Free Markets, Free People

Proposed Taxes On Oil Producers Will Be Paid At The Pump

This is such a basic lesson I’m surprised it has to be repeated so often.  

The background:

Under pressure to narrow projected deficits, President Barack Obama’s 2010 budget proposal calls for raising more than $31 billion over the next decade by eliminating the oil and gas industry’s eligibility for various tax breaks.

When you’re thowing around 3.6 trillion dollar figures for budgets, someone is going to ask, “how are you going to pay for it?” A 3.6 trillion dollar budget certainly doesn’t answer, “by cutting spending” does it? So new sources of revenue have to be found. But in a consumer society who is the ultimate source of all revenue? If you answered, “the consumer” you get a gold star.

So revenue is the purported reason for the focus on oil companies. Additionally, they’re easy to demonize which makes for easy political pickings. That seems to be the modus operandi of this administration.
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The propsoal:

The plan would slap companies with a new excise tax on production in the Gulf of Mexico worth $5.3 billion between 2010 and 2019, and repeal the industry’s eligibility for a manufacturing tax credit worth $13.3 billion in that period.

In an era in which the word “trillions” is uttered with abandonment, billions suddenly don’t seem like much do they? Unless of course you’re a middle or lower income family. Then trillions and billions are meaningless. It’s how far can you stretch the thousands of dollars you earn each year?

Well that $13 a week tax cut you’re contemplating will quickly disappear at the gas pump if Congress and the adminstration get their way. Fuel prices will rise at the pump and may rise rather dramatically. That’s because that approximately 20 billion you see above will most likely morph into about 400 billion cost to the oil companies during that period:

The industry says the final cost of Mr. Obama’s proposals on petroleum production could top $400 billion, once his plan to put a price on greenhouse-gas emissions is factored in.

The lie:

The Obama administration has generally justified its proposals by arguing that taxpayers deserve a better deal.

Yeah, I know, “lie” is a strong word. I’ve always considered it to be the knowing telling of a falsehood. And that’s precisely what this “justification” is. The “taxpayer” being talked about isn’t you in this scenario. It’s the government. You will be paying the passed through tax at the pump which the oil companies will then send to DC.209546302_54daa93f9b

For the seeming millionth time, corporations don’t pay taxes, they collect them and pass them on. Individuals pay taxes.

Last but not least – Raising taxes in recessionary times (not matter how indirect) is a recipe for economic disaster. Additionally such taxes in recessionary times may have the effect of driving jobs offshore where taxes and restrictions are less onerous and seeing oil companies produce less oil and natural gas domestically in a time when there is a growing and increasingly worrisome energy gap.

Not a very bright policy.

~McQ

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47 Responses to Proposed Taxes On Oil Producers Will Be Paid At The Pump

  • “Not a very bright policy”

    That, in a nutshell, captures the performance of the Obama administration to date.

  • You act like TAO and his band of thieves and tax cheats don’t understand that the price will be borne by the consumer at the pump.

    They do (even Geithner isn’t stupid enough to believe otherwise.  Probably).

    Other than by making gasoline and other “conventional” forms of energy almost prohibitively expensive, how can TAO and the rest of the socialists / Luddites force us to start using alternative energy?  How else will they force us into driving tiny cars or using mass trans or biking to work (my commute is about 25 miles; great exercize, but I’m not too keen on it otherwise)?  And consider the opportunities for buying more constituencies for the filthy dems: new government programs to “help” people pay for their home heating oil, or put gas in their tanks, or even (gasp!) pay to heat their swimming pools.  Remember that fool woman who shrieked back during the campaign that, if she “helped” TAO by voting for him, he’d help her by paying her mortgage and her gasoline?  We all laughed at her at the time, but she was right about him paying for peoples’ mortgages.  Can paying for peoples’ gas be too far behind?

    • It will all be allocated according to you need comrade!

