Reasons To Keep Oil Prices High, Ctd

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A reader addresses Chris Edwards via our post:

Yes, Mr. Edwards, the percentage increases in the gas tax between 1984 and 1992, seems rather large, but this a rather lazy argument and ignores almost all of the developed world. Take a look at this article in The Economist from 2011. My coworker – back when I used to work at the Energy Information Administration – used to have [the above] graph contained therein posted outside his door for a good reason. Developed countries’ gas taxes are almost all at least a $1 higher than ours!

Another also pounces on Edwards:

You know what else happened between 1982 and today? A wee bit of inflation. The 18.4¢ today is equal to just 7.5¢ when adjusted for inflation. That’s a slightly less meteoric rise. But what’s perhaps even more disingenuous – and this is from someone who apparently has a masters in economics – is where Edwards starts his chart and analysis.

There’s really no good reason for him to start that chart in 1982 that I can find. If you extend it backwards, the gas tax was unchanged at 4¢ from 1959 to 1982. The 4¢ gas tax in 1959, had it been adjusted for inflation, would stand at 32.5¢ today (about what the 18.4¢ 1993 figure would buy today if adjusted). In other words, thee gas tax that built the Interstate Highway system 50 years ago was nearly double what it is today. Of course, we now have to maintain that system, but no longer have the tax base to do so. The 1993 hike merely brought it up to where it had been originally, but it has slipped by nearly half that value in the past 20+ years.

Unlike most other taxes that are per dollar, gas taxes are per gallon (which makes some sense due to the volatility of gas prices), but unlike those taxes, they don’t rise with inflation. They should, but good luck getting that through Congress. So any time inflation ticks up, it’s a backdoor tax cut for drivers, with the only side effects being the condition of the roads they drive upon.

Is $3-A-Gallon Gas Good News?

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Mataconis argues that overall, the ongoing decline in oil prices is a boon to the US and other advanced industrial nations:

Falling prices for oil will eventually filter through to the prices of the products derived from oil itself, including not only gasoline but also home heating oil and jet fuel. In the short and medium term, this would provide some relief for consumers and for companies that depend on transportation such as Wal-Mart, Amazon, airlines, and shippers such as UPS and Fed-Ex. If prices continue to fall, those benefits will become more apparent and could help to boost economic growth at least slightly, which would be good news for the jobs market and even tax revenues and the Federal Budget Deficit. Other nations that are oil dependent would likely experience similar benefits, which would be good news for areas like Europe where the economy seems to be slowing down a bit and for the world as a whole, which in turn would be good news for nations that are dependent on international trade, which is pretty much every major industrialized nation at this point.

Derek Thompson, who believes prices might fall even further, points out that some industries and regions will be hurt even as consumers celebrate:

It’s hard to say how the sliding price of gas will affect the United States, as a whole, because the economy is a messy mix of cities, industries, and consumers behaviors, each of which experience falling prices differently. In cities with lots of driving and not much energy production—e.g. throughout California—cheaper gas is simply good, the end. Three-buck gasoline gives back as much as $500 a year to the typical family with two cars, compared to the $4.50 gallons from a few years ago. But mining and energy jobs have been the fastest-growing sector of the labor market, and thinner profits for energy producers will hurt states like North Dakota and New Mexico, who have relied on energy exports to pay for new jobs and higher wages.

Jared Gilmour posits that the falling prices are “threatening to make costly US shale extraction uneconomic”:

Limited pipeline capacity and overproduction of natural gas in the Marcellus shale has pushed prices down, making it hard for producers to turn a profit. Drillers are taking on ever increasing amounts of debt to finance their operations. And there may not be as much shale oil and gas as the US government forecasts, according to a new report from the Post Carbon Institute, a California-based think tank that promotes sustainable energy. “Shale will be robust for the next four or five years, but because of declines at the well-level and field-level, it’s not sustainable in the medium and longer term,” says study author David Hughes in a telephone interview Tuesday. “Policymakers should be aware of that before they try to cash in on a bounty that may not exist ten or fifteen years down the road.”

But industry experts tell the WSJ that prices would have to fall quite a bit farther to endanger the shale industry:

Marianne Kah, chief economist of ConocoPhillips , said oil prices would need to fall to $50 a barrel “to really harm oil production” in U.S. shale basins. She said 80% of the American shale sector—in which ConocoPhillips is a major operator—is profitable at prices between $40 and $80 a barrel for benchmark West Texas Intermediate crude. Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, said he believed prices would have to fall much further to put significant pressure on the U.S. energy boom. “I am not sure if $80 is enough,” he said. “You might need $60 or $65 to really see a stress test.”

(Chart via GasBuddy.com)

The Geopolitics Of Slightly Cheaper Oil

Looking over Russia’s budget for the coming year, Callum Williams observes how many of its assumptions depend on oil prices remaining pretty high:

graph_3In 2015 Russia will need an oil price of about $105 a barrel to balance its budget (see chart). But crude is currently trading in the mid-$90s, down by about 10% since May. Weak demand from China and healthy supply from America help explain the drop.

Lower dollar-denominated oil prices are not so bad for Russia, given that the rouble has weakened so much. But over the past few years the budget’s reliance on oil revenues has increased. When excluding oil, there was a shortfall of 3.6% of GDP in 2007, but now it is more like 10%. Russia expects to run a small budget deficit (about 0.6% of GDP) this year. That prediction is optimistic—the Kremlin is banking on an oil price of $100. The latest predictions from Energy Aspects, a consultancy, show that the price of Brent is not expected to pass $100 for about nine months.

Steven Mufson details how the dip in demand and surge in US production is bad news not only for Russia, but Iran as well:

Crude oil and oil products made up 46 percent of Russia’s budget revenues in the first eight months of this year. At a time when the West is trying to sanction Russia for its incursions in Ukraine, a 10 to 20 percent drop in oil prices could prove powerful. Still, it’s still a far cry from the 1980s, when Saudi Arabia produced enough oil to flood the market and drive prices down so far that many experts say it sped up the fall of the Soviet Union. That’s not going to happen now, but Russia could be squeezed a bit.

Iran, whose oil exports are limited by sanctions related to its refusal to limit its nuclear program and open it up to greater international scrutiny, will also suffer a setback. Iran’s oil minister Bijan Namdar Zangeneh late last month called on the Organization of the Petroleum Exporting Countries to keep oil prices from falling any further. “Given the downward trend of the oil prices, the OPEC members should make efforts to offset their production to keep the prices from further instability,” Zangeneh said according to Shana, a news agency supported by Iran’s oil ministry.

But according to Keith Johnson, the other Gulf petrostates are much less vulnerable:

“In the short term, the Saudis are the last ones who need to worry. They can sit it out for a couple of years, even with oil below $90,” said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies. Other Gulf states, such as Kuwait and the United Arab Emirates, can also resort to deficits or spending tweaks to weather a price storm, she said. That may partly explain the deaf ears turned by Saudi Arabia and other big OPEC members to Iran’s pleas. Of the big producers, Iran by far requires the highest prices to remain fiscally sound, by some estimates as much as $130 a barrel. Further, Iran has been hammered by Western sanctions that have cut its oil exports — and earnings — almost in half.

Yet Saudi Arabia, still the world’s swing oil producer and a visceral opponent of Shiite Iran, has little interest in slashing output. Quite the contrary: Saudi Arabia on Wednesday suddenly started offering discounts to maintain its market share, even if it undermines overall crude prices.