Timing Is Everything

Two news items about oil caught my attention this week, and both of them illustrate the pitfalls of poor timing. If the windfall profits tax bill introduced by Senator Casey and seven of his freshman Democratic colleagues had been proposed at the front end of the current industry cycle, it would have at least been chasing a genuine price-spike windfall, rather than the profits from increasingly expensive new projects. And had the report that Iraq's oil reserves may be double their officially-reported 115 billion barrels--with the increment mostly in the Sunni western part of the country--come out a year or two ago, it might have helped Iraq's feuding factions find common ground. Instead, these two items merely contribute to a bleak picture of the future facing the major oil companies.

Because Iraq is still immersed in sectarian and terrorist violence, with no end in sight, it's going to be a long time before any of the country's newly-discovered oil gets to market. For that matter, any increase in production above pre-war levels would require a dramatic realignment of OPEC quotas, or Iraq's departure from the cartel. But if the new oil is anything like the old oil, distributed in a small number of large deposits with straightforward geology and low development and production costs, then Iraq's long-term future potential isn't 4-6 million barrels per day, as many have thought: it's another Saudi Arabia capable of similar volumes to what the Kingdom puts out. That needs to be factored into considerations of Peak Oil timing and the future oil price with which alternative energy projects must compete. It also serves as a reminder of just how much of the world's future energy supplies belongs to state oil companies in the Middle East.

As to a windfall profits tax on oil companies, this is never a good a idea, but at no time worse than when the industry is facing a serious profit squeeze--caught between rising global construction costs and more assertive national oil companies, both upstream and downstream. Our energy companies need to develop enormous quantities of new oil to replace reserves they are consuming, while investing in new refinery capacity to keep product supplies growing; all of that is going to cost hundreds of billions of dollars. Siphoning off a large slice of that money to fund new poverty programs is a good way to derail those projects and keep the prices we pay for petroleum products high indefinitely.

Taxing oil companies makes for great populist sound-bites, but it is directly contrary to any realistic notion of enhancing our energy security, when the state oil companies are getting bigger and more powerful.