Friday, October 24, 2003

Repeat after me: Oil price rises are not a tax increase


1984 Redux: Political double speak has reached monumental proportions. Orwell explained (and predicted) that the motivation behind those who bastardize the language is to eliminate debate -- mostly about policy issues and apportionment of power. The old boy had a point.

Which brings me to my weekend peeve: Whenever Oil increases in price, you will hear it described as a “Tax.” This nonsense is spouted on Bloomberg, CNBC, CNN, Fox -- essentially anywhere the chattering headshold court. Here’s the typical thoughtless sound byte:

“With each dollar increase in the cost of a barrel of Oil, we lose almost 6 billion dollars of GDP. Price increases in Oil act as a Tax on the economy.”

There is no doubt that increased energy costs are a drag on the economy. The greater percentage of their finite resources consumers spend of gasoline and home heating oil, the less discretionary dollars they have to spend on other things. As oil prices rise, dollars which could be better spent elsewhere in the economy become unavailable. Rising energy prices are an expense, a cost, a drag on the economy.

That’s not my beef . . . It’s the disingenuous labelling the increase “a tax” which is so, well, Orwellian.

Why? We have organized ourselves in a society to collectively do what we could not accomplish as individuals. We form governments to administer these tasks, including the collection of (horror!) Taxes.

This turns out to be a good thing. Your taxes are what pays for teachers’ salaries, so your kids can get an education. Taxes build the schools, buy the books, fund the H.S. sports teams.

When oil prices go up, none of that revenue finds its way to schools. So pray tell me, how is it a tax?

Here’s another place where your tax dollars go: Police, Firefighters, EMTs. Have we already forgotten the valor of those who died trying to rescue others on September 11th? These were municipal employees; Their salaries were paid with tax dollars. So were their uniforms, police cruisers, walkie talkies, firetrucks, ladders, axes, oxygen masks, waterhoses. EMT’s use ambulances, emergency medical supplies and training -- all taxpayer supported.

When OPEC cuts production so oil prices go up . . . that money never finds its way to cops, EMTs, and firemen; It goes to the Saudis, who fund the Madras religous hate schools, which indoctrinated the terrorists who (tuition funded via Oil revenues) trained at flight schools where they learned to fly the planes that eventually took down the Twin Towers.

We haven’t even started discussing the roads those ambulances travel on, the bridges and tunnels the National Guard protects, or the harbors the Coast Guard patrols.

I find it especially galling to hear higher oil prices called a “Tax” during War time. This obnoxious denigration of tax dollars is a backhanded slap at society. It is offensive to anyone who thinks about it.

The Kevlar protecting the heart and lungs of every U.S. Military personnel in the Gulf was paid for by taxes. Each Abrams M1 tank, every F-117 stealth fighter, M16 rifle and tomahawk cruise missile is funded with tax dollars -- not higher oil prices. There are five aircraft carrier battle groups in the Gulf region; Each carrier group houses 10,000 men, has 3000 aircraft. Guess how they were paid for?

The next time you hear some Minister of Propaganda spouting this nonsense, challenge them on it. Ask them how much of this “tax” pays for teachers or cops or firefighters or soldiers in the armed forces. Force them to confront their own “Newspeak.”

Some of them aren’t even aware of what they are saying; These are the idiot Parrots with limited intellectual bandwidth. They exist in large numbers, and are dangerous when they repeat the meme.

Politely correct these people before they spread.

Much more insidious are the bastards who are fully cognizant of their word play. They need to be publicly humiliated for their linguistical crimes.

Freedom costs money. So do schools, roads, water supplies, and everything else a modern civilization requires. It behooves you to understand what does -- and does not -- pay for them.

Posted at 11:49 AM in Finance, Media | Permalink

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» Oil Prices Are Not Taxes II from The Big Picture
Last October, I ranted that “Oil Prices are not a tax increase.” That outburst was focused mostly on the Orwellian Newspeak aspects of the phrase. But in the intervening months, I’ve come up with several other reasons why oil increases do not re... [Read More]

Tracked on May 17, 2004 6:05:43 PM

Comments

Great post. This ties into my entry for next weeks CotC, the deadweight loss with taxes, (a href="http://www.steveverdon.com/archives/2003_06.html#000080">link.

