Immediate Oil & Gas Price Relief - How Congress Can Act

Updated June 2008.

Here are three simple proposed federal laws that would provide near-immediate price relief and stability to the United States oil consumer. (These were first proposed in various forms in 2006. None have been acted on to date. If your representatives will not enact at least all four points of the first proposed law immediately, perhaps you should not vote for them, as they would then be clearly responsible for allowing your cost of living to rise despite having ways to stop it.)

The Commodity Fairness and Stabilization Act - Proposed Federal Law #1

The congress directs that gains from trading in all commodities shall be treated as Ordinary Income, taxed at the prevailing rate for the taxpayer. This includes foreign transactions made on US exchanges or made by US taxpayers on foreign exchanges.

The congress directs that losses resulting from any type of commodity trading shall not be deductible for tax purposes. This includes foreign transactions made on US exchanges or made by US taxpayers on foreign exchanges.

The congress directs that margin trades on commodities are prohibited on US exchanges. Full payment for a trade must occur at the exchange settlement time.

The congress directs that any title to a commodity must be held for at least seven calendar days. Holding a commodity for a shorter period will result in a 20% tax penalty on the value of the trade.

Purpose of this proposed law

The first two components of this proposed law are designed to constrain commodities trading, including but not limited to oil and gas futures. For example, speculative trading routinely occurs while the product has already been produced and is being transported across the sea, with the futures ownership changing hands dozens or even hundreds of times, and with the price usually rising with each trade. The oil is still in the same ship going to the same place as before. Only the price changes.

The original producer and end-seller usually see little of the price increase and profits caused by this trading. In the case of $130 a barrel oil, the effects of speculation represents as much as $100 of that total price, with those profits going to the small group of speculative traders, including both individuals and institutions.

Causing speculation to be taxed as ordinary income (currently taxed as Capital Gains) and eliminating the ability to write-off losses resulting from foolish gambles in commodities (effectively eliminating this gambling with the average consumers money) will result in far fewer high-risk trades being done in these materials.

The third part of the proposed law eliminates a regulation loop-hole exploited by Enron that allows certain commodity trades to be executed with as little as 10% of the needed funds available, while normal stocks must have far more funds at hand. The proposal is to completely eliminate the ability to use margin (or "IOUs") on commodity trades, and that the full amount of funds must be available at settlement of the trade, which usually happens within three days of the trade or at the close of that same trading day.

The fourth part of the proposed law makes it unprofitable to buy and sell the same commodity repeatedly in a short period of time. Currently, speculative traders or their trading computers might buy and sell the same material a dozen times in a single day, driving its price up needlessly. This part of the proposed law makes such activity unprofitable.



The American Petroleum Production Act - Proposed Federal Law #2

The congress forbids the exportation outside of the United States of any petroleum product, in raw or refined form (hereafter known as a "material"), that was extracted from federal lands and leases, including off-shore leases.

Exportation of a given "material" is allowed if the President publicly certifies that the United States has sufficient quantities of the given product to fully meet the needs of the United States. Certifications must be renewed every two years, and can be publicly withdrawn by the President at any time.

The President may declare to the congress that exportation of a specific "material" is being permitted on an emergency basis to a specific country or countries, for a duration that does not exceed six months, and can be renewed only with a further public declaration.

Violations of this law shall be punished by a fine equal to 110% of the value of the "material" improperly exported, and possible seizure of transportation vessels and vehicles.

The congress grants individual states the right to enact similar bans on material extracted from state-owned lands and leases.

Background

There is considerable oil and gas production from lands and off-shore leases areas that are owned by the federal government. In exchange for being the highest bidder, a given company is given permission to extract oil, gas and other minerals from these federal lands.

Under current law, there is nothing to prevent the lease-holder from taking the oil or gas pumped from the lease area and selling it to a third country where a higher price may be obtained, or trading it through other parties who may eventually sell it back to an entity within the United States, but now the product is at a far higher price than if the lease-holder had refined the oil or gas themselves or sold it direct to a U.S. based refiner.

Currently, the bulk of the oil extracted from Alaska (almost all of which comes from federal lands) is being exported to countries in Asia, where better prices can be obtained by the oil companies. U.S. refineries receive little or no crude oil from Alaska, despite Alaska being capable of providing over 7% of the daily needs of the United States. Currently Alaska provides less than 1% of the United States daily needs, with the rest of Alaska's production being sold to countries in Asia.

