turnover was $138 billion, giving them a margin on sales of 9 per cent: which isn't really, anything much to write home about. "

Bloody hell chap, do you know what margins most businesses run on? That's a very decent margin right there compared to most.

Compare it to a software company, such as Microsoft - which is running close to 30% net profit - yet how many people are yelling at taxing the monopoly?

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Election Year

It's an election year for Prez of the U.S. of A. Don't believe anything the morons say no matter how much sense it may appear to make.

The whole process is a race to see who can out-stooopid the other and in the end the American people elect who seems to be little more than the lesser of the two evils.

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Yes, a windfall tax is blindingly stupid

About as stupid as saying offering oil companies more places to look for oil will result in lower prices. Okay, it will. It'll result in petrol/gas prices being slashed by as much as 3 or 4 pence a gallon. For about a week. In ten years, which is the absolute minimum amount of time it would take to rush the 3-7 days worth of oil to the market.

Supply issues? Not with oil there isn't. There is enough oil at the moment to adequately supply every market that wants it, and will be for at least another 3 or 4 decades. The supply problems don't start until you hit refineries.

I'll give you the overwhelming example of why petrol/gas prices are this high.

In Alaska (where I live) we have a little bit of oil. About enough to hand out a few billion dollars to the general population every year. Money that is made from taxing oil corporates. Alaska has no taxes and turns a profit. All good until you start buying petrol/gasoline or heating oil or electricity or natural gas.

The average price per gallon of gasoline in the US is $3.80 (today). The average price in Alaska is $4.40, rising to $12 per gallon depending on where you live.

We drill our own oil, we refine our own oil and we sell the gasoline produced in our own gas stations. Tell me exactly how 1/2 million people is too much demand for millions of barrels of oil per day? Tell me why we pay more, when the oil companies have no middle men, no market speculators, no anything to go through.

Now tell me again that oil companies don't set the price of energy to what they want it to be. Tell me again that giving them more land to drill is going to lower the price of energy within ten years. What, you're going to add a clause to the permission that says they must lower prices? Because without one there's absolutely no fucking way they will. Why should they? If people are paying $110-$140 / barrel today, why should they sell for less tomorrow? Because they have more? They have more right now, more than they need to supply the market.

Oh yes, we have a shortage in supply. Just the other day I went to fill up and the petrol station said "No, sorry, we're out, too much demand you see.". I call bullshit. In 30 years time, you might have a point about supply. Today, with maximum capacity being delivered by everyone that can deliver, not a chance is there a supply problem.

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J
Dead Vulture

Yeah, right...

"I realise that in the middle of an election that the small still voice of reason isn't going to get much airplay"

Funny how everyone thinks *they* are obviously that "small still voice of reason"...

Anyway, the global casino creates the problem and then the solution advocated is to... just let the casino solve it by doing more of the same!? Sounds very reasonable indeed, natural selection at its best. And we know how that one works out for the not-so-fit.

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Coat

How 'bout a Windfall Regime Change tax?

'Nuff said.

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I am shocked

>Yes, approx 9% profit isn't a high margin, but as the market increases in size,

>the profit margin is supposed to shrink. Think AT&T before the breakup.

At the utter blissful ignorance of so many posters here are buying left wing propaganda hook, line, and sinker.

Profit margins shrink as size grows? How on earth do you attract capital that way since by definition it would be in your economic interest to invest in other areas you can attain higher rates of return?

AT&T before breakup was a highly regulated monopoly. It's profits weren't low due to market size, they were low because those profits were guaranteed by a complex system of regulations that assured them a set rate of return under favorable accounting rules in exchange for providing universal service and being protected from competetion.

One recent show one proud liberal was waxing poetically about how good the high energy prices are, and she felt the pain of the working class, so we should provide them energy tax credits (i.e. tax everyone else already paying more for energy in order to encourage more consumption by others for whom the energy would be relatively cheap).

Oh well...if energy costs do not collapse soon, next year's municipal budget season in the U.S. is going to be a hoot. Taxpayers, particularly the fixed income seniors who turn out consistently and in large numbers (unlike the mythical Obama Youth), will not tolerate even zero-increase budgets after this winter. They'll be looking to squeeze blood from the stone of municipal budgets in those communities that approve them by referendum, and even where it's all by represenative government...the city councils will be under enormous political pressure to cut taxes.

