Free Republic

So far I have seen nothing mentioned in the media that I would call “subsidies” or tax credits for the oil companies. What they have so far proposed has to do with how quickly money spent on assets are depreciated (depleted in the oil business), something all businesses do (whether epensed or depreciated). All things being equal (oil prices, production, operating expenses, etc) the taxes paid to the government over an asset’s life is the same under these cases, only the timing changes when it gets paid to the government (in this case the government wants the money sooner). In fact, a case can be made that the government and consumers will actually be hurt by this because lengthening depletion times results in reduced rates of returns on investments resulting in once marginal wells not being drilled. This means less royalties paid to landowners (whether the government or private individuals), less taxes paid on the oil production, and fewer people hired.

1) Percentage depletion versus cost depletion. The proposals want to make all oil companies use cost depletion which is what all large oil companies must do. As mentioned before, this results in longer depletion times for small producers which typically drill for smaller production wells, does not increase government revenues over an asset’s life, and reduces rates of returns. Under certain circumstances percentage depletion can result in more than 100% of an asset being depleted over a number of years which I think is a legitimate criticism. I doubt this would result in more than $100 million dollars over a 20 year period.

2) Intangible drilling costs. Currently, up to 70% of a well drilled can be expensed and 30% depreciated over 5 years. The proposal is to depreciate 100% of the costs over 5 years. Again, no additional tax money goes to the government, just the timing of it being paid. This impacts small companies more than the larger companies because the larger companies tend to have more money spent on infastructure to produce the oil, things such as platforms, pipelines, barges, etc. (all these items are depreciated over long periods of time). The reason so much of a well is expensed upfront rather than depreciated is because the only long lived asset resulting is the wellbore casing, tubing, and christmas tree.

Mortgage cramdowns such as those being proposed will be a disaster. Banks are willing to accept the risk on bankruptcy adjustments for credit cards because they charge spreads of 15% to 20% and limit credit exposure usually to a few thousand dollars to maybe 20 thousand dollars. Credit lines can also be reduced monthly if problems develop.

People mention that corporations are allowed to adjust their debt during bankruptcy but almost no corporation can get a loan unless they have equity to total capital ratios of at least 50% (most ratios are much greater than that) as well as good cashflow. Why would anyone lend to an individual with equity ratios less than that on a relatively illiquid asset? You’d also be nuts to lend longer than 10 years or so and it would have to be at much greater rates than you see today.

The other problem will be in valuing any current mortgage notes/loans held by banks or investors. Once bankruptcy judges can adjust loan values to any amount, you will see turmoil in the credit markets that make today’s problems look like a walk in the park. Don’t kid yourself that the taxpayer won’t in the end get hit with taking all these massive losses.

If this proposal really goes through I’d bet the credit markets will completely freeze and cause a total financial collapse.

As I posted on several other oil threads nearly two years ago, when oil demand approaches around 98% of production capacity oil prices start to rise hyperbolically due to the relative inelastic demand/supply curve. This was seen in the late 1970’s when crude prices went from a few dollars a barrel to around $30 (this occured with almost no oil trading or supposed speculation) followed by the collapse in oil prices in the 1980’s to around $10 to $15 a barrel when the demand/supply ratio dropped to around 95%. As I discussed in these posts two years ago, all you needed to do to drop oil prices rapidly was to reduce the demand/supply ratio by about 3% or about 2.5 MMBOPD.

This is why when the Democrats talk about the fact that we might only get 1 million barrels a day from ANWR and that this is only 1.2% of world supply so it will have little or no effect on price is bogus. Oil prices are greatly affected by small changes in the demand/supply ratio when that ratio approaches around 98%. In addition if you were to add oil production from offshore the U.S. now currently off limits you might increase world production by up to 2 million barrels a day or 2.5%.

The floor for oil prices is typically set by two things, usually the cost to develop and operate a field to produce a barrel of oil at the last marginal barrel of demand (I would estimate this to be around $50 to $70 per barrel at current demand rates), though it can sometimes drop to the cost of producing (operating costs only) the last barrel of demand (I would estimate this cost at between $20 and $25 per barrel). If oil should drop to the latter floor almost no new production will be brought onstream.

