bmcgreggor

Why Is Oil So Expensive?

35 posts in this topic

I wrote: "the US government long ago nationalized much of the source of crude oil, specifically off shore and in Alaska (where less than 1% of the land is privately owned)."  How is that misleading?

It's misleading to say that the US government collects royalties, as opposed to taxes, on all US oil production.

And when you say that the US government nationalized the oil sources, who owned them before?

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It's misleading to say that the US government collects royalties, as opposed to taxes, on all US oil production.
I did not say it collects royalties on all US oil production. They call the taxes on production "royalties" on the nationalized resources. There is no private land in the ocean offshore or in the enormous land area where private ownership is not permitted in Alaska. There are of course other areas in the US where oil is produced on private property, subject to other kinds of taxes, but government also owns a lot of land outside of Alaska. The Federal government alone owns over 30% of the land in the US, mostly in the west.
And when you say that the US government nationalized the oil sources, who owned them before?
As far as I know no prior private ownership was recognized, and almost all or most must have at the time been unclaimed within the vast ocean and Alaskan wilderness. The government decreed its own complete control without even knowing what was there. (There are some private inholdings within government and tribal [called native corporations] land boundaries in Alaska, but they count as part of the less than 1% privately owned land in Alaska; today those inholdings, which include both residences and mining claims, are under constant attack.)

There is no Constitutional provision empowering the government to own and control production of natural resources. The Federal government was supposed to have permitted claims to formerly unowned land and resources as it did in some regions with the Homestead Act and with the Mining Act. In the situation with oil today we have private companies discovering oil fields and producing crude oil with perpetual extortion payments to the government called "royalties" for nationalized resources in place of recognizing ownership rights.

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Actually, according to Richard Salsman, we are all wrong...
I have yet to see an explanation. If inflation is the primary cause why don't we see it in all other prices, too? In some areas real estate prices are also climbing, but the general price inflation rate has remained low. What is it about government monetary policies that cause the sharp increases in oil prices now?

As for Iraq, that is part of the political turmoil we have mentioned. There were reports of pipeline and oil field sabotage earlier in the war, but nothing like the first Iraq war over Kuwait.

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I have yet to see an explanation. If inflation is the primary cause why don't we see it in all other prices, too?  In some areas real estate prices are also climbing, but the general price inflation rate has remained low.  What is it about government monetary policies that cause the sharp increases in oil prices now?

As for Iraq, that is part of the political turmoil we have mentioned.  There were reports of pipeline and oil field sabotage earlier in the war, but nothing like the first Iraq war over Kuwait.

Good questions. Post them in the appropriate thread in the Richard Salsman section of this forum.

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I did not say it collects royalties on all US oil production.  They call the taxes on production "royalties" on the nationalized resources.

In regard to oil and gas production, the term 'royalty' has a special meaning separate from tax payments. An oil company pays the government a 12.5% royalty payment on all gross production on government owned lands. These are terms laid out in an Oil and Gas Lease. In this context, the government is acting strictly as a property owner. On top of that, the company has to pay taxes on their own revenue gained from production.

As far as the term 'nationalized', I take the definition to the transfer of assets to government ownership. If the land in Alaska was never privately owned, it isn't nationalized, it's simply owned by the government.

There is no Constitutional provision empowering the government to own and control production of natural resources.  The Federal government was supposed to have permitted claims to formerly unowned land and resources as it did in some regions with the Homestead Act and with the Mining Act.  In the situation with oil today we have private companies discovering oil fields and producing crude oil with perpetual extortion payments to the government called "royalties" for nationalized resources in place of recognizing ownership rights.

On this point, we agree. If an oil company develops lands controlled by the government, ownership of the land should be transferred to the company.

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In regard to oil and gas production, the term 'royalty' has a special meaning separate from tax payments.
Of course it has a special meaning and is in addition to other taxes. It's still a tax, an exaction, whatever you want to call the official seizing of wealth. The government "acting strictly as a property owner" is quite an "act".
As far as the term 'nationalized', I take the definition to the transfer of assets to government ownership.
Why do they have to take it from a prior acknowledged private owner? They are simply nationalized resources. And they continue to take previously undiscovered resources every time they are discovered and developed.

