From: Matthew Welland (matt@essentialgoods.com)
Date: Thu Jan 30 2003 - 16:08:21 MST
I have just joined extropians and I'm pleasantly suprised by the range of
topics here. I hope I'm not too off topic by contributing to this thread but
this is one of my favorite subjects...
Anyhow, about the price of oil, one big factor in price is taxes. No suprise
there. However I suggest that the relationship might be a little different
than one might first assume. Huh? Surely if you tax oil, the price goes up.
Perhaps, perhaps not. Here is my reasoning:
i. Tax oil *at the barrel* (i.e. not at the pump)
ii. Prices of oil based products; fuel, plastics, etc. naturally rise.
iii. Alternatives to oil based products appear a little cheaper.
I.e. wood or metal instead of plastic, bicycling instead of
driving etc.
iv. Some consumption shifts away from oil to alternatives
v. Demand for oil decreases slightly
vi. To maintain revenues oil producers drop prices a little (*)
Now, assume for a minute that the increased tax revenues taken in by taxing
the oil are used to displace some other tax burden (yes, yes, an unlikely
scenario). Then:
a. The nation sees no net change in the tax burden
b. The nation sees a net decrease in the price of oil
c. The oil producing country has a little less income from oil
The net effect: a reduction in the price of oil from the nations perspective.
I.e. by taxing crude oil an oil importing country can trim some of the
windfall profits from the oil exporting country.
For the above reasoning I am not considering transient effects. Transient
effects and unintended consequences might include things like decreased
economic activity, political unrest, me having to sell my beloved gas
guzzling SUV etc...
A fun thought experiment eh? The best evidence in support of this argument
are some of the strong statements the oil producing countries (especially
OPEC) make against consumer countries taxing oil.
Matt
-- (*) Of course they could increase prices but remember there really is a free market at work in the oil arena. If one producer increases price they are likely to see market share fall. On Thursday 30 January 2003 12:45 am, you wrote: > Steve writes > > > Robert said > > > > > > > The price of oil is subject to a complex "present value > > > > > > > > analysis" of both the countries producing it and the > > > > consumers. It comes down to a question of "do I gain > > > > more by pumping the oil or leaving it in the ground?". > > > > Lee responds > > > > > Who ever gains more by leaving it the ground? (Besides > > > U.S. farmers, I mean.) > > > > Many people I'm afraid. It's a question of time horizons. You compare the > > return you would get by pumping the oil now to what you might get in the > > future assuming (a) you, your heirs or assigns will still control it (b) > > other sources have been depleted in the meantime and (c) there's been no > > technological breakthrough in the meantime to cause a slump in demand. > > This doesn't just apply to oil the same is true of other resources, above > > all land. It can pay not to develop land but to leave it idle if this > > leads to a rise in its capital value or to a rise in rents at a future > > date. > > Yes, that makes perfect sense. But (c) supposing that there's no > tech breakthrough, you're gambling that the oil in the ground will > become significantly more valuable over time. Right now, I think > that the Saudis or any other big investor can get quite a return > on their profits, perhaps 5-8% or more, intelligently invested in > the right places. > > The only reason I personally understand, then, to leave it in the > ground is that you don't have very much of it. An oil company > that projected that its reserves would run out in a decade or so > might well be better off to forego investing in new equipment, and > continue to extract the oil with its present machinery. But the > *big* oil producers such as Saudi Arabia, Iraq, Russia, Venezuela, > and Mexico won't be running out of oil until the whole world does, > and that's not in the foreseeable future. (The need of money *now* > in these regimes would---it still seems to me---overpower long > term benefit anyway even if it existed.) > > > > Leaving all the profits to Iraq? That's not how > > > markets work. Unless they achieve a cartel, it > > > forces down the world market price of oil, right? > > > > But this *is* what some producers have done in the past > > particularly the Saudis. You forgo profits in the short > > term (let them accrue to whoever controls Iraq) in the > > expectation that the income your resource will generate > > in the future will be greater than it would otherwise be. > > I thought that they did this only when their cartel was > working. No? > > > An important consideration here is the time horizon of > > the Saudi rulers. If they think they are going to be > > overthrown in the near future they have every reason > > to cash in their chips now but if they are confident > > of holding on the incentives work the other way. > > When you say "cash in their chips now", do you believe > that they are afraid of running out? > > > > Don't you acknowledge that the Saudis and everyone > > > else are trying to make as much money as they can? > > > > Yes but when - within what time horizon? > > That's what makes this a difficult but interesting > discussion :-) > > > Lee concludes > > > > > Why, no. Of course they'll have to change their behavior. > > > They'll either have to lower their price or sell less. > > > > Not at all. There's a third option (although you could say it's another > > version of the second). The factor that might well make the Saudis behave > > the way you predict lee, is the demographics they face. They have a lot > > of overqualified young men and not enough jobs for them (jobs they are > > keen on that is) so a decline in oil income has sever political > > implications for them. > > Sure, a short time horizon, especially for countries less > stable, could indeed (one would think!) cause an increase > in production. That it's not happening in some places, > e.g., Venezuela, is quite bizarre, but shows, I guess, the > inevitable political component. > > But what you wrote here---the "third option"---I don't follow. > In my simple minded picture, I suppose that a Western-run Iraq > might within five years or so be producing significantly more > oil. So the world-wide price must fall. Therefore, the Saudis > or anyone else must either obtain drastically less revenue or > raise production themselves. Doesn't this seem right? > > Lee
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