Uncle Sam’s Multi-Trillion-Dollar Oil Lockup
Maybe the Treasury bailout will force us to look at revenues we are losing by locking up our energy resources.
As I write this column, the two major news stories are that:
- The Treasury $700-billion-plus bailout of the financial industry is in jeopardy — at least the blank-check, right-now, no-accountability version Treasury Secretary Paulson and Fed Chairman Bernanke appear wedded to.
- Harry Reid and Nancy Pelosi have apparently bowed to reality and will not try to renew the ban on offshore drilling for oil and natural gas that has annually been enacted into law for over a quarter-century.
Assume for the moment that the bailout passes and that the ultimate taxpayer loss runs into the hundreds of billions (in theory, it should be less than the amount Paulson and Bernanke want; but never underestimate the government’s ability to make a bad thing worse). Where is that money going to come from?
How about item 2 above?
One of the untold stories of the offshore drilling ban is how much the country has lost in tax revenues over a period of decades because of it.
Congressman John Peterson (R-PA) seems to be virtually alone in making this huge point. The numbers are stunning. In a PDF available at Peterson’s home page (at “Charts and Other Useful Information”), he tells us that “the United States is the only industrialized nation in the world which prohibits offshore exploration and production of domestic energy.”
The government collects royalties on oil and natural gas when it is extracted. Peterson’s office has obtained information from the Minerals Management Service and the Energy Information Agency showing that the average royalty rate based on market prices of the resources when extracted is 15.17%.
Earlier this summer, Peterson’s office prepared this summary (in HTML format here) of how much royalty money is just sitting there offshore:
Even if you adjust Peterson’s calculations to reflect current prices of roughly $100 a barrel for oil and $8/mcf for natural gas, the royalties locked up still amount to over $1.8 trillion (about $500 billion from natural gas and $1.3 trillion from oil).
But that’s only the beginning.
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Tom Blumer owns a training and development company based in Mason, Ohio, outside of Cincinnati. He presents personal finance-related workshops and speeches at companies, and runs BizzyBlog.com.
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30 Comments
1. Self-hating boomer:They’re still not done trying to lock up domestic energy:
http://www.powerlineblog.com/archives2/2008/09/021606.php
Sep 26, 2008 - 10:22 am 2. David Thomson:We must not get overly excited about the recent approval of more oil drilling in the United States. That is only half the battle! There is still the matter of endless lawsuits, so-called environmental impact studies, and other obstacles to overcome. Our elected officials must also pass legislation making it difficult to halt the drilling.
Sep 26, 2008 - 10:39 am 3. AlexinCT:The donkeys will come back to this and try to lock it up sometime later anyway (like if they bag the WH in the coming election). Reid is already trying to put our largest oil supply – shale oil -off limits as SHB above pointed out. This is not over yet. The left has a vested interest in controlling energy because it is the engine of our modern society’s economics. Those that control energy control the people. And remember that collectivism is all about controlling the people…
Sep 26, 2008 - 10:58 am 4. DensityDuck:The problem is that Democrats seem to believe that if a certain option is made hugely expensive, that the market will step up and invent a magic free solution. You see this in the rhetoric about public transportation and gas taxes; people say “oh, gas tax should be 400%, that way everyone would take the bus!” Well…WHAT bus? Buses do not magically respawn if demand outstrips the number available; and it’s not like I can just take my car to the dump and trade it in on a bus route.
On the other hand, you have the contractionists, who just think we shouldn’t have energy at all.
Sep 26, 2008 - 11:07 am 5. NukemHill:You missed a couple of decimal points here:
That should be 3.65 billion barrels, according to the quoted text you provide. That makes it $54 billion. Not quite so much.
Sep 26, 2008 - 11:10 am 6. Elliot:please be more careful with math. it should say 365 million (not billion) for north dakota, and the final figure is 5.4 billion, not trillion.
Sep 26, 2008 - 11:14 am 7. Jody:You are only talking about the royalties. What about the hundreds of thousands of additional high paying jobs to find, extract and distribute the oil and/or gas?
Sep 26, 2008 - 11:17 am 8. Stephen Macklin:Don’t forget that in addition to the royalties, energy production will generate increased income for oil and gas companies – that will be taxed. Producing al of this energy will create lots of jobs – which means lots of income tax revenue for Uncle Sam as well.
