A 92% Tax Rate?!?!
May 18, 2008
– Comments (8)
Over the past several months I have blogged about why I believe high oil prices are here to stay on a number of occasions. While I believe that oil will eventually peak, I don't think that we are there yet. The problem is not that we are running out of oil but that much of the low hanging fruit has already been picked. The remaining oil is in difficult / expensive places to get at like deep under the ocean or in countries that have severely underinvested in their infrastructure, such as Nigeria, Mexico, Venezuela, and most of all Russia. This week's Economist had an outstanding article on why Russian oil production has peaked and how it is unlikely to increase in the near future.
Russia levies obscene taxes on oil companies. Its base oil tax rate is 65% at prices over $25 per barrel (the last time that I checked we were slightly above that price level). Then it adds all sorts of production, corporate, payroll, etc... taxes on top of that which can skim up to as much as 92% of oil companies profits per barrel!!!! No wonder no one wants to invest in new oil fields in Russia. Talk about an absurd, short sighted tax policy that discourages investment (we're probably headed in that direction ourselves with all of the "windfall" tax ideas that have been thrown around in this Presidential election).
Over the past seven years, Russia has accounted for 80% of the increase in the world's non-OPEC oil production. The increase in Russian oil production has basically matched the increase in demand for oil from China and India. However, we may have seen the last of the increases in Russian oil production for a long time. April marks its fourth consecutive monthly decline. It now sits at more than 2% below the peak level of production that it hit in October 2007.
The problem isn't a lack of oil, Russia still has plenty of it. The problem is the country's absurd tax policy has discouraged companies from investing in finding and drilling in new places. Instead, oil companies have been using all sorts of techniques to squeeze every last drop of oil out of the maturing existing fields, which Russia offers tax breaks on.
Even if the Russian government sees the light, and that is doubtful, it can take a number of years before a new oil field is developed. As one can imagine, Russia's mismanagement of its resources is very bullish for oil prices and it is partially responsible for the high prices that we have seen, and will likely continue to see.
Deej
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