The Oil War and R-OIL wedding at home

By Bill Becker.

Who should we blame for high gasoline prices?  The President? Oil companies? Price gougers? Protestors in the Arab Spring?  People who drive Hummers?

The answer to that question is one of the first serious issues of the 2011 presidential campaign.  (Sorry, Trump. Sorry, Birthers.)  It’s an issue that could – and should – become an oil war at home, politically speaking.

The issue is heating up because gas prices affect us all, whether we’re buying fuel, food or consumer goods. Rising gas prices threaten our recovery from the recession and our ability to put Americans back to work.

To anticipate how the price of oil might unfold as a campaign issue, we can look to California in 2006.

One of the initiatives on the ballot was Proposition 87 to establish a new tax on petroleum extracted from the state’s oil fields. The tax would have raised $400 million annually to fund alternative energy programs, with the goal of cutting the state’s oil consumption 25 percent over 10 years.

Proposition 87 contained a clear prohibition against oil companies passing the cost of the tax to consumers by raising fuel prices. The tax would have to come out of profits.  In July 2006, polls indicated that 51 percent of California’s voters supported the initiative.

Then in August, opponents launched an aggressive campaign of television ads supported in part by more than $30 million from Chevron. The ads claimed Proposition 87 would result in higher gasoline prices — despite the prohibition in the initiative.

One of the ads featured the president of the California Chamber of Commerce warning that Proposition 87 “would impose a $4 billion tax on oil produced in California, a tax that would lawfully be passed on to the rest of us.”

By October 2006, voter support for Proposition 87 had dropped from 51 percent to 41 percent. The measure was defeated in the November election.

Fast forward to Washington in 2011. Republicans are warning again that a “tax increase” (actually subsidy reform) for oil companies will push gasoline prices higher. Some are blaming President Obama for expensive gasoline.

To his credit, the President stirred the pot on oil subsidies with an April 26 letter to leaders in the House and Senate, urging them to “take immediate action to eliminate unwarranted tax breaks for the oil and gas industry and to use those dollars to invest in clean energy to reduce our dependence on foreign oil”. Obama included the same proposal in his last two budget submissions to Congress.

A day later, 29 Democrats in the House wrote to Speaker John Boehner, proposing  an up-or-down vote on oil subsidy reform. Boehner said no. His spokesman explained:

The Speaker wants to increase the supply of American energy to lower gas prices and create millions of American jobs. Raising taxes will increase gas prices and make it harder to create jobs.

In that response, Boehner’s spokesman managed to squeeze three big untruths into two short sentences. They came straight out of the dog-eared playbook the oil industry and its supporters continue using to frighten voters about jobs, taxes and energy prices.

The President has proposed repealing tax breaks for oil companies, not increasing taxes for the rest of the country. Repealing the subsidies will result in higher gasoline prices only if oil companies want to shake down consumers. Four billion dollars a year is chump change in the oil industry. It would shave very little off the industry’s profits.

In the first three months of this year alone, Exxon-Mobil earned nearly $11 billion. Chevron netted more than $6 billion. When Rep. Diane DeGette asked the Energy Information Administration several years ago whether subsidy cuts would cause an increase in gasoline prices, EIA told her that oil revenues were so large that eliminating the industry’s government subsidies need not make a difference in the price at the pump.

The third misstatement in Boehner’s response was that subsidy reform would discourage oil companies from drilling. So long as there’s money to be made, oil companies will drill. Again, $4 billion a year will not make a dent in their profits.

In regard to the blame game, Politico reports this week that:

Americans are paying more than $4 a gallon for gas, ExxonMobil announced a 69 percent boost in earnings, and President Barack Obama is struggling with the fact that he can’t do much about any of it”¦.  Political experts of all stripes say (high gas prices are not) good news for Obama.

Politico cites a new Washington Post – ABC poll in which 60 percent of Independents said they “are concerned enough about gas prices to say that they definitely will not back Obama for reelection.”

But if President Obama can’t do much about it, why should Independents blame him for gasoline prices?  The Administration has deployed the few countermeasures in its toolbox to reduce our dependence on oil and the price we pay for it. Among other things, it has instituted aggressive new efficiency standards for vehicles and, despite opposition from House Republicans, would like to increase them even more. The President doesn’t benefit from spikes in the price of oil. On the contrary. We can be certain he will do all he can to keep the recovery on track.

If it’s not “the most powerful leader in the world”, then what really affects oil prices? Former Labor Secretary Robert Reich explains it this way:

It’s a global oil market. Even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.

