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More on Obama's Energy Rebate / Tax Plan

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August 05, 2008 – Comments (11)

My reply to devoish got kind of long, so I decided to post it as a blog entry.

“I believe we should immediately give every working family in America a $1,000 energy rebate, and we should pay for it with part of the record profits that the oil companies are making right now.” – Barack Obama

This is the crux of TMFBent’s post on Obama’s proposed rebate.  Fellow Fool devoish challenged those of us who commented to read the whole speech.  I’ve now read it.

Nowhere in the speech does Obama provide any details on how that additional tax on oil companies will be assessed or how many working families get the proposed checks.  Devo states it’s 77 million (I didn't see that in the speech), so we’ll go with that.  $1000 x 77 million = $77 billion.  Last quarter, all the oil companies combined earned something like $50 billion, annualized, that would be $200 billion.  So, in theory the plan could be carried out by confiscating 40% of oil company profits – but that doesn’t mean it would work.

I don’t have data for the entire industry, but consider that the biggest oil company, ExxonMobil, reported an effective tax rate 49% last quarter.  Add in this additional tax proposed by Obama and that rate jumps to 70%.  Does anyone really think XOM and other companies aren’t going to change their business model if faced with that big a change in taxes?  Does anyone think higher taxes won’t result in higher prices for gasoline and anything based on oil?

Some possible actions oil companies might take if Obama’s tax was enacted:

     - Spin off some businesses and relocate them to more tax friendly countries.
     - Move the whole company offshore.
     - Leave oil in the ground and wait for a friendlier administration.
     - Defer marginally profitable production projects.

It may sound far fetched, but if faced with a 70% tax rate, wouldn’t it make sense for the integrated oil companies to investigate selling off their refineries and US production business and incorporating the rest of the company in Dubai, the Caymen Islands, or some tax friendly place?  What happens to Obama’s grand plan if ExxonMobil’s current $10 billion per quarter of income taxes stops flowing?

I don't know how the oil companies will respond if this tax scheme is implemented, but they certainly won't sit still and give up 40% of their current after-tax profit.  In nearly all possibilities, the federal government not only doesn’t get as much windfall profit tax as they projected, they lose tax revenue they’re getting now.  In short, the tax scheme won’t generate as much revenue as expected because companies shift their business plan to adapt.  In this case, those business adjustments will reduce US oil supplies, raise gas prices and cost jobs as at least some energy company business is abandoned or moved offshore.

Another certainty is the higher taxes will raise the price of gasoline, plastics, transportation, heating and everything else tied to oil.  There’s a very good chance the inflation caused by the new tax would cost these working families more than the $1000 credit proposed by Obama.

Consider that most companies’ stock prices are valued based on the potential earnings stream.  Cut that earnings stream by 40% and the stock price should fall by 40%.  Now consider that energy companies make up a little over 16% of the S&P 500.  A 40% drop across 16% of the S&P 500 equates to a 6.5% drop in the market.  If your family has more than $15,600 in your IRA, 401K, pension plan and stock holdings you just lost that $1000 and then some.  Gee, thanks Barack.  And that assumes an optimistic case where the rest of the market doesn’t follow oil companies lower.

His speech is also full of gov’t control and giveaways funded by taxpayers.  As president, he plans on directing “the full resources of the federal government and the full energy of the private sector…”  Last time I checked the constitution, the president doesn’t have the authority to direct the “full energy of the private sector.”

He’s also proposing a $7,000 tax credit for plug-in hybrids, extending the renewable energy Production Tax Credit for five years and placing billions of the risk of bringing alt energy technologies to market on the taxpayer.  Gee, who gets to pay for all that?

And, he proposes following California’s lead in managing utilities.  Anyone remember why Gov. Davis was recalled?

There’s also no answer to why oil companies’ roughly 10% profit margins deserve extra taxation while companies with much higher margins deserve to escape that treatment.

Obama does have a few good points.  For example, he’s now going against his party’s congressional leadership and has joined McCain in recognizing that more drilling should be part of the solution along with nuclear power and clean coal technology.

After reading the speech, I stand by my comment that the math doesn’t work.  The economics are even worse.  The speech is long on wonderful objectives and gov't control and woefully short on any details of how we get there.