    • I don’t think it’s true that I ‘act’ as though [Obama, et al]  “don’t understand that the price will be borne by the consumer at the pump”, docjim505.  That’s why I entitled a portion of the post “The lie”.

  • And to avoid “paying at the pump” we’re soon going to hear a lot more about  “windfall profits”, “price gouging” and “manipulation” of price by eeeeeeeeeeeeeevil big oil, and will there be a federal law to deal with that? You betcha!

  • Well, I don’t think increasing taxes is a good idea, and yes, Econ 101 illustrates that companies don’t pay taxes.

    But…on the positive side, it’s a good thing the tax credit is being repealed.  The less government distortion in market prices the better, I say.  Government should not be in the subsidy business for much of anything. Period. 

  • The market price for oil is driven by supply and demand for oil.  In this case, the production costs for oil are so low that the price at the pump bears little relation to the amount of money it takes to produce oil.  The argument that higher prices will be passed on to the consumer in this case is wrong — only if the price of oil gets so low that production costs factor into it will it get passed on.   That is unlikely to happen. 

    However, this money will be diverted from other endeavors of oil companies: exploration for new oil fields, or R&D into alternative energies.   But it is not the truth that taxes all get passed on — the market sets the price by supply and demand, and taxes play a role in determining the amount supplied at a particular price in cases where production costs are relevant.  For oil, tax increases to oil companies won’t make much difference to the price the consumer pays.  If you argue against this in terms of decreasing oil exploration or other oil company activities, you’ll have a better case.

    • “The market sets the price by supply and demand”.

      Ah, so, today, you argue that markets actually regulate themselves…

      Nothing further, carry on.

      • You beat me to it!

      • No, supply and demand sets prices.  It doesn’t regulate the market.  It doesn’t automatically fix downward recessionary spirals.   Markets aren’t magic.

        • As to the markets being magic, 

          You insist on repeating that statement.  We’re fairly convinced that supply and demand regulate the market, you seem to be of the opinion there is a magic third party that MUST be in this equation in order for a market to function.  I’m reasonably certain you believe this third party influence to be government, and I believe you mean the word ‘regulate’ to literally mean regulations above and beyond the simple supply versus demand curve.

          Enlighten us then on what the word “regulate” means to you.

        • Wait.  Didn’t you just the other day reject the law of supply and demand?  Now you say that it sets prices but the market doesn’t???

          • Markets are not automatically self regulating — that means they do not automatically and magically adjust to macro problems like a recession, or the kind of financial problems we’re facing.  That’s pretty much conventional wisdom everywhere.  How you get “the law of supply and demand doesn’t work” from that is beyond me, especially since I made clear that markets are the best way to produce value.  They just aren’t magic, need rule of law and regulations to prevent abuse, or to help economies stabilize.

          • “Don’t adjust to macro” – sure, in, say California, 2 bed room houses that were (over)priced at $500,000 and selling because people were convinced they had that value, would still be  selling at $500,000 if it weren’t for government regulation.

            I understand, completely. 

    • You’re wrong, professor.

      basic economics:  prices are set by two things: cost of production and free market levels.  The market cannot value something lower than it’s production value unless the item itself is worthless.  That isn’t the case with oil.

      If you screw with/increase the base level of production, the market automatically adjusts and makes a new floor.  THAT’S how the costs are passed on the consumers.

      • Joel, the price of production has very little to do with the price of oil.  That’s why oil companies get such huge profits when prices increase, it’s pure gravy for them.  This isn’t like a produced good, it’s a different kind of commodity.  In fact, there’s a whole field of economics on the economics of non-renewable resources that goes into the ways in which oil and other resources differ in terms of how the economic factors play themselves out. 

        However, you are right that it has an impact.  In this case the impact would be that they’d either have to cut down on exploration or developing alternatives.   Probably they would re-calculate the optimum amount to spend on that with future profits in line.  That may mean splitting some of the costs between the consumer and other reinvestments in the company.   However, this is NOT a complete passing the cost of the tax to the consumer, as the post implied.    Note I said in my post that not “all” the tax will get passed on, and that it will make “very little difference” in what the consumer pays.