Purpose of this proposed law

The purpose would be to require that oil or gas pumped from federal lands and leases be made available for consumption within the United States first, rather than exporting it to another country simply because a higher sale price might be obtained by some private company with such action done at the expense of the American public.

The law allows for exportation of specific materials provided that the President publicly certifies that the United States has a surplus of the given raw or refined product, and that allowing for exportation of that material does not threaten national security.

A further function of the law is that, in the event of natural disaster or other emergency, the President can authorize exports to the government or designated refiners or distributors in another country that needs the given product urgently. The President can only do this via a public disclosure, and such exports must be renewed publicly or cease after six months. The purpose of this clause is is to prevent secret deals from being created to allow exportation of petroleum products despite a lack of supply-independence status.


Public Land Oil Pricing Act - Proposed Federal Law #3

The congress directs that raw oil and gas products produced from federal lands shall be sold at a price that is based on a fixed formula specified by the federal government.

The lease-holder must show the expense of exploration, operation and royalty payments within that specific lease, field, or individual well, and the product value of production from that specific lease, field or individual well will be that expense figure plus a fixed 15% profit, or 10% profit for production in areas designated "environmentally sensitive".

The lease-holder is free to sell (or account for) the product at any price up to the specific value established.

The pricing system of this act goes into effect for a given field no more than 14 days after the price calculation has been verified by the designated federal agency and the appropriate profit percentage determined. Lease-holders have 180 days to provide initial cost and expense information to the designated agency, demonstrating the price that should be charged.

The operational expense, at the lease-holders discretion may be re-computed once a year, and a new sell price then established for production going forward.

The lease-holder may spread the exploration and initial drilling costs, as well as any subsequent fracturing and other revitalization expenses over ten years.

Violations of this law shall be punished by a fine equal to 110% of the over-charge, and the possible loss of the lease and all equipment within the lease area.

Background

There is considerable oil and gas production from lands and off-shore leases areas that are owned by the federal government. In exchange for being the highest bidder of a one-time payment, a given company is given permission to extract oil, gas and other minerals from these federal lands. The federal or state government may receive a further small royalty based on the actual amount of oil or gas extracted from the lease area.

If a royalty payment does occur on a given lease, it is typically a fixed price-per-quantity-extracted royalty payment, and is not adjusted based on market value of the extracted material. A well that was established when oil was $21 per barrel might have a $1 per barrel royalty, and the same royalty remains in effect for that lease even when the producer gets to "sell" that barrel for $65. The producer could pocket up to the additional $44 as pure profit, if the production costs remain stable.

Purpose of this proposed law

The purpose is to have the U.S. Government direct the pricing of oil and gas produced from those lands and sea beds that are owned by the taxpayer, while still providing a reasonable profit to the lease-holder, regardless of lease-holder expenses.

Currently the price of oil that is established due to speculation, or the whims of other countries or organizations is typically applied by oil companies to all production sources, even if nothing happened to increase the cost of production from some sources, including those sources that the given oil company owns or has the lease for.

Because oil and gas in federal lands is in fact property of the U.S. tax-payer, this law states that the tax-payer and its government have the right to declare what the price is of oil and gas produced from these areas and that this price is based solely on actual cost to obtain, and not the whims speculators, other countries or organizations that threaten the security of the United States.

By effectively taking all federal land oil and gas oil production out of the commodity futures pricing system and out of OPECs indirect pricing control, the action will stabilize oil prices because federal land oil and gas will initially be far less expensive than the price that speculation has pushed "world market" oil prices to. Other sources, including overseas producers who see demand shift even briefly from their supplies and they will likely cut prices in order to compete.

In some ways, this act could be seen as nationalizing part of US oil production, but this land was already owned by the government, and producers are free to produce elsewhere if they don't like the rules. If they elect to produce on federal land, they will have to follow the pricing and profit guidelines that the government establishes.

It is expected that transportation and refining entities who are in receipt of oil and gas priced under this program are expected to pass the likely-lower costs on to consumers.


Things Congress should actually be doing something about (and a few they should stop talking about or just "investigating")

About the most worthless thing on the planet is a Congressional investigation (except maybe a Presidential investigation), the main purpose of either appears to blame no one important, take no action and if at all possible, never report findings, or take so long that the results are useless and millions are wasted in the process.

Congress should move beyond delaying things with investigations designed to not report any results until after the elections, and actually take SOME ACTION! Here are some things Congress should look at now!