 

11 Comments – Post Your Own

#1) On August 05, 2008 at 10:44 PM, DemonDoug (32.86) wrote:

Anyone remember why Gov. Davis was recalled?

As a Cali resident who voted for the recall, I can tell you.  It's because he was in league with Bush and his cronies at Enron, and that in large part is why CA had the energy issues it did at that time.  It was also (for me anyway) because he was the worst pay-to-play politician I've ever seen, for example the prison guard's union gave his campaigns something like 2 million dollars and they all got 15% raises every year for 3 years.

Since Davis got the boot, California has had a sensible energy policy with NO blackouts or even brownouts since then.  We have developed a sensible plan that includes giving tax incentives to people installing solar panels, but the main point of it is making sure that the biggest power drain days there is enough energy to go around, and I repeat we have had NO blackouts since then, even though there have been times where energy usage has been far higher than when the Enron boys were bilking "grandmothers in california."

I’ve now read it...

Nowhere in the speech does Obama provide any details on how that additional tax on oil companies will be assessed or how many working families get the proposed checks. 

Windfall tax, and likely checks to be given out based on a means test.  Obama however KNOWS that this would never, ever fly, so you know as well as I do, this is simple political pandering.  He might even think it is a good idea (gee, giving the little guy some money, after the big guys get all their socialized money, see: BSC, JPM, BAC, CFC, C, etc etc), but he knows it won't fly and it will just play well with his constituency.

As far as your statement about companies leaving the US, good luck with that.  The Cayman Islands thing only works for people who are pushing digital dollars around all day.  Any drop of oil or gas that hits US soil is going to get taxed, guaranteed.  And it'll be that way for any other country for that matter.

Does anyone really think XOM and other companies aren’t going to change their business model if faced with that big a change in taxes? 

See: PWE, PGH, SU, CNQ, BQI, ECA for your answer.  In case you are too dumb to figure it out, the answer is NO.  Canada changed it's tax laws regarding royalty trusts and the provinces tax the oil sands companies out the wazoo, but guess what, they are still making money and paying taxes.

Some possible actions oil companies might take if Obama’s tax was enacted:

Let's take these theories and break them down one at a time shall we?

     - Spin off some businesses and relocate them to more tax friendly countries.

First off, this has already happened, when XOM announced it was selling off all it's company-owned gas stations. Secondly, like I said before, since most of the transactions with the oil and gas happen right here on US soil, they are getting taxed.  It is not as easy to just move your company's HQ and say "oh now we are paying Cayman Island's taxes from now on" as it seems.  It's almost exclusively hedge funds and insurance companies, and they can get away with it because they can say their "transactions" which are just digital bits moving around are taking place there.  If it was so easy, they would have done it a long time ago.

     - Move the whole company offshore.

This is your most asinine suggestion. Are they going to start building refineries in international waters, or in the Cayman Islands?  Or maybe they'll start building refineries and shipping the gas here to the US?  Remember, the US consumes 25% of the world's oil.  China and India are ramping up.  Maybe they could move their operations there...ooooh wait, I forgot, they'd just tax that darn old american company up the wazoo anyway.

     - Leave oil in the ground and wait for a friendlier administration.

Let's say XOM did this.  Watch the price of oil double almost overnight.  Even at a higher tax rate, you think XOM would just leave oil in the ground?  Riiiiiiight.  Not only that, they have a responsibility to hit growth targets every quarter.  Can't be doing that if you aren't pulling black gold out of the ground.  And the taxes would likely be even for all players - if XOM were to abandon it's leases, I'm sure SLB or OXY would be happy to drill and HOC and SUN would be happy to refine what XOM isn't.

     - Defer marginally profitable production projects.

Any company that did this would quickly find themselves sinking faster than the titanic.  This is business, it's dog-eat-dog.  CVX has made up huge ground on the big oil companies by aggressively expanding it's oil finds.  PBR has been absolutely exploding.  You could argue that the entire Canadian oil sands is a "marginally profitable production."  Meanwhile SU has a market cap of 50B.

And then so what if we go through a couple of years of real, hard significant energy pain.  We did in the 1970s and no one died.  Hell, before 1900 no one ever used crude oil for anything.  And then just think of the upside to that - what if we really ramp up renewables and clean energy and reduce energy usage to where we are completely off foreign oil in 10 years. 