Adding production from ANWAR and the offshore continental shelf could add 1 to 2 million barrels per day to world production, or 1.2% to 2.4%. This would have a significant effect on oil prices probably dropping them to as low as $60 to $70 per barrel. Oil prices were between $10 and $20 per barrel for 20 years when capacity exceeded demand by only 4% to 5%. Oil prices escalate rapidly whenever demand starts to get around 98% of capacity and above due to the unstable foreign sources of supply and the relative inelasticity of demand. Adding U.S. sources of supply would also add high paying jobs to the U.S. instead of overseas, reduce our trade deficit, and likely strengthen the dollar (though foreign curriencies are more buffeted by interest rate differentials and inflation concerns than most other factors).

OPEC will have a very hard time reducing supply as all of them except for Saudi Arabia need the cash currently. The Saudis will not likely want to cut production either as that will disrupt their refineries and chemical plants.

One other thing people tend to forget is that a significant protion of your natural gas is from oil fields as it is dissolved in the oil and many times is found as a gas cap on top of the field. Natural gas is not only needed for enery but is the basis for most of our fertilizer.

Having worked at Prudhoe Bay I can tell you this, oil production has had minimal effect on the area. One is that the footprint is so small as you have isolated well pads connected by a small road with pipes taking production to a processing center. No one goes outside unless they absolutely have to since the weather is so miserably cold (even in August you might get some weather that aproaches 60 degrees but you can also get blowing snow). The land is tundra and all looks the same (flat and boggy). Depending upon the time of year you get animals migating through there with no problems since they know the natives will rarely hunt them these days. If you ask me I believe a solar plant in the Arizona desert has a much worse impact on the environment than ANWAR will as solar plants drastically alter the surface area habitat.

As far as offshore production, drilling ships don’t look much different than other ships, and most of your production will be from subsea wellheads so you won’t even likely need any unsightly platforms.Most people won’t even know there is oil and gas prodution going on unless they’re told.

I love how the democrats claim they are just repealing tax breaks given to the oil companies. These supposed tax breaks are that the oil companies (actually all U.S. based companies with foreign operations) don’t have to pay U.S. taxes on their foreign operations until they repatriate that money back to the U.S. These companies do continue to pay foreign corporate taxes on those foreign operations. If you force the oil companies to pay additional taxes on their foreign operations even if the money is not brought back to the U.S. this will cause severe problems:

1) U.S. companies will be at a severe disadvantage bidding for foreign leases since foreign companies will be bidding with lower tax rates. Nothing like letting the Chinese win all the contracts and ship all the oil to China rather than the U.S.
2) The current foreign operations of U.S. oil companies will be woth more to foreign companies than the U.S. company. Many U.S. companies will likely sell to reap the
higher value.
3) With oil companies such as Exxon making 75% to 80% of their profit overseas this law will likely force them to reincorporate overseas or merge with a foreign company with headquarters overseas. Their go a lot of high paying corporate officer jobs as well as banking, accounting, legal, and IT computer jobs

I think people who support McCain as a fiscal conservative have lost sight of the forest for the trees. Sure, he might (again, that’s might) be able to cut $20 billion to $50 billion annually in earmarks, but then it has been estimated his global warming legislation will cost the economy at least 1% a year or $140 billion and his amnesty plans will cost at least $100 billion a year. Add in additional costs for taxpayer funded lawyers and judges helping terrorists clog the U.S. courts when he closes Gitmo and brings them to the U.S. McCain also voted for the latest $150 billion giveaway which will do little to grow the economy and add few additional jobs. I hardly consider McCain a fiscal conservative.

I am all for getting rid of earmarks and reducing social spending that is a drag on the economy and curtails the rights of individuals (including McCain’s global warming and amnesty legislation), but the focus needs to be on how you grow the economy(GDP), and what level of debt is reasonable to increase that growth rate. Even AAA companies (the highest credit quality) have debt because it is cheaper than equity and increases your growth rate. People always talk about how much the government debt has grown under Bush, but forget how much the GDP has grown. The real issue is what is total debt to GDP (very little change under Bush including going through the Clinton recession and 9/11) and is that an appropriate rate to maximize economic growth. McCain doesn’t understand this hence his votes against the Bush supply side tax cuts. Several studies have shown that it is the reduction in tax rates at the highest levels, i.e the investing and private business class, that drives the majority of jobs and economic growth.

