Californians: Vote No On Prop 87!
Al Gore and Barbara Boxer support Proposition 87, on the California ballot for the November 7, 2006 election. That fact alone ought to be enough to convince voters to defeat the proposition. However, the advertising campaign in favor of the proposition merits examination for the insights it offers into the thinking of the political Left on economic issues.
In the television ad featuring Al Gore, Gore begins by stating that "California is dangerously dependent on foreign oil." Another pro-87 ad shows a Saudi prince and mentions the compensation paid last year to the CEO of Exxon. This column from the San Jose Mercury News, by Senator Barbara Boxer, carries on the theme that Proposition 87 will lessen dependence on imported oil.
Al Gore, Senator Boxer and the proposition's other proponents probably hope that voters do not actually read Proposition 87. How does Proposition 87 propose to lessen our dependence on foreign oil? By a severance tax on oil produced in California! The tax would not affect oil from Saudi Arabia, or Iran, or Venezuela, or even Alaska, Louisiana or Texas. It is assessed only on oil produced right here in the State of California!
Moreover, the proposition states that California oil producers may not pass the tax on to "consumers" in the form of higher retail prices for gasoline or refined oil. Inenvitably, then, if California oil producers are assessed with a new severance tax at the rate of 6% of the value of produced oil (based on current oil prices), the new tax would have the following consequences:
A. The California oil producers will try to add the cost of the tax to the wholesale price they charge the refiners who purchase their oil. Proposition 87 does not prohibit increasing the wholesale price of oil. The refiners, at least theoretically, will not be allowed to increase the price of their retail products. Those refiners operate in an elastic, open national and international wholesale oil market. They can buy oil from anywhere. Naturally, rather than accepting the higher cost of California oil, which they cannot include in their retail pricing, the refiners will meet their needs by purchasing foreign oil or oil produced in other States.
B. Due to the higher cost and lower profit margin of producing oil in California, as well as the decrease in demand for pricier California oil that will result from refiners turning to foreign oil sources, investment into the California oil industry will decline. Investment capital for drilling, exploration and technology will be directed into Texas, Alaska, Louisiana, Oklahoma, and foreign oil fields--any place but California!
In the interest of full disclosure, the Kosher Hedgehog has clients who are independent oil producers here in California. By the same token, my legal work in the California oil and gas industry gives me some informed insight into the current state of that industry. California oil and gas fields are in their declining years. By and large, (contrary to the pro-87 ads which talk about the worldwide profits of Exxon), the oil giants such as Exxon do not have a lot of interest in the California oil production industry. Increasingly, oil exploration, drilling and production in California is the province of smaller independent companies. Those types of companies are the most economically vulnerable to a huge severance tax increase. I have no doubt that the passage of Proposition 87 would result in a recession in the California oil industry.
Only the liberal mindset would conclude that a tax on oil produced in California, and only in California, would reduce our dependence on oil imports. If you want to see more money flow into the pockets of Hugo Chavez and Venezuela, Mexico, Saudi Arabia, Iran and the other OPEC countries, vote Yes on 87. If you want to put more power into the hands of the enemies of Israel, such as Iran, Saudi Arabia and Venezuela, vote Yes on 87. If you rank Al Gore and Barbara Boxer among the great economic thinkers of our time, vote Yes on 87. Otherwise, please vote NO!