        • “… the price of production has very little to do with the price of oil.”

          Only an academic could think this way.  Tell me, if the price of producing a college graduate were to increase, what would happen to the price of tuition?

          “That’s why oil companies get such huge profits when prices increase, it’s pure gravy for them.”

          Then why does the price at the pump fluctuate?  Why not find the highest possible level that the market will allow and stay there?  Prices went up to just shy of $4 in SoCal during that “gravy” period.  So why have the oil companies allowed the prices to recede to $2 a gallon?  Per your model, they have cut their profits in half.

          “This isn’t like a produced good, it’s a different kind of commodity.”

          So there’s an unlimited supply of cows to make milk and endless fields of wheat?  Assuming the “peak oil” predictions are true, we won’t start feeling the effect of a dwindling supply until 2025.  Besides, crude oil may not be a “produced good” but unleaded gasoline certainly is.  And that’s the point.

          “However, this is NOT a complete passing the cost of the tax to the consumer, as the post implied.    Note I said in my post that not ‘all’ the tax will get passed on, and that it will make ‘very little difference’ in what the consumer pays.”

          Did you study economics from the Underpants Gnomes?  The example you give of another way to cover the tax (“cut down on exploration or developing alternatives”) still comes to rest at the consumer’s feet.  If BP cuts down on exploration and R&D, that will cut down on supply.  You’re such an expert on supply and demand, hopefully you can figure out what happens to prices when there’s not enough supply to meet the demand.

          • The price at the pump fluctuates wildly because of supply and demand.   It certainly doesn’t fluctuate because of taxes or changes in production costs — those are about the same now as they were when the price was $4.00 a gallon!  Also, there is limited production capacity, and OPEC is currently cutting production to increase price.

        • Erb, you should be embarrassed that you display such an appalling lack of economics understanding.  But perhaps, being fat drunk and stupid is a badge of honor to you and yours

          • Yet you cannot show where I’m wrong.   And I’m not — this is basic economics!  Apparently you don’t really understand how the oil market works.   Oh well — your problem, not mine.

          • >>>>Oh well — your problem, not mine.

            No, your students problems that their education is so flawed by being taught by someone like you

        • Scott, I have to disagree with your analysis in the sense that oil company profits run between 8 and 10% of revenue.  Even with oil as high as it was, XOM did not make an outsized profit.  Historically, oil companies have used the price of oil to support E&P.  So, the cost to the consumer of reduced exploration is reduced supply.  And, that is not only a future cost, but a current cost.  At $100 bbl, small stripper wells are profitable, but at $50 bbl, they are shut down again, reducing supply and then driving up prices.   If you are old enough to remember the Fram commercials, it is a case of pay me no, or pay me later.  But, in every case, the consumer pays and the government takes.

          Rick

          • OK, this response makes some economic sense.  I still don’t this corresponds to the claim that taxes are simply ‘passed on,’ but it is a logical argument that taxes do have an impact.

  • Hey Erb – when gas is selling at $2 a gallon, the oil companies make about 9% profit.  When gas is selling at $4 a gallon, the oil companies make about 9% profit.  Go figure…

    • Good heavens, are you suggesting companies have business models that they establish ahead of time that determine what percentage of profit they wish to make on their product, and that this model might adjust the market cost to reflect a change in production costs in order to regulate the amount of profit made to the percentage that matches the model? 

      No, it makes far more sense that they’ll take a profit loss to keep the price the same at the pump even if it means they short exploration and product development.   Never mind this will probably lead to the collapse of the company over an extended period of time as they run out of resource or are unable to compete in a changing product market.   What matters is that no tax cost increase will be seen by the consumer!  Clearly Obama, and at least one other person on this thread, understand this.  It’s not magic.