The Atlantic offers more detail:

Fuel taxes make up 12 percent of the retail price of gasoline. Gas taxes averaged 48.1 cents per gallon as of last January. The federal portion is 18.4 cents per gallon; state taxes averaged 28.6 cents.  The federal tax supports the Highway Trust Fund, which is used to build and maintain the interstate highway system, with smaller portions going to mass transit. It’s unlikely these revenues can be reduced without further damaging the nation’s deteriorating transportation infrastructure. The American Society of Civil Engineers estimates we are spending $110 billion too little each year to maintain the transportation system even at current levels. Meantime, the Congressional Budget Office predicts the Highway Trust Fund will run a $7 billion deficit this year and will continue to have deficits through 2020.

The biggest factor by far is the price of crude oil. It accounts for 68 percent of what we pay at the pump.  It also affects our trade and budget deficits. The Congressional Research Service estimates that when petroleum costs $100 a barrel – a price we’ve already exceeded – oil imports increase the U.S. trade deficit by $100 billion. Every $10 increase in the price of oil costs our military (in other words, taxpayers) $1.2 billion a day.

The balance of gasoline prices – 20 percent – goes for refining, distributing and marketing the fuel.

The biggest factor in price volatility is supply and demand. Also in the mix are increases in U.S. oil consumption during the summer, speculation in oil markets, what’s happening in the Middle East and other countries from which we import petroleum, and the strength of the dollar. The least of the factors – overwhelmed by the others — is domestic oil production.

Gasoline prices are complex, but the politics are simple. Secretary Reich puts it this way:

This gusher (of oil profits) is an embarrassment for an industry seeking to keep its $4 billion annual tax subsidy from the U.S. government, at a time when we’re cutting social programs to reduce the budget deficit. It’s especially embarrassing when Americans are paying through their noses at the pump.

If that doesn’t dissuade Republicans and oil-state Democrats from going to war on this issue, then we should ask them some questions:

  • How can the members of Congress who condemn federal budget deficits support subsidies the oil industry doesn’t need?
  • How do oil subsidies, some of which have been in place for generations, square with conservative mantras that the federal government shouldn’t be picking winners or engaging in corporate welfare?
  • How can members of Congress justify oil subsidies when they’ve been warned repeatedly by experienced senior military experts that, “Dependence on oil undermines America’s national security on multiple fronts”?

Without question, there are issues on which the interests of the oil industry and the public coincide.  Politicians may tell us what’s good for Exxon is good for America. But leaders will acknowledge where those interests diverge and, when a choice must be made, will come down on the side of the American people.

If gasoline prices become a huge issue in the 2011 elections, we will see who favors the blame game over solutions and who represents the welfare of oil companies over the welfare of the country.  I can see the first bumper sticker now: John Boehner. R-Ohio or R-Oil?

— Bill Becker

9 Responses to The Oil War and R-OIL wedding at home

  1. Mike Roddy says:

    Once again you have come up with excellent information, Bill, thanks.

    Marshall McLuhan foresaw all of this, by saying that the content was irrelevant in television messages, since the medium conveys emotional information. The oil companies and the Republican Congressmen they have purchased know this. Koch and Exxon realize that they can lie without qualification as long as they know the phrases and facial expressions that push the public’s emotional buttons. People and the government now act only when reality overwhelms them.

    This does not bode well for action to slow global warming, but to overcome this problem we have to be aware of it in detail. Social science surveys and charts won’t help, but creative and incisive media gurus will. There is no qualified heir to McLuhan, a true genius, but his more pedestrian successors will have to do.

  2. Mike # 22 says:

    The only solution here is better vehicles. The President should be pushing the next generation of autos. We need clear leadership here.

    The President: “Wake Up America, your vehicles are too expensive, they are killing jobs. Buying in the gas to keep your vehicles on the road is a giant tax, it is running up the deficit, Republicans are being fiscal lunatics. Our economy suffers every time the Republican imposed gas guzzlers fill up, America must be Free from these Job-Killing & Economy-Killing Gas Tanks.” Arnold: “This President is no girlie-man”. Barack and Arnold get into Tesla S, drive to golf course.

  3. Barry says:

    The top chart would be even more effective at communicating just what role the federal government plays in gas prices if “Taxes 12%” was broken down into:

    * “State taxes: 7%”
    * “Highway Fund: 4%”
    * “Mass Transit Fund: 1%”

    Both Bush Sr. and Clinton passed laws that diverted some of the federal fuel tax revenue to pay the debt…but congress nixed all that with the Taxpayer Relief Act of 1997.