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Coat

Over Simplified

There's a number of things that have already been pointed out which really should go into a balanced article. However it's already a long article and far more than the average Guardian flock member would read before hitting "Stick it to the man" on their poll in favour of a windfall tax.

Economics is apparently a dying subject in Britain, there's not enough interest in it at schools I read. In my own not in the least humble opinion, anyone without a basic grasp of economics shouldn't be allowed to vote. Worse still is our populist government who feel the need to ignore the mandate under which they were elected, and rather than become informed on issues which affect all of us, and handle them for us, they seem to worry more about being re-elected and just go for what White Van Man says he wants in The Mirror.

Would you go to a doctor who diagnosed you with whatever you felt like you had? "Doc, I've been feeling really tired, I think I've got ME" "Ok. You've got ME" "I can't have cancer, I feel fine" "Ok, no cancer then"

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Elasticity

The problem is how inelastic demand for petroleum is. It's so critical to our daily lives that the price can increase by insane amounts, and it will only marginally affect how much people use. The same is true with water consumption, which is one of the reasons most water districts are government chartered, privately operated monopolies.

As much as I like free markets, they don't work for public utilty goods like water, power, and gasoline. I honestly think the government should charter and regulate a gasoline monopoly with (relatively) fixed prices.

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Ummm

"Bloody hell chap, do you know what margins most businesses run on? That's a very decent margin right there compared to most."

Perhaps you should have read further then. I do actually link to industry sector by profit margin. Oil and gas is 60 th in the list.

"All of this is pretty much sewn up by 4/5 huge extraction/supply companies with a number of small exploration companies prospecting. Its not an industry you can just go out and buy an oil field with no experience or track record. Its an oligopoly and we're stuck with it."

Umm, no, it's not an oligopoly.

http://www.thehindubusinessline.com/2006/09/06/stories/2006090603850100.htm

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@ @ RRRoamer By Mark (+tangent rant)

I don't really want to get into a discussion on the Peak Oil theory itself, suffice to say the real world seems to differ slightly from it (I seem to remember reading in the 90's that we wouldn't have _any_ oil left by now). However, you are correct that EP companies are charging more for their crude now, and this _does_ have to do with Peak Oil, or rather, it has to do with easily drillable conventional oil supplies.

Shell's Perdido platform in the gulf of mexico (currently under construction) will drill for oil at a dept of 8000 feet (roughly 2.5km). It already has and will continue to cost a shitload of money, not just the building of it (which is already completed), but the part that goes on the ocean floor isn't just bloody hard to successfully accomplish (e.g. expensive), 10 years ago the technology used to accomplish it didn't even exist.

point is, go far enough back and there wasn't even any reason to drill for oil in the sea, rigs on land were both cheaper and easier to transport oil from. Then that oil started to run low, and they went to shallow waters. now they've developed the technology to go even deeper.

Oil isn't just made into petrol or diesel (not that you made that comment, I'm just going on a tangent). Our society is based on it. In case you didn't know; everything in your house, from the shoes you wear, to the cereal that you eat, to the uranium in the reactor down the road is only possible because of oil.

Oil is more expensive now because of 2 things: a dramatic increase in consumption (India & China, although I don't see how we can shake our fists at them and demand that they stop using oil at the same insane speed that we ourselves do), and as you mentioned yourself; easy oil has just peaked.

Windfall tax theory goes something like this: It costs the oilcompanies more now to make 1 liter of petrol than it ever has, so the price of petrol (and all comodities that depend on oil.. in other words pretty much everything) has gone up. We will correct this by making it more difficult for oil companies to make money, and take the money away from the ones that still manage to turn a profit. This will increase competition and lower prices.

Spot the flaw.

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Not market forces

I agree with Fred Goldstein and others. There's collusion, alright, just not as explicit as those who seek it are used to.

Check out any and every bit of data regarding historic oil prices and you'll note sharp increases whenever war threatens production. In particular, you will note that the current uptrend began with the invasion of Iraq. Prior to that point, with the only notable exceptions being spikes during previous oil-state war actions, oil prices have been relatively stable for decades.

It's not so much a windfall _profits_ tax on the businesss because they are honestly "earning" too much money for the market to support, but rather the _retrieval_ of funds that have been inequitably flowing to these ogliarchies as a result of manipulation by those that run them ... including Bush, Cheney and their families.

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Power Arrived In 2000 election

Nice try Mr. Worstall, you almost pulled it off with this piece but there's a few problems. First let me address some of the comments.