      • They’ll do what the market ultimately shows is in their best interest.  It’ll probably be a mix of decreased profits (because they do go up when the price rises) and decreased reinvestment.  But I’m sure they’ll survive.  They might even try to get some tax breaks with developing alternate energies (which many are already doing.)

        • On what planet is decreased profits in the best interest of a company?!!?

          • Ronnie GipperOn what planet is decreased profits in the best interest of a company?!!?

            On the evil planet Libtard, where we’ve somehow all wound up living due to some sort of freak time warp or transporter accident or something.  ;-)

            Judging from the howling several months ago about “obscene” oil company profits, the AIG kerfluffle, and now various banks’ decision to return TARP money just as fast as they can, it seems reasonable to conclude that making too much profit* is bad for a company in that it could result in being pilloried before Congress, being slapped with excessive regulation, executives being stalked by democrat (spit) goons from ACORN, and even bills of attainder.

            We’ve seen very clearly, both in the news and in the various comments, that libs^ absolutely do NOT understand the market.  While sensible people understand that profits (even “obscene” profits) are good in that they encourage investment and reward risk-taking, libs look at profits as intrinsically evil, something that people don’t earn but rather steal from “the public”.

            —–

            (*)  “Too much” being a highly subjective and elastic term that depends on such factors as how much money the corporation in question has donated to democrat trash, its general standing in the eyes of MiniTru, and how close the next election is!

            (^)  Let us not forget that Yosemite Sam referred publicly to “obscene” oil company profits, and that there were quite a few Republicans who voted for the AIG bill of attainder.  So, sorry as I am to have to admit it, economic stupidity is not the sole province of democrats (spit).

          • I would say ‘Planet Moron’, but that name is already taken by someone who posted here on another thread.

    • Yeah, but wait until anyone talks about stopping the government from a 15% tax on the stuff, nd listen to him holler.

  • The price at the pump fluctuates wildly because of supply and demand.   It certainly doesn’t fluctuate because of taxes or changes in production costs — those are about the same now as they were when the price was $4.00 a gallon!  Also, there is limited production capacity, and OPEC is currently cutting production to increase price.”

    Taxes and other production costs have a direct effect on supply!  How can you not see this?

    Let’s say you’re operating a lemonade stand.  It costs you $20 to buy the supplies you need to make 40 glasses of lemonade.  You could sell these glasses for $.50 a pop and break even, but you’re saving up to buy a bicycle.  So you up the price by $.10.  So for each batch of 40 glasses of lemonade you make $4.

    One day you go to the store and discover the price of your supplies has gone up by $5.  Maybe the actual cost of cups is more, maybe the sales tax has increased.  Whatever the case may be, it now costs you $25 to make 40  glasses of lemonade.  In order to maintain your previous amount of net profit you have to:

    a) increase the cost of the lemonade to compensate for increase in production costs
    b) buck up and pay the higher cost out of pocket
    c) look to the Underpants Gnomes for advice
    d) chuck it all and go to grad school

    As for the price at the pump not fluctuating as a result of production costs, have you ever noticed what happens when a hurricane hits an area rich with refineries?  Here’s a hint:  http://www.msnbc.msn.com/id/26676331/ .

  • Obama said greed prevents tax cuts from trickling down to consumers and employees.  Wouldn’t greed ensure that tax increases trickle down to the consumers and employees?

  • Anyone who claims that taxes aren’t passed on to the consumer doesn’t understand business.  Here’s one example:  sales tax.  That tax is either passed directly to the consumer in the form of adding as a separate item at time of purchase, or it is factored into the price (I see lots of places that say “Price includes sales tax”).  But, either way, the tax is passed on to the purchaser.

    Other taxes work much the same way, except they tend to be part of the cost of doing business, and the cost of doing business is factored into the price of goods.  If you have employees, the payroll taxes are counted as part of the labor costs, but you would tend to keep your labor cost at a certain percentage of sales.  When you’re figuring out how to price stuff, you consider cost of materials sold, cost of labor, fixed costs, and profit.  Fixed costs include business taxes and licensing fees (as well as a bunch of other stuff).