Sep 26, 2008 - 11:28 am 9. matt:Lower energy costs and more of our energy dollars being spent domestically will foster economic growth which leads to – you guessed it more tax revenue.
as a trained economist and successful businessman, I would strongly disagree with your characterization of the original Paulson/Bernanke plan as a no-accountability bailout. In fact, the upside for the federal government is considerable. The Republican mortgage guarantee plan is, on the other hand, a joke, and if a sensible plan is not in place very quickly, the fallout for the economy will be hell on earth for all of us.
It is time to stop playing politics and enact (reenact) sensible legislation to deal with so many of these issues. But first we have to stop the bleeding. WaMu, Lehman, Merrill, Countrywide, FNMA and Freddie should all be a tip off that there has been a huge failure in the money markets which needs to be cleaned up quickly and effectively if we are avoid another great depression. Read your history.
Lobbyists have to a greater extent been the ones responsible for many of the problems, as has corporate management pursuing their bonuses to the detriment of their shareholders. A Congress of fools allowed this to happen. But first things first. It’s a triage situation and one cannot stand on principle when the patient is bleeding out.
Sep 26, 2008 - 11:29 am 10. Tristan Phillips:Let’s not forget who’s going to pay those royalties.
Hint: It’s not the companies that the government hands the bill to.
Just another d*mn tax that someone wants us to pay. Always nice to see a Tax & Spender out himself in all their orgasmic glory.
Sep 26, 2008 - 11:43 am 11. Holdfast:The Royalties will be paid by the oil extractor – and it will be part of the price passed on to consumers, just like they are currently paying it as part of the cost of a barrel of oil – they are just paying it to governments like Russia, Kuwait, Saudi Arabia, Venezuela and Nigeria. I dislike taxes as much as the next guy, but this is pretty much the best possible tax – getting money for something that otherwise would not benefit anyone, while growing jobs here and not sending gigabucks overseas.
Sep 26, 2008 - 11:56 am 12. Trained Voter with Common Sense:Trained economist says — Lobbyists have to a greater extent been the ones responsible for many of the problems, as has corporate management pursuing their bonuses to the detriment of their shareholders.
I would get my money back on your training if I were you Mr Trained Economist. While there is a great deal to be concerned about with Fanny Mae and Freddie Mac lobbying and their manipulation of their figures, lets review again the major recipients of their lobbying Congress with their crooked business model…Chris Dodd D John Kerry D Barach O’bama D. And in addition to lobbying, how about providing a great bench seat for Democratic administration staffers like Jaimie Gorlick – what was her take again? Ninety mil?
I hear nothing but Democratic talking points from you. Nothing about the Carter Community Reinvestment Act, Nothing about ACORN, nothing about Congressional pressure on banks to make loans, nothing about common citizens being allowed to take out loans that far exceed their ability to pay.
As far as I see it, by including ACORN in the bailout bill, the Democrats in Congress are putting a hand grenade in the bailout, ensuring that it will be 2 trillion in a couple of years.
And which Presidential candidate has been tight with ACORN??????
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Acorn’s new goals are municipal “living wage” laws targeting “big-box” stores like Wal-Mart, rolling back welfare reform, and regulating banks — efforts styled as combating “predatory lending.”
http://article.nationalreview.com/?q=NDZiMjkwMDczZWI5ODdjOWYxZTIzZGIyNzEyMjE0ODI=
While Obama’s Acorn connection has not gone entirely unreported, its depth, extent, and significance have been poorly understood. Typically, media background pieces note that, on behalf of Acorn, Obama and a team of Chicago attorneys won a 1995 suit forcing the state of Illinois to implement the federal “motor-voter” bill. In fact, Obama’s Acorn connection is far more extensive. In the few stories where Obama’s role as an Acorn “leadership trainer” is noted, or his seats on the boards of foundations that may have supported Acorn are discussed, there is little follow-up. Even these more extensive reports miss many aspects of Obama’s ties to Acorn.
Acorn is the key modern successor of the radical 1960’s “New Left,” with a “1960’s-bred agenda of anti-capitalism” to match. Acorn, says Stern, grew out of “one of the New Left’s silliest and most destructive groups, the National Welfare Rights Organization
Sep 26, 2008 - 12:09 pm 13. Webrider:+++++++++++++++++++++++++++++++++++++++++++++++++
— but perhaps you like giving them cover while focusing on “evil lobbyists”
Trained Voter with Common Sense:
Amen, all on target and completely dismissing the Astroturfer’s (Matt) comments. I sick to death of the Democratic operatives all over the place denying what actually went down. Democrat socialist policies are the root cause and perpuating them will only make the problem worse. The Bailout would only be temporary, if they don’t STOP this nonsense of rendering the market and sound business practices inoperative due to their desire for “fairness”.