Why didn't Oil companies do something back in the 80's and 90's when prices were $10 a barrel?

Short Answer: Because Bill Clinton was in office!!

In 2000, the oil lobby and its unholy alliance with the Christian Reich got an Oil Man (Dick Cheney), and his bumbling sidekick (Dubya Bush) into office!

Dick Cheney for those who don't was the CEO of the larget Oil field services company in the world, Halliburton, right before his VP duties.

The Oil lobby is huge and powerful, it was able to put Bush/Cheney into office, that was prerequisite to todays state of affairs.

As someone who lived in the West Texas Oil Patch during the 1980's I can tell you all about the complaints of those in the Oil Business at that time. Following the oil bust of the 1980's prices were TOO LOW to merit drilling anywhere in the US or offshore for that matter.

Today there is a market environment that is VERY conducive drilling in the US and the Iraq war is nothing more than a resource grab that will allow US oil companies to stay in the game in the middle east as well. Ask yourself if there were no Oil in Iraq would a single US Soldier be there?

Now, back to your article Mr. Worstall, you try to make it sound like Mr. Obama wants a windfall profits tax purely for the sake of "pandering" to the populace. But I ask this: Have you or anyone else read the actual legislation that hasn't yet been proposed? Perhaps you would find that Mr. Obama proposes taxing profits that aren't reinvested, or perhaps you would find that there is much more benefit for the American people as well as our energy future to have Oil profits invested rather than giving the already superwealthy top management a bunch of gimmes.

Lastly, Big Oil is the root cause of much of the conflict, pollution, and other problems in the world. The Oil lobby has very successfully stifled the quest for alternatives in the US. Todays high gasoline prices are really the only thing that has caused Americans to curb their insatiable demand for gasoline and is going to spur the shift to alternatives. By my reckoning the Oil industry is vastly oversubsidized by the American taxpayer and all it produces is more headaches in terms of traffic, high food prices, and geopolitical conflict.

For Americans much of the problems associated with Oil and energy are "new" but these are problems that have been in the making for a long time and no one can say that they really expected for the finite reserves to last forever when the demand curve has been steadily upwards and even accelerating.

If we look at our current situation as a WAKE UP call then the time to seriously invest in alternatives to Oil is now. A windfall profit tax with exemptions for alternative energy investments will really help, so thanks for bringing some sanity to the debate MR. OBAMA

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Windfall Profits Tax

I take a much simpler approach to corporate taxes: THERE IS NO SUCH THING AS A CORPORATE TAX!!!

Any tax, regulatory fee, mandated spending (such as for health benefits, family leave, etc.) is just another entry on the Expense column of the corporate ledger, just like office rent, equipment purchase, salary, etc. It all gets factored in to the cost of the product or service provided by the company, and therefore is paid by the consumer.

When McCain was proposing the "gas tax holiday" several months ago, I had to agree with Obama that it wouldn't work, because the pump price would just creep up to fill the gap caused by the missing tax. Obama said he had past experience in Illinois with this policy, and knew it wouldn't work.

Well, we have past experience with windfall profits taxes on the oil industry, which resulted in both higher prices and an increase in the importation of foreign oil. But Mr. Obama apparently didn't learn his lesson from that experience, and wants us to go through it again. Obama is no doubt an intelligent person, but sometimes intelligent people aren't very smart. This is one of those times.

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Tax, supply demand

I noticed that in June us American's were really into small economic cars.... Gas was high. Now the cost of gas has gone down just a bit, and suddenly we're looking at SUV's again. I'm kinda ambivilant about the windfall tax.

Basically it's a government run savings plan. We'll pay more at the pump, then get a check later. Maybe... just maybe, it will also help curb demand, and keep us looking into alternative energy and economic cars. Problem is, it will hurt poor people (at least until they get their check.) Also anyone who drives all the time won't get the same proportion back. Same for those who don't drive, they're only paying more on everything else they buy.

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Anonymous Coward

Unfortunate

... that the article is based around the idea of supply and demand when there isn't a supply shortage. Oh well.

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@RRRoamer

The whole point of OPEC is to make a cartel that controls the flow of oil onto the market, keeps prices high and prevent free market competition from being effective. In other words, controlling the supply side so that it just matches demand and makes for a scarce resource.

The cartel was not working as it intended in the 1990s (too many break away players selling oil) which drove down prices.

