In response to the windfall tax proposed on oil and gas company profits
Short answer: It will do more harm than good.
Standard reporting or media soundbites do not work well with this subject matter. I’ll attempt to address the classic reactiveness of government leaders with the way in which the world of economics and integrated global supply chains work. I have been chronicling the rise of U.S. shale oil and gas since 2006 to today. But here, we’ll talk about oil. A simple brief history follows:
1) In the c. 2013-14 oil price environment, Brent prices hovered above $100 range. In June 2014, price dropped from $111 to $47 in January of 2015. Why? Because OPEC (it’s a cartel) decided to regain lost market share as the U.S. began producing considerably more. Partly through the eyes of CEO Scott Sheffield of Pioneer Natural Resources, I wrote my first U.S. energy revolution story in print in January of 2014 that described what was to come. I had to sit on the story six months before it was actually published, but telegraphed ahead as I could. Media such as The Wall Street Journal, The Economist, and others then all caught a whiff and did their thing.
[Here is a chart of Brent pricing as described above and below.]
2) After that market share battle, shale throttled back. Finally, prices were around $80 by October 2018, reflecting a market trying to adjust. Remember U.S. oil is in private market hands. Our economy is based largely on this premise. (Read about the collapse here. Also at D CEO here.)
3) Prices tanked at the worst point of the pandemic in 2020, and in February of 2022, they were at $97. This is lower than the period when U.S. shale roughly broke out in circa 2008-2013.
4) In 2016, OPEC formed the extended cartel to include Russia, a top three producer at a given point, and other producer countries. Prices stayed in a certain range as they managed the market. They had one tantrum period, or so, when Putin wanted to go against the grain during the pandemic. (This is all documented in my Seeking Alpha articles.) This further helped collapsed prices at one point.
Where we are today
Oil prices were rising as supply and demand were mismatched, owing to OPEC reducing production as well as U.S. producers, in response to the pandemic. Investment in U.S. shale resources were also reduced because of investor demands. They wanted their returns, which drives the raison d’etre of private market, publicly-traded companies. (Read the D CEO story of November 2021 for how and why we got here.) OPEC+ continued to manage the market. They need higher prices to invest and build the government coffers which ran low during said low price periods.
Fast forward: Oil markets are responding as they do, with volatility. Other commodities follow this type of market reaction in times of crisis. Russia’s invasion added rocket fuel to market in which prices were already rising for all of the reasons I just mentioned above. Some politicians are reacting as they do: short-term ideas that may realize next election cycle gains.
End result: U.S. citizens will be further disadvantaged as U.S. producers have less incentive to produce here. This is why the majors largely left U.S. fields to global ones. American jobs were lost. Prices ultimately rose anyway with OPEC controlling price and global oil markets more. U.S. shale oil and gas redressed the global market gaps and moderated prices for energy resources. That’s it— full story.
(Read this January 2014 D CEO article which highlights the beginning of U.S. shale oil happenings and how “independents” came to own the lion’s share of shale resources as the majors ceded their U.S. assets.)
Whose windfall? Not Americans, not the rest of the world. Maybe Putin’s.
Note: I may edit this further for added specificity but wanted the information to be disseminated.