If the oil companies won't build refineries, the government should build them, using the oil companies profits to entirely pay for them

Like most Americans, I am tired of the oil companies defending themselves by whining that there is insufficient oil refining capacity and that is what is mainly responsible for high prices. Yet these are the companies that control the existing refineries and have consistently failed to build new ones. These are also the same companies that have EACH had in excess of TEN BILLION DOLLARS in QUARTERLY profits in recent quarters, partly thanks to the fact that they failed to build additional capacity!

The fact of the matter is that the oil companies want the oil supply to be tight and unpredictable because that is an excuse for higher prices. They want the transportation systems to be aging and under-capacity because that is an excuse for higher prices. They want there to be insufficient refineries and have no plans to build more because that is also an excuse for higher prices. They want mismatched and different blending rules for various states and cities so that a given refinery has a captive market and can charge whatever they want.

Unlike other industries, in the oil trade you can actually increase profits by doing nothing. This they do well.

A state-of-the-art high-capacity oil refinery with the absolute best efficiency, superb pollution and safety controls, plus gold plated toilets and built on an accelerated schedule could potentially cost a billion dollars to construct . EXXON/MOBIL alone could buy TEN such refineries with CASH from their profits from just one quarter of 2005 through 2008. How about EXXON/MOBIL building just four, starting now? That will leave them with SIX billion in walking-around money for that quarter.

Congress should declare that if the oil companies do not IMMEDIATELY begin active construction on at least six refineries located within the United States, then the federal government will put out contracts for the construction of a minimum of six refineries to be located around the country, with construction of associated pipeline and terminal facilities, AND that the cost will be paid entirely out of NEW taxes charged against the oil company profits, the companies who were clearly unwilling to build these refineries themselves with the surplus profits that they had available.

If the oil companies don't get work underway on their own and the government does have to direct construction of refineries itself, the government should not operate them. Instead, licenses to operate these government-owned refineries would be awarded to smaller companies who were financially incapable of the construction investment but capable of safely operating such a facility. The licensees would also have the right to buy the facility from the government after ten years.

The oil companies should also lose any patents they possess related to the refining process and formulations if they fail to actively and massively invest in constructing these new facilities. This is a national security issue, and patents have been invalidated during wartime or for national security reasons before. (The current U.S. president has repeatedly stated that this is wartime.)

Oil companies should explain the 750% jump in refinery profits between 2004 and 2007

According to a refining industry report, the average profit per barrel for refining a barrel of oil increased from $6 to $42 in that period. That alone raised the price of gasoline by at least $0.80 per gallon.

Congress should demand to know what factor justified increasing profits at this level, a time with virtually no changes in the environmental blending rules. Also, since refineries are controlled by the oil companies and only charge what the oil companies dictate, there are no supply/demand issues at this level, and no valid reason for such an increase. It is just another excuse to bump up overall oil company profits.

The President and Congress (actually the political party machines) should quit quibbling about additional oil exploration in Alaska. The fact is that additional drilling there won't noticbly alter the United States supply situation.

Ignoring all the environmental issues (some of which are valid, some probably not valid) with drilling anywhere in northern Alaska for a moment, the fact of the matter remains very simple: All the oil produced in Alaska goes through a single pipeline to a terminal in Valdez Alaska.

On its peak throughput day (Jan. 14th 1988), the Alaskan pipeline carried just over 2.1 million barrels of oil in a day.[1] Since then, line changes have greatly reduced its usable capacity. For 2007, the line averaged 738,601 barrels a day[2], or less than 4% of what the United States consumes daily.

The maximum amount of oil you could actually send through the pipeline today is estimated to be about 1.7 million barrels a day (about 8% of US daily consumption), and that assumes it was running continuously and at near-peak efficiency, which it rarely does.

That means that even if the oil companies were allowed to drill for oil everywhere in Alaska they wanted to drill, and they were able to put in 10,000 new wells overnight with each one producing 1,000 barrels of oil a day (both impossibly high numbers), how much of that ten million barrels of new oil each day could they actually get out of Alaska and deliver anywhere? Answer: 1.7 million barrels, still only 8% of US daily needs. The trans-Alaskan pipeline is still the bottle-neck, not the ability to drill in ANWR or anywhere else in the Alaskan interior.