Creating a new energy economy isn’t just a challenge to meet, it’s an opportunity to seize – an opportunity that will create new businesses, new industries, and millions of new jobs.  Jobs that pay well.  Jobs that can’t be outsourced.  Good, union jobs.  For a state that has lost so many and struggled so much in recent years, this is an opportunity to rebuild and revive your economy.  As your wonderful Governor has said, “Any time you pick up a newspaper and see the terms ‘climate change’ or ‘global warming,’ just think: ‘jobs for Michigan.’”  You are seeing the potential already.  Already, there are 50,000 jobs in your clean energy sector and 300 companies.  But now is the time to accelerate that growth, both here and across the nation.

But nah, we should just let the oil companies keep drilling, polluting, keep lowering taxes on the rich, and keep pumping dollars into the market.

His speech is also full of gov’t control and giveaways funded by taxpayers.

Incentives and grants are different than giveaways, and I'd MUCH rather we be using our resources to invest in our energy future than to let the old system keep rotting us out; besides which, 150b is like 3 months in iraq, and it's not even close to the 770B that Congress has straight out awarded to the mortgage bailout and ag bills.

I could also bring up the fact that Obama has a huge plank invovled in investing in the nation's infrastructure as opposed to investing in blowing up other nation's infrastructure.  This can only help energy and transportation in the long-term, but nah, let's just drill in ANWR and off the coast of CA to keep the oilmen happy.

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#2) On August 05, 2008 at 11:36 PM, LordZ wrote:

WOW you 2 really like giving winded huge speaches...

DEmon you know such a plan is flawed and really wouldn't produce the desired benefit, and now Obama would propose we drain our reserves to sell the oil on the market ??? wtf ??? than I hear something really stupid like replacing and selling our light sweet crude with that sour stuff that none of our refiners are equipped to handle ???

Bottom line without the long winded words, OBLAMA plan is BAD !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! its bad !

it would not be wise to single out the oil companies and  over tax them thinking that there won't be severe reprocussions from it.

As to drilling if we don't others will, they will do it right off the international waters with less safe older equipment, I can see it right now Cuba will place a few rigs as close as they can to America with old Chinese technology.

Your living in a fantasy world if you think they won't, especially if we won't bother to take advantage of our own resources ~ imagine the day we once again become self sufficent ~ imagine being  exporters of oil ~

PBR is the best example of the possibilities and potential.

If we are truly serious about change we will need to use all the tools ~ more drilling, more nuclear power, utilizing natural gas, solar, wind, geo thermic, wave force utilization, WE need to wake up and become the true great nation again !!!!!!!!!!!!!!!!!!!!!!

Obama knows this, all he needs to do is embrace and do the right thing ~ he needs to become the maverick that MCCAIN had been to his own party.

WE cannot tax or spend our way out of our fiscal irresponsibility...

I would prefer if any additional taxes for the rights to drill in such expanded waters were used to shrink our deficit and perhaps credit an AMerican SOUVERIN WEALTH FUND>>> just imagine if we could support all our social programs with income as opposed to debt....

However I'm sure some SOB will tear my ideas apart and simply copy my words and attack them...

THAT IS SO annoying,,, copying someone elses words...

and than talk over them,,,,

LORD Z
 

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#3) On August 05, 2008 at 11:38 PM, rd80 (96.92) wrote:

Windfall tax, and likely checks to be given out based on a means test.

Still no clue what constitutes a 'windfall profit'.  And as much as congressional democrats have been pushing a windfall tax, there is a good chance it would fly if they pick up the White House and a few more seats in Nov.  But you're right, this portion of the plan is simply pandering.

Any drop of oil or gas that hits US soil is going to get taxed, guaranteed.

Agreed.  That's the point, since every drop of oil or gas gets taxed, fewer drops of oil or gas show up and those that do are more expensive.

As far as shifting business practices to avoid taxes, of course they will.  The Canadian trust examples you present have little business flexibility by definition.  I could be wrong, but doesn't the trust structure put the tax obligations on the shareholders with the dividend payout?  And didn't those share prices take a big hit on the tax change?