Is the 12.5% royalty on leases really that simple? Usually they impose all kinds of complexities and costs in everything they do. Are you connect with the industry?

The additional abuse being heaped on private landowners who are inholders is a separate issue, but a real horror story that hardly anyone outside of Alaska knows about. It is a direct result of authority granted, primarily to the National Park Service, through the Alaska National Interest Lands And Conservation Act (ANILCA) of 1980. ANILCA was pushed through Congress during the Carter Administration by environmentalists -- both lobbyists and those working inside the Carter Interior Dept. -- as a "compromise" to the kind of complete control they really wanted and still do. See the bottom of the page "SITUATION IN ALASKA AFTER 1980 ..." at http://landrights.org/ak/wrst/shortcourse.htm.

Alaska is regarded as a kind of environmentalist internal Federal colony rather than a state, which is one reason why there are so many problems, involving Federal legislation and national politics, trying to allow even minimal drilling for oil there. It's a shame that these problems are better known.

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Of course it has a special meaning and is in addition to other taxes.  It's still a tax, an exaction, whatever you want to call the official seizing of wealth. The government "acting strictly as a property owner" is quite an "act". 

To an oil company it's the same thing as paying a regular royalty owner. The government is actually a lot easier to deal with than private land owners, the royalties are smaller, and the lease terms are already negotiated.

 

Is the 12.5% royalty on leases really that simple?  Usually they impose all kinds of complexities and costs in everything they do.  Are you connect with the industry? 

It's actually remarkably simple because, as I said before, they function as a landowner, not a government agency. You simply cut them a check every month for the revenue produced on their leases.

I just started a semi-permanent career at a fairly large oil company, I've been working in the industry for about a year.

When I see how much money the federal government takes in from oil and gas production, it floors me. Between royalty interests and taxes they probably get over 20% of the gross revenue of oil and gas production in this country.

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You will often see pragmatist big business accepting taxes, fees and regulations as long as they are "predictable". They prefer arrangements with government to competing in the market and know that smaller competitors are often unable to tolerate the "overhead" of the government restrictions and costs. Such cozy relationships established between government and business are otherwise known as fascism. Sooner or later the businesses begin to complain when the "stable" fascism to which they have become accustomed turns against them. This has been the trend as the viros have gained influence over the use of government power to obstruct or shut down extraction of natural resources everywhere they can. The designation of government land as Wilderness, National Monuments, roadless areas in forests, endangered species listings, the campaign to rescind the Mining Act, endless appeals of logging agreements, etc. are all means they use. If you look deeper you will find more problems than the 12% "royalty" on oil.

What is the nature of your work in the oil industry?

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You will often see pragmatist big business accepting taxes, fees and regulations as long as they are "predictable". They prefer arrangements with government to competing in the market and know that smaller competitors are often unable to tolerate the "overhead" of the government restrictions and costs. Such cozy relationships established between government and business are otherwise known as fascism.

...

I wouldn't go as far as to say that the relationship between oil companies and government as 'cozy'. There are several reasons why dealing with the government as a land 'owner' is sometimes easier than dealing with private landowners, but the primary reason is that they want to make it simple for oil companies to pay them lots and lots of money. But other aspects of government regulation, especially on the operations side of things can be a nightmare. My boss was telling me that the State of Wyoming used to only allow us to operate wells for certain months out of the year. Other months the wells would sit idle, for no particular reason, just on some bureaucrat's whim.

What is the nature of your work in the oil industry?

I actually work in the title and lease department, dealing with leases and contracts. Specifically, I handle the division of interests on wells. Simply put, my job is to make sure that everyone pays and gets paid correctly based on their interest in a particular well. It is a sort of integration between the land dept, operations, and accounting.

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