    So, it’s just sophomoric to claim that taxes aren’t passed on to the consumer.

    • In general, taxes affect the cost of production which means that you land on a different equilibrium point in terms of supply and demand.  It is not a case where the costs are merely passed on to the consumer.  Rather, depending on the supply-demand situation, it’s a mix.  There may be reduced profits for the company, plus an increase in price.  However, those tax dollars are presumably spent in another part of the economy, increasing demand and perhaps improving the tax payer’s situation.

      • Scott – I’m going to prove you don’t have a clue as to what happens in the real world…

        “There may be reduced profits for the company, plus an increase in price. However, those tax dollars are presumably spent in another part of the economy, increasing demand and perhaps improving the tax payer’s situation.”

        Quod erat demonstradum

      • “Joel, the price of production has very little to do with the price of oil.  That’s why oil companies get such huge profits when prices increase, it’s pure gravy for them.”

        Scott, you say that it’s a bad thing. Rising prices are the harbinger of shortage. Shortage=Bad. The cure? Increase production. “Windfall” profits resulting from shortage are the way capitalism provides both the incentive and the means to increase production. 

      • I give up.  You’re an idiot.

      • Nothing in all that blather disproves my point:  that business taxes are passed along to the consumer.

        Your post is just more hand-waving, and it deepens everyone’s belief that you don’t know the first thing about economics.

        Oh, one thing about your statement:

        It is not a case where the costs are merely passed on to the consumer.  Rather, depending on the supply-demand situation, it’s a mix.  There may be reduced profits for the company, plus an increase in price.

        The fact that a company has a reduced profit means that it is still making more than its expenses.  Which means that ALL of its expenses are being paid by its customers.  Which means that ALL of its taxes are being paid by its customers.  If the tax increase were great enough to erase the proift, you can bet your bottom dollar that the price of the good will increase.

        A company can decide to take less in profit, but that doesn’t mean the increased tax isn’t being factored into the price of the product.

  • “Economists see corporate taxation in a different light from most people. They note that a company is actually just a legal paper entity, not a person. The cost of corporate taxes, they say, is passed on to real people – shareholders, employees, consumers – through lower dividends, trimmed wages, or higher prices for their products and services. Economists have been unable to agree on a distribution of the tax burden for many decades. It’s just too complicated.” http://www.csmonitor.com/2005/0314/p17s02-cogn.html 

    I recall from my econ 101 days that such taxes were passed on in part, though some would be paid by the corporation. Sometimes this was mostly passed on and sometimes not much at all, though reduced profits for a corporation also has pernicious economic effects, too.

  • I simply don’t understand why all of you are having such trouble understanding what I’m telling you. Simply put, supply and demand works, even though production doesn’t really affect cost and reduced supply or increased demand don’t cause markets to adjust. That’s so obvious I don’t see how anyone could dispute it.

    I’ve explained it all in my blog post on post-modern economics, which itself links to eleven other posts of mine, which therefore proves my point.

    I’d also recommend my other post on post-modern engineering, where I explain that the laws of thermodynamics are valid but you can still build a perpetual motion machine. As long as you grunt righties get to it and work out the details, while we wise leftists continue to spend time in quiet contemplation of how the world is supposed to work so we can come and instruct you about that.

    • Of course!  It all makes sense!  Thanks for clearing that up!

      • Oh, I’m happy to help. I’m glad at least one person around here appreciates my brilliance and incredible grasp of complex issues. I have a PhD, you know, which gives me my godlike powers of political science. I’m happy to come here and graciously share my wisdom, and I don’t either do it because I’m obsessed with proving my self-worth by lecturing to dense righties, so all of you ought to stop saying that right now! And stop laughing! You sound like a bunch of hyenas!