I understand your desire to rationalize a vote for McCain but I don’t buy them and will never vote for the man. I will devote my time and money to conservative Republicans downticket.

His signature proposals if elected include global warming legislation estimated to cost over $140 billion each year (not including the huge government apparatus to enforce this law),amnesty legislation costing around $100 billion annually, closing Gitmo and bringing terrorists to the U.S. where they have additional constitutional rights. I personally believe we have a better chance of Repubs stopping these bills with a Dem in the white house than John McCain.

I still remain ambivalent about whether McCain is really better on the WOT or not (and I have strongly supported Bush in all aspects of this including the surge), but if you believe in open borders, not aggressively interrogating terrorists when your cities are at risk, and want to give more rights to terrorists to sue and hinder our fighting men (putting them in further danger), then I strongly question why we are fighting overseas. You haven’t even secured the homeland so why bother.

The democrats want further strengthening of McCain Feingold and the fairness act. Do you think John McCain as president will fight these items as it is one of his crowning legislative victories.Again, I believe we have a better chnace of halting such idiocy with the repubs in congress fighting a dem president.

Anyone who believes a liberal Supreme Court judge will retire under a Repub President is dreaming unless of ill health or an agreement to nominate a liberal in their place. This argument is only based on hope. Additionally with a likely dem majority senate, who do you really think will go through? Anyone remember who followed Bork? Perhaps you will get some better judges on lower courts, but McCain and his buddy Graham have put holds on some of Bush’s nominations as well aas the gang of 14. i personally believe McCain will work to nominate judges working closely with Dems so this does nothing for me. Besides the results of judicial decisions by judges nominated now would be felt years down the road, and we have more immediate worries.

Last, and this is an issue each person needs to make his own decision, I think John McCain by temperament and trustworthiness is unfit for the office. So is Hillary and Obama. As an investment banker I have worked with companies, governments, and politicians worldwide and our rule is never to work with someone you don’t trust and McCain has shown by his past actions he is not trustworthy on conservative issues.

This Texan will never support McCain for the following reasons and will vote Republican downticket but not at the Presidential race (I will vote third party or abstain):

1) The cost of McCain’s global warming bill will dwarf by tens of billions of dollars annually any savings from cutting earmarks (which I heartily support eliminating). It will also lead to a huge increase in goverenment agencies who will want to control your lifestyle and will seriously negatively impact the economy. It is estimated that the bill’s negative impact on the economy could be greater than 1% annually or about $140 billion dollars alone each year.
2) McCain did support the Iraq war and surge which I agreed with, but if you are going to close Gitmo, bring terrorists to the U.S. and give them constitutional rights, and not support an aggressive interrogation even when a U.S. city is threatened with the loss of thousands of lives, plus leave your borders wide open, why are you fighting overseas? Under this scenario our overseas troops will be constantly sued for civil rights violations (mostly imagined of course)and how can you win such a war?
3) McCain has shown he has little regard for the first amendment as shown by McCain Feingold. So what are we fighting for overseas?
4) The McCain Kennedy amnesty bill would have cost over a hundred billion annually and did nothing to keep terrorists out of the U.S. Once again, why are we worried about earmarks and fighting overseas if you support this bill?
5) McCain has fought against drilling for oil (and this means no natural gas for heating or making fertilizer also) in ANWAR or offshore. This has helped lead to higher oil and natural gas prices, and more dependence on foreign souces harming national security. So why is McCain considered good for national security?
6) McCain supporters love to point that he might (and I stress might)appoint more conservative judges than the democrats, but we know that he and Lidnsey Graham held up several judges with holds, not just through the gang of 14 deal with Democrats. Has Mccain been active last year or this to move Bush’s judges forward? No. Additionally, the reults of judicial decisions take decades to work themselves through the country’s affairs and McCain’s actions will have seriously harmed the country long before I have to worry about judicial decisions.