    I also think it might be interesting to readers to see it as cents per gallon. These are fixed amounts that do not go up and down with the price of gas:

    * State Taxes: 29 cents (average)
    * Highway Fund: 15 cents
    * Mass Transit Fund: 3 cents

    A problem for our roads is that auto mileage is improving faster than the Highway Fund is increasing. In addition inflation has reduced the buying power of the fixed highway fund dollars by 33%.

    The result is that Americans are paying much less per mile driven on the roads into the highway fund than they used to.

  4. Roger Blanchard says:

    I just wrote something this morning for a journalist at The Detroit Free Press concerning the price of oil. Here is the balk of it:

    A fundamental reason the price of oil has been rising in recent years is that global production has largely been flat. In 2005 global total liquid hydrocarbons (TLHs) production was 84.595 million barrels/day (mb/d) and in 2010 it was only 86.711 mb/d. That is a rise of only 2.50% over the course of 5 years. The production increase is actually deceptive because what has been increasing is largely natural gas liquids and ethanol production, both of which have much lower energy densities than crude oil. Although the Department of Energy (DOE) doesn’t have data on their website, and I don’t have time to calculate it, I suspect the actual energy content of the TLHs has decreased from 2005 to 2010.

    The DOE does have energy content data for global crude oil + condensate production and that has gone down from 153.2 Quadrillion BTUs in 2005 to 146.9 QBTU in 2010 while production increased from 73.712 mb/d to 74.042 mb/d. The data indicates to me that what is increasing is condensate production while crude oil production is declining.

    Obviously, demand for TLHs is increasing in countries such as China and India, which influences price. Also, exporting countries, in general, are increasing their consumption so there is less to export. The high demand for TLHs combined with limited supply leads to higher prices.

    The reason global production is flattening out is that many of the large fields throughout the world are in decline and what is being added involves generally much smaller fields that peak quickly and decline rapidly.

    An example of a large field in decline is the Prudhoe Bay field in Alaska. Production peaked in 1988 at 1.56 mb/d. Today it is producing around 0.3 mb/d. That is why Alaskan production has declined from 2.02 mb/d in 1988 to ~.65 mb/d now.

    Countries such as Russia and China are poised to see their oil production decline in the near future. Also, Mexico will return to decline, after a year of more stable production, as the Ku-Zaap-Maloob project goes into decline.

    U.S. oil production (crude oil + condensate) increased in the last 2 years, mainly due to increases in the deepwater Gulf of Mexico (GOM) and the Bakken Shale region of North Dakota. I’m confident in stating the deepwater GOM oil production peaked in 2010 and Bakken Shale production could peak as soon as 2015 based upon my modeling of production.

    It wouldn’t be surprising to see the price of oil decline some in the not-so-distant future but unless something significant happens to reduce demand, I don’t expect to see it go to less than $90/barrel. I expect to see $200/barrel oil by 2015 so it’s wise to be prepared for that.

  5. sault says:

    I think the correlation between gasoline prices and the President’s approval rating is Exhibit A on how uninformed the average voter is and how bad a job the media is doing to inform them. David Roberts’ article on Grist the other day made it clear that policy and politics are two totally different things.

    Since the media has fallen asleep at the switch, there is no backstop to how crazy and detached from reality the talking points from the right can be. With the systematic gutting of our education system over the last 30 or so years, the average voter doesn’t even have the critical thinking skills to look into the complex issues of our modern world and judge the facts for themselves. Add in the now unlimited influence of corporate money and the prospects for change look that much bleaker. The only saving grace is that the Republicans seem to be digging their own grave demographically by clinging to the culture wars and stoking closet racism.

  6. Bill Becker says:

    Roger (No. 4): It’s my understanding that another factor in rising oil prices is that the easy supplies are gone — that oil is becoming harder to reach and more expensive to produce. Is that you’re understanding, too?

  7. Robert says:

    You guys don’t know when you are well off. Compare the US breakdown to that for the UK:

    Duty + VAT (both taxes) are 80p out the 132p pump price of a litre of petrol. It might be something to celebrate if it caused us to limit our mileage – but it doesn’t. Only congestion does that. The real oil addict is the UK Government. How will they manage when all that lovely tax disappears?

  8. Roger Blanchard says:

    Bill #6,

    Clearly the easier fields to develop have been developed and oil companies are going into difficult environments such as deepwater areas like the deepwater Gulf of Mexico.

    Another point I didn’t make above is that the value of the dollar has been declining, which is a contributing factor in the rising price of oil.


  9. alexy says:

    “Every $10 increase in the price of oil costs our military (in other words, taxpayers) $1.2 billion a day.”

    Perhaps this should be $1.2 Million a day. At $1.2 Billion a day, a $10 increase is roughly equivalent to 1/2 the entire DoD annual budget.