There is no deadweight loss with a tax increase, thus a price increase is not the same as a tax. The comparison is baloney in this regard. Further, you are correct in noting that the revenue/profits from such a price increase are not used to fund public goods or other things the government tends to supply. Great post.

Posted by: Steve | Nov 17, 2003 12:52:50 PM

You will agree with me that the current 18 cent per gallon gas tax collections will perversely go down (due to higer dollar per gallon price of oil), thus leaving less money to be collected by the tax authorities. While not a "tax" per se, you will also agree that the hidden tax of inflation will also result from higher oil prices. Will you agree that inflation, which was described by Prop 13 proponents here in CA as a hidden tax, is indeed a hidden tax ? Regressive as hell too ! I found the 18 cent figure by the way on the Council of Foreign Relations weblink: http://216.239.53.104/search?q=cache:bOcj0cL9XRcJ:www.foreignpolicy2000.org/library/issuebriefs/IBOil.html+each+dollar+barrel+oil+price+dollar+tax+increase&hl=en&ie=UTF-8

Posted by: EV Debs | Dec 27, 2003 1:58:33 PM

It would appear that your argument is a bit flawed. We pay local school board taxes and they go to schools, teachers, etc. But none of the official taxes on gas go there, as they are supposed to support highways, and hardly any Federal taxes (by percentage) go there either.
When any part of the average person's life is dependent upon someone else's decision, that someone else making the decision is de facto government. If that defacto government is not held accountable by actual free enterprise to provide goods and services at the best value possible, then they indeed could be held guilty of excess defacto taxes.
In terms of economic activity, governments and businesses are indistinguishable, each provides a range of services, and charges for the privilege.
If costs rise or income falls then the individual cannot live as well if the reverse happens. Health care is currently taking historic high costs and taxes and is a major drag on the economy. Placing the health taxes variably based on age, and tied to employment is causing a major job availability shift away from older Americans.
Shifting health care to official government, would first remove the bias on Hiring and, as senior Government workers get a tiny percentage of the income of Senior health Insurance Executives, and the costs of the government program are closely watched Vs entirely secret, all the tax costs would be very much reduced.
The de facto or de jure nature of the government, would in itself be no different. Only the accountability, and skewed consequences would be different.

Posted by: Bob D | Feb 2, 2004 11:15:25 PM

I beg to differ about oil prices being determined by OPEC or the fact that the impact of higher oil prices does not act like a tax on consumers. It does act like a tax on consumers in that it takes money away from consumers that could be better spent in many other areas of the economy rather than just one piggy industry. After all, how many caddy's can one oil company executive buy.
Right now there is a loud sucking sound caused by the oil companies sponging off all the other industries they are devastating to the point of economic collapse. Whoops, forgot for a minute, the price of oil did go down by $8 a barrel this week during the Republican convention. How convenient for the Republican Party. Who says oil prices are not manipulated?

Of course oil prices are fixed and manipulated. But not by OPEC. In the mid-eighties oil prices began to be determined by the commodities Exchanges. There are a couple around the world but the most important one is in the US, the Nynex Commodities Exchange. The Nynex unregulated commodities exchange is the force that determines oil prices. By hook or by crook, I might add, because it is an unregulated exchange. Thoughts of Enron and those futures traders saying "burn baby burn" comes to mind. Does it ring a bell to anyone? Of course oil prices are manipulated just like the stock exchanges were before the 1929 market crash. Even the stock exchanges continue to be manipulated to a degree.

Changes in the price of oil work this way, investors (I prefer to call many onf them manipulators) buying oil futures contracts make the price of oil go up and selling oil futures contracts make the price go down. (Since the exchange is unregulated it is a perfect place to laundry money.)Pretty simple, you don't have to be a rocket scientist to figure that one out.

The way oil companies fix/manipulate oil prices is that they ban together as a group and excessively buy oil futures contracts. This makes oil price futures go up and as a result, the higher oil prices are used as an excuse to raise prices at the pump or home heating oil levels. How convenient.