Sep 26, 2008 - 1:08 pm 14. Tom Blumer:Tristan wrote:
++++++++++++++++++++++
Let’s not forget who’s going to pay those royalties.
Hint: It’s not the companies that the government hands the bill to.
Just another d*mn tax that someone wants us to pay. Always nice to see a Tax & Spender out himself in all their orgasmic glory.
++++++++++++++++++++++
Response:
Tristan, I don’t disagree that it’s a tax, but I don’t know where you got the “spend” part. If you find it, let me know.
In fact, I would argue that the royalties from domestic energy extraction would more than justify totally eliminating federal and state gasoline taxes.
If enough royalties came in each year from energy sources (remember, the $6.1 trillion is a HUGE underestimate, in that it excludes so many things that actually exist, and assumes a level of recoverability of shale that is probably very low), you might be able to justify eliminating the income tax and all of its odious paperwork.
How’s that for “tax and spend”? (/sarc)
Note to Nukem and Elliot — I appreciate your catching the Bakken situation. I believe the reserve numbers in the excerpted article were mistaken based on very recent developments (I believe Gingrich said on Hannity the other day that Bakken, based on revised estimates, may get to the point where it produces more oil per year than Saudi Arabia), but since I couldn’t get my arms around anything provable, I had it removed.
Sep 26, 2008 - 1:10 pm 15. SomeGuy:>>The problem is that Democrats seem to believe that if a certain option is made hugely expensive, that the market will step up and invent a magic free solution.<<
They don’t expect a magic free solution or they’d just pass a law mandating that a magic free solution be created. No, their real plan is to make it impossible to drive a private car which in turn would make it impossible to live in the suburbs. The plan is to force everyone back into the cities where they will live in govt. high-rises and get around on govt-provided mass transit. This makes everyone dependent on govt. and guess who is the party of big govt? This is the collectivism that the Left wants to see imposed on America.
Sep 26, 2008 - 1:35 pm 16. Marc Malone:I think these projected numbers are for a five-yr period right? That means EVERY five years, right? Lessee, $6,000,000,000,000 + $6,000,000,000,000 + $6,000,000,000,000 + well, you get the picture.
Of course, making these new jobs here in the use will create 2-3 ancillary jobs as well, right? This would be a… what’s the word… oh, right, PARADIGM SHIFT in our economy! The Trade deficit would shift from $700B to a net plus of, what, $600B?
Well, the Dems can’t have that! They do better when the economy’s bad, right? So, they do what they can to make the economy worse….
Sep 26, 2008 - 1:37 pm 17. Deb D:All I gotta say is, if Dems know they’re locking up potential revenue for the treasury, they’ll dump those damn environmentalists in a second! Great report, Mr. Blumer. I’m including a summary and a link to your column from my blog. Wow, great stuff!
Sep 26, 2008 - 1:55 pm 18. BizzyBlog » Latest Pajamas Media Column (’Uncle Sam’s Multi-Trillion-Dollar Oil Lockup’) Is Up:[...] It’s here. [...]
Sep 26, 2008 - 1:55 pm 19. cedarford:The royalties are a nice side benefit. The bigger benefits are enhanced security from a supplier disruption and most important, allieviating the bleeding away of 700 billion a year in US wealth (Odd isn’t it that that’s the same amount Congress and Joe public are up in arms about pissing away on the economic rescue plan.) Pissing our wealth in similar amount ANNUALLY – every damn year – to foreigners who pay no taxes and contribute far less to economic multipliers and good jobs when they do invest petrodollars back into the economy…is far more ruinious and unsustainable to America than the rescue package.
(Not that a few of our main suppliers – Canada and Mexico and hopefully soon Venezuela again are unwelcome long-term suppliers, nor are huge LNG suppliers Libya, Oman, Qatar really any problem..)
PS – 1. I think that it is all kinds of sick that oil, coal, gar-rich Alaska is now getting a substantial portion of their Nat Gas from Russia.
Sep 26, 2008 - 2:54 pm 20. Mark B.:2. Maybe someone can explain why environmentalists are just as opposed to offshore drilling for nat gas as they are oil. Is it those dreaded gas spills? To much fishlife flourishing in the nurseries and hangouts of the artificial reefs each rig is?
Deb, some of them already know it. O! himself is quite well aware that lowering top marginal tax rates always — always — results in more tax revenue. It’s about “fairness”, or more to the point, tax policy as social engineering, or even more to the point, using someone else’s money to buy reliable constituencies.