No one has appeared that is willing invest the estimated $30 to $40 billion dollars it would take to build a second trans-Alaskan pipeline. (The original cost $8 billion in 1977 and took three years to build.) So the pipeline transport capacity we have now is all there will be, at least until global warming makes it possible for tankers to actually load in Prudhoe bay, which they currently cannot do for most of the year because of navigational ice hazards. Oh, and if someone actually did build a second pipeline of the same type, it would only increase capacity by perhaps another 1.7 million barrels. Combined and with both old and new pipelines working perfectly, you would then be providing 16% of US daily needs, still a very long way from "energy independence".

Now back to real life: If there is no way to get additional Northern Alaska oil to market, the oil companies won't be drilling that many new wells, and may even shut some older wells down. Since the oil companies already seem to prefer to not actually spend money, the amount of drilling that would occur in any newly-opened areas might not be as significant as some fear or wish. Why drill somewhere when you can't get the oil to market? Even the oil companies consider that point. Plus, to open new areas, they must run new pipelines and other infrastructure to those areas an considerable cost.

This "must drill in this particular spot in Alaska to be energy independent" chant is really just another a political activity focus point, a somewhat pointless thing selected almost at random by political parties to stir public interest and emotions up so much that the public hopefully gets distracted and won't pay attention to the things a given political party really wants to sneak past the voters, like another pay raise for themselves, starting another war or giving control of U. S. ports or soil to another country. The "don't burn the flag" legislation and the attempts to constitutionally mandate the anti-communism phrase "under God" be kept in the pledge of allegiance all fall in the same category. Even the idea of building a fence along the Mexican border is another of these goofy focus points. (If the fence was practical and actually worked to keep terrorists out, why didn't we build one between Iraq and Iran and between Iraq and Syria? That's because fences don't work but the task of trying keeps a lot of money flowing to the right construction and technology companies residing in the right elected officials districts.) The public needs to stop falling for any of these feints.

I personally don't think the oil companies need to drill in the ANWR, but some officials in Washington hope we have all our eyes focused on that controversy while they quietly have their hands in our wallets, or doing something that is even more illegal and impeachable than what they have already done.

Because the idea of drilling in the ANWR is so dumb, let's allow the oil companies to do it! No, let's MAKE THEM DO IT, under OUR PRICING STRUCTURE! The ANWR is at least a hundred miles from where the oil companies could connect to the existing pipeline which they would have to shut down for days/weeks to add in new connections. (Another excuse to raise global oil prices!) There are no decent roads where they want to explore (in some places, no roads at all), no power, no supplies, no workers, the weather and seasonal problems are as bad if not worse than where they drill now, the heat of the crude oil melts the frozen mud (permafrost) that is everywhere causing pipelines and other structures to sink, and any oil produced in these new places can't possibly be more profitable than what they can get from where they are already producing.

I can't see why the oil companies want to mess with ANWR at all, and perhaps this is just the political parties saying that allowing drilling anywhere is just their position and another part of the country is their actual target that would sneak in under a nation-wide access grant.

Now, what would actually help the United States some is if the oil that already comes through the trans-Alaskan pipeline was actually sold to Americans, but the people ranting about the need to drill or not to drill in this or that place in Alaska have successfully diverted the attention of the U.S. public away from looking at the other end (or the size) of the pipeline and the fact that Americans won't be seeing any of that oil no matter what is decided and where drilling occurs, not unless the oil companies are forced to do deliver it to the U.S. So far, the oil companies in Alaska are looking out for their profits, not the United States and its people, so the Alaskan oil usually goes to Asia.

Require that oil companies invest in Iraq oil-field reconstruction.

How much money have the big oil companies spent on getting Iraq at least back to the level of production before the wars? Basically none. Having oil volumes from Iraq dramatically improve is the last thing the oil companies want, because an Iraq producing 20 million barrels a day could knock world prices down $80 to $100 a barrel, and eliminate one of the excuses being used for high gasoline prices.

So the oil companies have stayed on the side-lines, complaining that it isn't safe to invest or build in Iraq. For parts of Iraq, the security situation is definitely bad, but there are some large oil-producing areas that are quite stable and reasonably secure (certainly as safe as Nigeria and a lot less corrupt), but the big oil companies just don't want to have anybody speed up the recovery process for the Iraqi oil industry.

The congress should consider using some of the excess oil company profits to invest in Iraqi infrastructure, if the oil companies won't fund the work directly. A billion dollars can build many miles of buried and concrete reinforced oil pipelines that no small explosives would ever harm, and the larger facilities can be protected with other means.


References

[1] http://www.alyeska-pipe.com/Pipelinefacts/Chronology.html
[2] http://www.alyeska-pipe.com/default.asp

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