For a parallel, look at the diamond industry. In some places you can pick up diamonds with little effort, but the supply chain is heavily controlled to prevent a free market.

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Wrong author

Might I suggest rewriting in terms of Machiavelli rather than Smith. The only part Wealth of Nations pertains to current oil prices, windfall profits and applicable taxes is Book V. Chapter I. Section II. - On the Expense of Justice - and then only in its omission.

True, before Jan 2001 Wealth of Nations used to largely apply to oil. But then, Mugabe used to be a nice guy, too.

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Political endorsement

I think we know who you are going to endorse.

So which oil company do you have stock in?

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windfall tax

This article is spot on : the idea of a windfall tax is stupid, and it is time the airhead politicians stopped trying to fool people that it is for the greater good.

It is not in oil (energy) companies interests for fuel prices to be too high. This encourages alternatives, be they don't use oil - don't use car so much, etc. look at alternatives - public transport, cycling, walking, electric car, etc.

The above said, we must consider the future.

Now I don't profess to be a greenie, and I am sceptical about 'global warming', but taking a common sense attitude to things you can arrive at the following conclusion : if you keep shitting on your own doorstep sooner or later it's going to stink, and you'll run out of toilet paper. The sun might dry the odd turd so that the rain washes it away, but sooner of later the doorstep is not going to be a nice place to be ! The Earth is much the same; it can only take so much load.

Earth (the planet) provides us with a rich environment in which we can live for free. How much does it cost to provide a life sustaining environment in space ? These environments are not rich. I certainly wouldn't want to live there ! We get so much more, and for FREE.

What I am trying to say is that we should strive to take care of (and appreciate) what we've got. This means that we shouldn't waste what nature gives us. We need to preserve the richness of the environment.

The other thing to consider is that Mother Nature can wipe us off the face of the planet we are **VERY** fortunate to live on in a blink of an eye.

Our reliance on fossil fuels is part of the present, with no attractive alternatives. Renewables will help, but ask yourself how much wind there is on a freezing cold winter night when you need lights and the power to run the central heating ? Not much, so we have to have fossil fuel parrallels to cover these situations. Don't even talk about nuclear with radioactive half-lives of thousands of years.

So how can we help ourselves ? The only answer is cut down on our natural resource usage. To the yanks and canadians who whine about fuel prices : we've paid more in the UK than the price you whinge about for fuel for a decade, and our economy still works ! I love a V8, but you really can downsize and help yourselves with this problem. Incidentally it will make what is left last longer, and help us all. We need to repair broken items instead of throwing them away. It is cheap goods from China that has lead us to this mentality via economics. So now the west has better air quality and we rant at China about emissions, except that we create the demand for the same. How hypocritical is that ?

The UK government wants biofuels to be included in road fuels. Is it ethical that to achieve this target biofuel crops are grown in place of food crops ? Consider that there are people starving. Using crops for fuel, given starving people does not seem right to me. Maybe I don't have enough understanding here ?

The bottom line is that the government can do its revenue gaining exercise, under the guise of green credentials.

However, what really needs to happen is that we all look at how to preserve our environment, be that rejection of planning permission for a new housing estate, buying a smaller more efficient car, etc. We can only keep crapping on our doorstep for so long. ***WE*** have to change now, and it is down to us to be willing to change. If we don't, we **WILL** face Mother Natures wrath, and it won't be pretty - probably an extinction level event with us as the cast.

my 80p/L tax on this matter ! Thanks for reading !

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IT Angle

@a few commenters

Don't forget about the other costs of running an oil field- especially a subsea one. There's the maintainence of them (they can't just leave them down there and hope they don't leak!), powering some pipelines (keeps the oil hot so it doesn't solidify and block the pipe), running tankers, decomissioning costs (which the UK gov't has, IIRC, just mandated be set aside during construction). As well as defending their infrastructure from idiots with trawl-boards and the idiots from Greenpeace who seem to think there's a magic "off" button they can press to stem this evil black tide of relatively cheap energy.

The Oil companies have to pay to keep this all maintained- and at the 2.5km water depth someone mentioned above that's maintaining equipment that's under ~250Bar (~3750PSI) of pressure. So not the easiest to get to in the event of a fault, and probably one of the easiest places for things to go wrong. And they've got to pay to maintain [most of] this for another quarter of a century at least.