Yeah, XOM moving offshore is far fetched - but some smaller companies with a lot of international business might do it.  If 25% of your oil market is causing you a 70% tax burden, wouldn't you consider writing off the 25% to focus on the other 75%?  40% of your after tax profits is a pretty big incentive to make some changes.  At a minimum, at least some of those higher taxes will get passed along to consumers.

And they're already leaving marginally profitable oil in the ground.  That's why some of those 68 million acres aren't being drilled, it isn't profitable even at today's prices.  Higher taxes just push that bar higher.  My main point is drastically increasing the tax rate won't produce the expected revenues and will increase prices.

And then just think of the upside to that - what if we really ramp up renewables and clean energy and reduce energy usage to where we are completely off foreign oil in 10 years.

Consider this, go ahead and lease the offshore sites.  Put the lease revenues towards ramping up renewables.  If the renewables can be developed as economically viable alternatives to oil in 10 years, there won't need to be much drilling.  If the alternatives don't pan out to economically feasible for mass production, the oil's there as a hedge. Also consider that the only gov't answer to alt energy has been subsidies for corn based ethanol - arguably the dumbest option out there.  Both political parties signed up to that idiocy and neither one is backing away from it.

Sorry, a $7000 tax credit for buying a car is a giveaway.

I don't know of anyone who's arguing for drilling in ANWR and off the coast as the entire answer, but I firmly believe it's part of the answer.  One of the main arguments used against it is that the oil won't flow for 5-10 years.  I could use the same argument against alternative transportation fuels - no point, they aren't commercially viable for at least 5-10 years.  In both cases the answer is the same; if it's going to take that long, we better get started.

Thanks for the comment.  Hope my reply didn't ramble too much, 'tis way past my bedtime.  Believe it or not, we actually agree on a lot of the energy policy. 

My main point was that the $1000 rebate funded by taxes on oil companies is a bad idea that's likely to do more harm than good.

 

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#4) On August 05, 2008 at 11:38 PM, rd80 (96.92) wrote:

Windfall tax, and likely checks to be given out based on a means test.

Still no clue what constitutes a 'windfall profit'.  And as much as congressional democrats have been pushing a windfall tax, there is a good chance it would fly if they pick up the White House and a few more seats in Nov.  But you're right, this portion of the plan is simply pandering.

Any drop of oil or gas that hits US soil is going to get taxed, guaranteed.

Agreed.  That's the point, since every drop of oil or gas gets taxed, fewer drops of oil or gas show up and those that do are more expensive.

As far as shifting business practices to avoid taxes, of course they will.  The Canadian trust examples you present have little business flexibility by definition.  I could be wrong, but doesn't the trust structure put the tax obligations on the shareholders with the dividend payout?  And didn't those share prices take a big hit on the tax change?

Yeah, XOM moving offshore is far fetched - but some smaller companies with a lot of international business might do it.  If 25% of your oil market is causing you a 70% tax burden, wouldn't you consider writing off the 25% to focus on the other 75%?  40% of your after tax profits is a pretty big incentive to make some changes.  At a minimum, at least some of those higher taxes will get passed along to consumers.

And they're already leaving marginally profitable oil in the ground.  That's why some of those 68 million acres aren't being drilled, it isn't profitable even at today's prices.  Higher taxes just push that bar higher.  My main point is drastically increasing the tax rate won't produce the expected revenues and will increase prices.

And then just think of the upside to that - what if we really ramp up renewables and clean energy and reduce energy usage to where we are completely off foreign oil in 10 years.

Consider this, go ahead and lease the offshore sites.  Put the lease revenues towards ramping up renewables.  If the renewables can be developed as economically viable alternatives to oil in 10 years, there won't need to be much drilling.  If the alternatives don't pan out to economically feasible for mass production, the oil's there as a hedge. Also consider that the only gov't answer to alt energy has been subsidies for corn based ethanol - arguably the dumbest option out there.  Both political parties signed up to that idiocy and neither one is backing away from it.

Sorry, a $7000 tax credit for buying a car is a giveaway.

I don't know of anyone who's arguing for drilling in ANWR and off the coast as the entire answer, but I firmly believe it's part of the answer.  One of the main arguments used against it is that the oil won't flow for 5-10 years.  I could use the same argument against alternative transportation fuels - no point, they aren't commercially viable for at least 5-10 years.  In both cases the answer is the same; if it's going to take that long, we better get started.