So what happened this week when the price of oil collapsed by $8 a barrel. It certainly was not because of the continued terrorist or Iraq's cut off of 90% of their oil exports. That would have made the price of oil go up. Yet that had no impact on oil prices. What did impact oil prices were oil companies banning together and excessively selling oil futures contracts. What do you know, the price of oil dropped by $8 a barrel. Just in time for the Republican convention. Is this a new trend for oil prices? Not likely.
After a Republican victory by two oil men I'm confident that the price of oil will surpass $60 a barrel again and again it will be blamed on OPEC. Why not. If the price can be forced to $52 why not $62. Don't forget, we are dealing with piggys. Anyway, OPEC use to be the culprit but they no longer are. America's piggy, oil industry executives can now the thanked for manipulations in the price of oil.
Thanks for your comments, Marti

Posted by: Marti Ouimette | Sep 3, 2004 4:02:16 PM

Bob D:
I agree with your comments about the impact of defacto taxation. Any increase in cost not attached to the expenses of selling a product act as defacto taxation to our economy. The war in Iraq is a great example. There are many cost that may not immediately be seen within the deficit it is causing, like its impact on interest rates. Of course when interest rates move from 6 to 7% it is not a tax persay, however, the impact of the cost of the war in Iraq is higher interest rates, higher gas prices and higher cost of both domestic and foreign security, just to mention a few causes.

That one percent increase in interest rates because the government is in the money pool taking what it needs to fund the war, regardless of the pressure it puts on interest rates to advance, may not be called a tax but it certainly acts like one. It has a huge impact on the economy that most Americans don't seem to be able to grasp.

All interest rates advance extending from home mortgages to credit cards to unsecured loans, further fueling inflation and the cost of a federal deficit which in itself causes interest rates to move higher.

There is only so much money supply in the U.S. The purse of the U.S. economy, the money supply, does have a limit. When the government has to use more than it's share (to fund the deficit) then every American suffers that impact although the impact is not called a tax. It is a hidden, sneaky tax or a defacto tax. Politicians chose to ignore it and the American taxpayer does not seem to grasp how the cost of the war in Iraq impacts their purse strings.

While we are fighting a war, we are not spending the money the war cost on education to improve math and science knowledge for our children or funding other areas of the U.S. economy. In other words we are paying double to feed Iraq's economy by taking it out of our children’s future and in addition paying much higher oil prices to boot. We are paying for Iraq's economy and getting no benefit.

It would behoove our government to start a dialog within the Muslim world, where at the moment there is no religious freedom, to better understand their grip. Let me see, we could start with us setting up Saddam Husain's government in the eighties to fight Iran. Also funding Osma Bin Laden in the late eighties to train Afghan fighters when Russia invaded Afghanistan. Then there is the Shaw of Iran the U.S. aided, abided and supported at the expense of the Iranian people whom the U.S. government supported till he was overthrown by the religious right in Iran. What possible grip could the Muslim people have? What grip wouldn't they have. They only live in abject poverty, under the thumb of dictators, the Royal Family of Saudi Arabia being one such dictator, who steal the wealth of their countries natural resources and do not share even a pittance with the populous. No wonder they're mad. How would you feel under the same circumstances?

The Muslim population in 2003 was 1.5 billion people. Compare this to the US's 300 million people. I think a dialog in some manor needs to start. That is a lot of terrorist potential and quadruple the U.S. population. That is a lot of people living in abject poverty who are getting sick of not having a piece of the worlds financial wealth. Thanks for your comments, Marti

Posted by: Marti Ouimette | Sep 7, 2004 5:05:06 PM

Actually, if you believe that oil prices are the result of the falling dollar (as I do), then they are indirectly a "tax".

Posted by: Rotten | Apr 14, 2005 11:52:15 AM

I dont want to read this bullshit anymore

Posted by: Nicolegrants Kidman | Jul 19, 2005 12:30:29 PM

I pitty the fool that relies on the good nature, benevolence, or/and cash money of any government, group of local elites, or other person for their survival and sense of confidence in the future. What is a master and what is a slave, and who seals the deal? The removal of reality from modern living makes us more comfortable, productive, vulnurable and weak. Donchuno

Posted by: Allen Pegues | Oct 4, 2005 10:05:11 AM

Ummmmmm,
I think you've missed the BIG question.

The BIG question is whether or not OPEC CAN open the faucet wider! It's not that OPEC conspiratorially get together and say, "How much extra money can we make by raising the price?"