Lots of this (unfortunately, not the defence stuff. That'd be too much fun) requires ROVs and AUVs, hence the late-coming IT angle to this economics story :P

Full disclosure: I work for a company that builds kickass robots to work under these conditions for the oil industry and spend a lot of time with people who do underwater pipe designs. So while I'm probably a bit biased, I can still offer another point of view for the argument against the windfall tax- they'll be looking after it for a quarter century which will cut into their profits/savings later on. So it's not all profit (all 9% of it...), some of it is deferred expenditure.

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of market structures and profits

1. Short-term vs long term - super-normal profits (those above that which are required to keep assets in an industry) can be made in the short-term. The short term is defined as "the period of time in which you cannot change fixed costs". Given the massive fixed costs inherent in the energy industry (finding an oil field, getting approval to drill, building a drilling platform, pipeline etc) that could be quite a long time.

2. a) tax vs profit - this is a zero sum game. Either the government has it (and spends it/gives it as a tax break) or the corporations have it (and spend it/give it as dividends). The real question is political, "who does the electorate trust to distribute the money?" Even if tax did drive up future prices, you can always tax those profits too... In short, government is essentially the same as a large corporation where everyone gets one share.

b) People mainly object to large concentrations of wealth rather than a particular return on investment percentage. There is a feeling that vast amounts of money tends to corrupt the executives, the corporations and the governments they deal with, leading to wrongful allocation of profits. Some sort of redress is required.

c) Corporations are just a legal fiction. Taxing corporations theoretically doesn't do much that taxing people directly wouldn't do. However, its much easier to do and allows governments to access revenue generated in-country, which may otherwise be passed to overseas shareholders. While heavily taxing people may be seen as immoral, the taxation of corporations is purely a pragmatic measure. Unless of course, an industry has failed to contribute funds to the party in power...

3. Oligopoly - a few very large companies, very similar product, huge barriers to entry and companies acting in very similar manner (with or without collusion). It looks, smells and tastes like an oligopoly. There may be new entrants - they manage to do so by being granted a legal monopoly on new oil reserves and raising billions in an IPO. Its still an oligopoly.

4. Stupid people/lack of information - we've been told that oil speculators are driving up the price - there is no real supply shortfall. No-one in the media seems to have identified who these speculators are. Perhaps a tax on them would be more appropriate. I suspect most people hear "oil industry (speculators) are pushing up the prices of oil". It should be easy to quantify - have the energy companies' profits (revenue - cost of goods sold) jumped in line with the retail price increases?

5. Governments (in the UK) have been telling people for ages that higher (petrol) prices reduces consumption and that's good for the environment. They can hardly complain when speculators do the very thing they have been saying is good for the environment. That said, they must be really peeved someone else is getting so much. Of course, the whole argument spurious. People give up other things such as DVD's long before driving to work and cancelling the weekend in Paris is more likely due to the spurious "airport security" taxes than anything else.

Flames, because everything will burn eventually...

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Peak Oil

Does NOT mean "no oil". That meme is spread by those who do not wish to give credence to any problems with oil production.

Like you.

Peak oil means that the easy extraction is over. Up until that point, if demand went up 20%, supply could go up 20% to meet it (if someone didn't supply more, then someone else could sell more oil and make more money than those who didn't).

After peak oil, the easy finds are unable to extract any more (rather like a balloon when it empties pushes air out less quickly) and any other sources take longer to extract (and so have a much lower rate of extraction.

So when demand goes up 20%, supply cannot move to match it (even if they want to) and so the cost goes up as those that demand oil have to bid amongst themselves to get preferential treatment in the limited supply.

Imagine, if you will, finding that the moon is hollow and has petroleum deposits 100miles under the surface right to the centre. But it is expensive to get that down here, expensive to refine (you won't be able to do it up there without a LOT of technology and comcomitant expense). But we now have a HUGE reserve we could exploit.

But not worth doing so even at $200/barrel.

And if we get to $300/bbl we only have a limited amount we can refine up there, a limited number of places we can land a ferry with the oil and a limited number of flights we can make. So we have a very limited ability to EXTRACT this and no amount of demand will make it possible.

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@Tim Worstal

If it isn't a cartel or ogliopy, how come, despite oil costs going up and competition being (in the case of no collusion), the profits have gone up for oil companies?

