Stealing from the Oil Companies

The House has passed a bill undoing agreements the Federal government made with oil and gas companies over exploration in the Gulf of Mexico.  According to the New York Times:

In an attempt to revoke billions of dollars worth of government incentives to oil and gas producers, the House on Thursday approved a measure that would pressure companies to renegotiate more than 1,000 leases for drilling in the Gulf of Mexico.

The measure, approved 252 to 165 over the objections of many Republican leaders, is intended to prevent companies from avoiding at least $7 billion in payments to the government over the next five years for oil and gas they produce in publicly owned waters.

This is insanity.  It is possible the original contracts between the government and oil and gas producers were giveaways, that is, more generous than necessary to promote the efficient amount of oil and gas exploration. In that case, Congress should not make such sweetheart deals in the future.

But reneging on existing deals, even bad ones, is disastrous.  If the government can, in effect, steal from private companies whenever that generates good PR for politicians, the incentives for investment and exploration diminish markedly.  And that means lower productivity, fewer oil reserves, and reduced welfore for everyone in the long term.

Comments

[MRE]

Professor Miron,

Is there no wiggle room for taxing windfall profits to the benefit of consumers? If oil companies see no percentage in investing more in greater refining capacity (say they've already invested a fraction of their profits in refineries and exploration and are waiting for refineries to be built and holes to be drilled etc...) does it make no sense to tax away some of the windfall profits these companies earn in order to cheapen the price at the pump or to somehow benefit consumers through public spending (being a libertarian as well, this is thievery in my opinion, but since it will happen to some degree anyway, you might as well do it right). Obviously, if you tax an oil company's profits away completely the incentive to invest will be damaged, and if you tax none of it they will have plenty of dough to play with and there will be incentive for entry leading to more competition...however, shouldn't there logically be a middle ground of taxation? Where oil companies are taxed up to a point where the impact on incentives is too small to measure, or is it that you just can't see/measure the opportunity cost of the firms that choose not to enter? Anyhow, I attended a talk hosted by the New York Fed a while back and the president suggested that there is a certain amount of taxation that ultimately has no measurable effect on incentives, however, other libertarian economists have been skeptical of this assertion and I was curious where you come down.
-Malcolm

[James]

MRE,

Renegging on a lease is not really the same as a "windfall profits" tax. If you believe that the government should engage in interventionist policy in the oil industry, that's another issue. But if you do favor such measures, you should also favor a government that maintains its credibility as well.

As for a tax cheapening the price at the pump, I don't see how this would work. Why would an oil company respond to a tax by lowering the price they charge? Public spending seems like a suspect idea too. What makes you think that the government knows better than the management of the oil companies how to spend the money?

[Mike Huben]

Once again, a libertarian is wailing about a perfectly ordinary private practice only because government is doing it.

Assume you are renting an apartment, and housing prices go through the roof. Your landlord could insist that you renegotiate the rent OR ELSE HE WOULD NOT RENEW THE LEASE WHEN IT EXPIRES.

If you read the article carefully, that's what is reported.

Propaganda. Sheesh.

[James]

Huben,

It's better when you just call those whom you disagree with propagandists and accuse them of wailing. At least that leaves it very clear how little substance your views have. But now you're really going in new direction. As I read the article, I can't find where it says that the government is telling the oil co's, "renegotiate or we won't renew."

[Mike Huben]

I was imprecise, James. Sorry.

"To give the government bargaining power, the bill would also prohibit the Interior Department from awarding any new leases to companies that refuse to revisit their leases."

So we're not talking renewal, we're talking denying opportunities for new leases (which may amount to renewal.)

Do you agree with me now?

[James]

Huben,

I can understand how one might see *that* part of the bill as equivalent to a "renegotiate or we won't renew" position. So I do agree with you at least that far. At the same time, the phrase you quote makes it pretty clear (i.e. the words "would also") that the bill does more, including reopening leases that have already been signed. So your argument in defense of this bill seems odd. There is a bill that does X and Y, Miron protests that it does X, and you counter that it does Y and Y is something libertarians should accept. But that doesn't even address the objection about X. Maybe you actually have something more sensible in mind and I'm just missing it.

[Mike Huben]

James, the operative word in the article is PRESSURING for renegotiation.

In other words, the US has no legal grounds to coerce renegotiation: only the ability to apply pressure to renegotiate by threatening to deny future leases to companies that won't renegotiate.

Pressuring for renegotiation is a common business practice.

Do you agree with me now?

[James]

Huben,

I agree with you on any matter of fact regarding this bill. Does it pressure for renegotiation? Yes. Is it printed on paper? Yes. Was it sponsored by a legislator? Yes. And so on...

But these facts, while certainly true, do not negate what Miron was initially protesting about this bill: it also changes the terms of existing leases. Miron's original link now requires a subscription, but I recall one politician being quoted as saying that this bill "reopens valid leases." Well, either the bill actually reopens those valid leases or it doesn't. That politician might have been lying. And the NY Times might have missed their chance to catch him on it.

But that doesn't seem to be the case as I read the summary of H.R.5427. The oil companies signed the leases in question with the expectation of receiving a subsidy in the form of energy program grants. The bill terminates such grants. Since you like landlord analogies, this is somewhat like a landlord offering you a lease with utilities included and halfway through the term of the lease refusing to continue paying for your electricity.

[Mike Huben]

James, your analogy is bad. A landlord who refused to pay the electricity could be taken to court. This is like a landlord saying that if you didn't renegotiate the lease, you wouldn't be able to renew. After the renegotiation, there would be a new legal contract.

As I said before, this is a common business practive, and Miron is complaining only because government is doing it. He claims it would be disasterous: that's a very nice fact-free claim. I might be inclined to grant him some credibility if he gave us a believable reason to think there would be a disaster. If this sort of practice is disaterous for government, why isn't it disasterous when private parties are doing it?

Have you noticed that Miron tends not to defend his viewpoints?

[James]

M. Huben,

My analogy is just fine. Pointing out that this bill pressures for renegotiation by threat of nonrenewal doesn't change the fact that other provisions within the bill also terminate programs which the original signers were expecting to continue when they signed the leases. You do realize that the bill could do both of these things, right? And that if the bill does both, pointing out that it does one doesn't negate the fact that it does the other?

"Have you noticed that Miron tends not to defend his viewpoints?"

I don't sign his paycheck so you'll have to take that up with him directly. Maybe he'll argue with you for a consulting fee.