It's that there just isn't any more capacity! They are extracting the light sweet crude as fast as they can, and guess what? It's not enough for our hungry industrialized nations. They recently admitted that the light sweet crude is in decline, and only the heavy sulfur "sour" stuff is still slightly increasing in production. In other words, THAT'S IT! The world production of oil is about to peak... and then begin an irreversible, permanent, unending decline. We've used the first half of the world's oil, the cheap half. The second half is just plain more expensive. More expensive because there is less of it which will start a bidding war, more expensive because it is deeper in the ground, more expensive because it is sour, not sweet, and requires building a bunch of new hydrogen cracker refineries... which use more energy to process and therefore cost more, and more expensive because it is in really hard to get to places, like deep sea or in the frozen tundras of Siberia or your poor northern wildernesses.

When it hits around 2008, it will be like the 1970's oil crisis, only this time it is permanent. Think this is a croc? Big oil have basically spelled it all out!

Chevron have said it! "The era of easy oil is over!" writes the CEO at www.willyoujoinus.com

OPEC have already said that light sweet crude is in decline. (Only the sour stuff is still increasing in production.) This backs up what Chevron has already stated, the era of easy oil is over. The age of sweet oil is turning sour.
http://www.vitaltrivia.co.uk/2005/08/26

Exxon Mobile have announced that the entire world outside of OPEC is about to peak in its production of all oil categories in the next 5 years. That is a huge announcement. It tells us that we will be dependent on OPEC for any increase in worldwide demand.
http://www.thebulletin.org/article.php?art_ofn=mj05cavallo

A senior Saudi oil geologist has stated to the New York Times that he believes Saudi oil will peak at about 12.5 to 15 million barrels a day. After that point, there can be no more growth in sour supply no matter what the world demands!

"When I asked whether the kingdom could produce 20 million barrels a day -- about twice what it is producing today from fields that may be past their prime -- Husseini paused for a second or two. It wasn't clear if he was taking a moment to figure out the answer or if he needed a moment to decide if he should utter it. He finally replied with a single word: No."

Once Saudi Arabia have peaked, then that's it — the world has peaked.
http://www.nytimes.com/2005/08/21/magazine/21OIL.html

The Hirsch report to the American Department of Energy has reported that the peak is near and he has emailed me the following summary of his report. (Download 96 page 500kb word file —
http://eclipsenow.org/facts/NotConvinced.html.)

"No one knows with certainty when the world production of conventional oil will peak, but a number of experts think it will happen in the next 5-15 years. Our work illustrates that the oil peaking problem can be mitigated with available technologies, but the time required for implementation is measured on a 15-20 year time line, at best.

The character of the oil peaking problem is like none other; without timely mitigation, the impacts will be dire, worldwide, and long-lasting. Prudent risk management dictates serious attention and massive action soon, which is difficult for most people and many decision-makers, who tend to wait until a problem is obvious before taking action.

Use this as you see fit.

Bob"

The effective end of the oil age is when we can no longer rely on the ever increasing production of cheap oil. For your average suburbanite, farmer and food distributor, the oil age ends when it costs $500 to fill the car!

1 in 10 American jobs depends on the car industry, let alone all the other jobs that flow on from the airlines, tourism, etc.


If you are new to the subject of peak oil, I hardly know how to sum up the consequences... other than it being one of the most serious questions humanity faces today! Cheap oil gives us our pesticides and fertilizers for farming. It powers our agricultural machines that harvest our grains, and then transports fresh milk and groceries across the nation to our supermarkets. Oil is food.

Oil is the chemical feedstock for the petro-chemical industry that manufactures our baby-cups and high chairs, computer components, car components, some crockery, DVD's, glues, lubricants, medicines, paints, phones (both fixed and mobile), plastics, shoes, staplers, stereo systems, sticky tape, sunglasses, toilet seats, toothbrushes, varnishes, videos, Velcro, watches, widgets, and a million other things. Oil enables much of our manufacturing.

Cheap oil also gives us transport. The airlines and international tourism depend on cheap oil. Ask your self this. Would you reconsider that overseas trip if it took 3 months to get there and back?

So you'll just holiday in your home nation somewhere?

Cheap oil affects things at a much more fundamental level than that! Oil enables you to live where you want, take your kids to the schools you like, drives you to work, the supermarket, the department store, hardware store, church, the movies, and a million other human endeavours that have been spread out through suburbia. Cheap transport enables the suburban town plan. Without cheap transport, suburbia itself is called into question.