I don’t doubt the overall revised numbers in the article, although I rather suspect that the unit price points cited for energy commodities would not survive a renewed commitment by the United States’ political class to more completely service our energy needs domestically. Coupled with vigor in energy-conservation technologies which are bound to emerge — something desireable, I so stipulate — I’m relatively certain those unit costs for oil and gas would drop significantly, meaning that the royalties per unit would also fall, but that the number of units produced would rise in response.
We’re not in an energy crunch; the market’s being artificially distorted by collectivst politics.
‘Berg
Sep 26, 2008 - 2:54 pm 21. William Jockusch:Look on the bright side. We didn’t extract that oil when it was $20 or $30 a barrel, and now that it is $80 or $100, it’s down there, waiting for us.
Sep 26, 2008 - 3:22 pm 22. Reid Continues Blocking Of Shale Oil « Tai-Chi Policy:[...] if we had been developing the domestic energy sources that the Dems have consistently been against, our Federal government would have collected at least $6.1 trillion dollars under current royalty rat……an amount that would pay for the $700 billion bailout plan quite a few times over, [...]
Sep 26, 2008 - 3:25 pm 23. Paddy:Mr Trained Economist, What sort of tricks can you perform?
My lawyer friends used to pose the question: what do you have when you lay all of the world’s economists end to end? Answer: nothing.
Sep 26, 2008 - 4:27 pm 24. Marc Malone:I’m no expert on drilling, but I suspect that the reason that Dems don’t want Offshore Nat Gas production is because oil and Nat Gas are co-located. I understand that in AK’s north slope, they have to pump the stuff back into the ground (!) because they have no means to pipe the TRILLIONS OF CUBIC FEET to markets. Thus the importance of Palin’s Nat Gas Pipeline project.
Anyway, what if they were drilling for Nat Gas offshore and hit the oil motherload, hm?
Sep 26, 2008 - 4:51 pm 25. john from cinncinati:how much are the Alaskans getting back each year? lets ask Gov Palin how she did it.
Sep 26, 2008 - 5:20 pm 26. Jaded:DRILL HERE DRILL NOW and all of the above…..American ingenuity with American workers…..lets keep that 700 billon we spent on foreign oil back in our account…..it appears we need to save the POOR on Wall Street!
Sep 26, 2008 - 5:41 pm 27. Tom Blumer:Marc Malone and all else:
The 5 years ONLY relates to the time period studied to estimate the average royalty rate.
It has NOTHING to do with HOW QUICKLY the resources are extracted.
I don’t know how much or how quickly, but it doesn’t seem at all unreasonable to think that we would be taking in a few hundred billion dollars year once a reasonable production level is in place. Now we send hundreds of billions of dollars overseas instead. Talk about stuck on stupid.
Williams Jokusch — that’s funny.
Sep 26, 2008 - 8:48 pm 28. WR Jonas:I was reading about an exciting new technology which is being tested in northern Canada, called THAI, which stands for toe-heel-air injection . If the project is successful the cost to produce oil directly from shale will be significantly improved.Using a very specially lined pipe which is placed in seams hot air in injected into the strata and forces the oil out of the rock into the pipe. Not only is the process cleaner environmentally but it produces a more desirable grade of crude. Very radical and perhaps revolutionary. In 20 years the Arabs may be pleading to get us to buy their oil.
Sep 27, 2008 - 8:50 am 29. Pfunk:You used the MMS estimates for offshore oil and gas reserves within the moratorium area. What about ANWR? Plus, if the 2000 acres of real estate within ANWR deliver the reserve estimates that are tossed around for that project, what about other portions of the North Slope in Alaska that are onshore? Surely there are onshore plays in that area other than in ANWR.
The technologies that are developed in order to extract hard to produce oil reserves more effectively and efficiently within Canada and the USA will eventually be used in other parts of the world. Because of our early technological leadership within the oil industry and the fact that the easy reserves in North America (other than in Mexico) have been produced, the technologies to produce the hard to get or hard to produce reserves will naturally be developed in North America. It is stories like yours, WR Jonas, that leads me to believe that the Peak Oil crowd may be somewhat premature in their dire estimates.
Sep 28, 2008 - 3:07 pm 30. BizzyBlog » The POR Economy: I Had NO Idea How Poor:[...] clear that reinstituting the ban is a “top priority” for next year — never mind the trillions in royalties that could fill federal and state [...]
Nov 15, 2008 - 7:37 am