The shareholders were happy with the previous profit levels. So if the base product went up 2p/gal, where's the need to up the price at the pumps more than 2p/gal? Doing it that way may reduce the % profit, but the ACTUAL PROFIT is the same. And unless they've had to tap the shareholders for money, the shareholders are still getting the same ROI they made with the company before.

But they up the price at the pump by 4p/gal.

Now if there wasn't a cartel/ogliopy/collusion, why did one not go and put their petrol up by not 4p but 2p? Since they will still get the same profit per gallon, their profit levels will not change. But by being cheaper than any others, they will attract more custom, selling more petrol and getting more of the market. Their profit per day will increase.

So why did NONE OF THEM do this?

Because of collusion/cartel/ogliopy.

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Flame

Crooks

Supply is deliberately restricted by the oil majors, They've Leased vast areas for drilling, and they don't drill because increased supply would be against their best interest. They petition for additional leases, so they can use "Oh Noes needz more oil" to lock up additional drilling rights they aren't going to use so they can inflate their stock price. They aren't investing in additional refining.

Speculation also has added a significant chunk to the price of a barrel because in an inelastic demand market exploiting the leverage vast financial resources can give you to manipulate markets is a no brainer.

Unless governments get serious about a broad portfolio of renewable and carbon neutral power, these crooks will continue to force the price higher, for something that has other better uses than burning to make things go. Maybe if they do demand would fall and we could eke out our remaining supplies.

Wealth concentration is thermodynamically unstable.

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Pirate

Profits?

As any accountant or finance officer can tell you profit is an etheral thing. A reasonable accounts team can make a company profit as big or small as they need. A "friend" of mine used to do the accounts for a management consultancy firm. On a turnover of £8M they only made a (audit assured) £300K profit. None of the Aston Martin driving directors felt that this was an issue. My "friend" could have made it a £3M profit that year and got it audit assured as well. A 9% margin? given the circle jerks run between finding, drilling, refining and punting it could be any number a CEO wants and I know a "friend" who make sure it passes muster during an audit.

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@ Tim Worstal "Ummm"

"Perhaps you should have read further then. I do actually link to industry sector by profit margin. Oil and gas is 60 th in the list."

"Ummm", yourself, chap. You had the net profit margin sorted back to front - Oil is 25th on that list, at a 13% net profit margin.

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Thumb Up

SWEET

and the winner is....

EL REG!

thank you very much for sparking this fantastic debate where the article itself is just a theme teaser and more useful information can be gathered from citizen's responses.

Nice one!

:-)

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WTF? Reg paid off by big oil now too?

WTF Reg? Since when are you supporting the big oil agenda?

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Go

Gas is still cheap in U.S.A

I would like to enlighten my less traveled American friends that the price they pay for gas is cheap. Here in the U.K we pay what is equivalent to 11 dollars US per gallon i would be glad of gas at 4 dollars a gallon.

The solution for the US is to ditch there clunky 5 litre engines, for instance my car gives 42 miles to the gallon top speed of 150 miles per hour and the engine is only 2 litre diesel.

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IT Angle

The sooner the oil is all used up...

The sooner the oil is all used up, people can get on finding alternatives.

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Linux

Gas will be even cheaper in China & India

Marvelously decent for Brits to pay $11 a gallon for gas, thereby reducing demand and lowering cost, overall.

This Canuck salutes the mother country for stimulating the developing economies, whilst simultaneously taking, a *most* impressive carbon tax 'hit', square on the chin.

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Alert

High oil prices is *GOOD* public policy

Oil is a fundamentally limited and valuable resource. I'm convinced future generations will revile us for having wasted the oil. The important value of oil is for chemicals--but we *BURNED* the oil. I'm confident they are going to compare our oil-burning policies with such misguided ideas as England's imperial policies in India and China.

Sure, Exxon is doing the rational thing--in the *VERY* short term. That's why it's up to the government to step in when those rational business policies have long-term consequences that are disastrous for the entire nation, and even for the world in this case.

Case in point: Denmark put high taxes on oil, and they are now living in an advanced society that imports *NO* petroleum. Not only is all of their energy produced from sustainable sources, but they have become one of the leading nations in the related technologies. (According to the NY Times where I read about this, last year one country was the home of 18 new competitors in the wind power industry--China. Think about the children--and the future.)

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Re: WTF? Reg paid off by big oil now too?

'course they have. And for a long time.

Just look in the science section, under environment. Anything there about AGW is bashed because big oil doesn't like the idea of not burning petrol.

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