Everything we do in the spheres of economic endeavour, industrial manufacturing and agricultural output are enabled by oil. Cheap oil supports the complex interaction of industrial petro-chemicals and cheap transport systems that created the intricate matrix of relationships that our daily lives depend on.

Quite frankly, I'm scared to death for my kids.

Posted by: Dave Lankshear | Oct 9, 2005 8:54:09 AM

Actually, I address the bigger question here:

Big Picture commodities

This essay was really a rant against those people who abuse language and facts for political reasons.


Posted by: Barry Ritholtz | Oct 9, 2005 9:00:26 AM

I think oil will finally begin getting replaced in the next few years. China and India's consumption are leaping. The US population as usual can't stop themselves. However, alternatives have just begun to come into common place in the last few years, hybrids(well half alternative), e85, that fuel cell thing(sure gets talked about more that executed). Funny didn't we go to war over oil? Too bad that wasn't actually the goal otherwise I could be driving around playing hardcore rap out the windows so the ladies would notice how cool I am. Anyways, I'm not too worried about oil, maybe there will be high prices for a few years, but the fact is in the long run transportation will find the best alternative and then we can get back to driving our awesomely obscene trucks and SUV's and hopefully keep the American stereotype alive.

Posted by: Online Trading | Feb 9, 2006 3:21:19 PM

Great post. I've never thought of it that way. Of course, now i too will be ticked off when i hear the term "tax" to refer to the negative impact of higher oil prices on the economy. So, what I'm saying is that reading your post was a mixed blessing. Keep 'em coming.

Posted by: Matt McCracken | Feb 28, 2006 2:00:01 PM

Taxes can be viewed on the dimension of cash inflows and cash outflows. The oil/tax debate is relevant with one of the cashflows and irrelevant with the other.

Governments are the chief beneficiaries of the cash inflows of tax revenue. Citizens and businesses are responsible for the cash outflows of taxes, which of course reduces discretionary spending. (I agree that both consumers and businesses derive some benefits from the governement's spending of tax revenue.)

Your argument touches on cash inflows of tax, which rightly points out that oil shocks do not result in more police cars. Most of the pundits, however, tend to focus on the cash outflows part of the tax/oil debate and they are correct in their assessment that an oil shock acts like a tax increase in that it reduces discretionary spending.

Posted by: JAS | Aug 10, 2006 8:30:45 PM

You state that an increase in oil prices does not result in tax dollars going to state coffers (teachers, firefighters, etc.) and that is plain wrong. You imply that it all goes to oil companies and oil exporters. Wrong again.

The US government taxes oil heavily for a variety of reasons (I believe more than 50% of the price at the pump is taxes and not fuel costs but I don't have numbers to show it.) Assuming the tax is 50%, a price jump from $1 per gallon to $2 per gallon at the pump means that 50¢ goes to taxes (teachers, firefighters, etc.) and 50¢ goes to the oil industry (oil companies and oil exporters).

Being an investor, you should have noticed that when oil prices rise, the oil companies make "windfall" profits. Since oil companies are, in their majority, American, again, the windfall goes in large measure to American pockets and they, in turn pay taxes (teachers, firefighters, etc.) on these profits.

The next question is why the US taxes oil so heavily? America argues, among other things, that high prices cut down consumption. We argue (I'm from the country that invented OPEC) that we are not being paid a fair price for our crude, i.e. we could be paid more if you didn't take such a large tax bite.

On a related topic, oil dependence is a serious problem quite similar to other dependencies such as drugs and alcohol. American dependency on oil feeds the mostly non-democratic governments of oil producing countries including my own. This is not too different to American support of drug cartels through high consumption of drugs. It would do the world a lot of good if Americans consumed less oil and less drugs.

Posted by: captainccs | Aug 30, 2006 8:33:25 AM

A senior Saudi oil geologist has stated to the New York Times that he believes Saudi oil will peak at about 12.5 to 15 million barrels a day. After that point, there can be no more growth in sour supply no matter what the world demands!That one percent increase in interest rates because the government is in the money pool taking what it needs to fund the war, regardless of the pressure it puts on interest rates to advance, may not be called a tax but it certainly acts like one. It has a huge impact on the economy that most Americans don't seem to be able to grasp.

Posted by: FAnckeR | Nov 17, 2006 4:43:53 AM

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