Thanks for the comment.  Hope my reply didn't ramble too much, 'tis way past my bedtime.  Believe it or not, we actually agree on a lot of the energy policy. 

My main point was that the $1000 rebate funded by taxes on oil companies is a bad idea that's likely to do more harm than good.

 

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#5) On August 05, 2008 at 11:44 PM, devoish (96.36) wrote:

Don't I get a righteous thumbs up for pointing out that the St Petersburg article turned 77mil families into 300mil consumers? which caused you in turn to think that the math would not work? 300bil in rebates to consumers from 200bil in profits was the way you read it because that was how st petersburg wrote it. The 77mil families come from the US census (I looked it up).

And how can you not mention the part of the speech where Obama points out that the oil co's are not drilling on 64mil acres of land that they have, yet desperately want to convince me they need offshore drilling rights? Sounds like the oil companys are trying an old fashioned land grab to me while their boy is still in office. You gotta admire them that after financing them into Iraq they still want more. I have to say though. I would rather see a tax on the gasoline at the pump where we all could taste and feel it rather than on the oil companys where it is passed on to us as higher prices. I'd also like to see their subsidies removed and get them to pay up on their gulf leases. 33bil in subsidies is alot for an industry that is as profitable as this one is. Like GWB said "at $50.00/barrell they don't need subsidies, there is enough incentive to drill" or something to that effect. And yet they aren't drilling the acreage they have? Wonder if somebodys just taking a negotiating position.

Back to the speech:

"If I am President, I will immediately direct the full resources of the federal government and the full energy of the private sector to a single, overarching goal – in ten years, we will eliminate the need for oil from the entire Middle East and Venezuela.  To do this, we will invest $150 billion over the next ten years and leverage billions more in private capital to build a new energy economy that harnesses American energy and creates five million new American jobs."

I have to admit that phrase sounds a lot better with all those other words not excluded. I take it to mean he will offer tax incentives and loans to industrys that will help make America less dependent on Middle East oil. This will work to help solve global warming, as opposed to other policys where we borrow from our children to worsen global warming.

Lets talk renewable tax credits verse drilling and who pays for what and how does it get paid for. If we drill, by the time the oil gets pulled out from under the ocean, refined and delivered to my car at $4.00/gal, if there are all 86bil barrels out there at the high end of the estimate it will cost us 3.4 trillion dollars to fill our cars. If on the other hand, we are encouraged to buy high mpg cars (or get a rebate that makes it possible to buy high mpg cars) and decrease our personal fuel consumption by 20% that would cost each of us.... wait, that would save us money! of course those rebates would have to be paid back in the form of higher taxes or less gov't. Ok, I vote less military, less iraq war. Anyone for higher taxes?

I'm curious about following california's lead on energy efficiency.

"The state of California has implemented such a successful efficiency strategy that while electricity consumption grew 60% in this country over the last three decades, it didn’t grow at all in California."

That would be pretty cool if its true, and the 3bil Dupont saved in energy costs would be nice to emulate too.

I notice he refers to the few good points you mentioned as compromises. Something about not letting the "perfect" stand in the way of the "good".

I kind of like a leader who wants to steer the ship in the direction it ought to go. It seems a lot better than to keep getting slapped around by the "invisible hand".

I still recommend reading the entire speech for yourself rather than a few choice, or in the case of Bents original post, misquoted quotes.

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#6) On August 05, 2008 at 11:52 PM, lepersinmyhead (22.49) wrote:

Our Iraqi "friends" as John McCain calls the Iraqi government have an $80 surplus thanks to the American taxpayer.  Let's tax some of that.

McCain/Bush energy plan:

1) Let's cozy up to the Saudi's (a country which produced 15 of the 19 9/11 terrorists). Can you imagine if 15 of the hijackers were Mexican - we'd be in Mexico City.

2) Let the Saudi's treat us like their red-headed step children.  We provide the people, money, and will to kick Hussein out of Kuwait and effectively protect the Saudi's from imminent invasion and the Saudi's continue to operate a cartel of oil.

3) Talk about supply and demand when most of the world's oil reserves are controlled by undemocratic nations operating in an organization that rejects "free market" principles

4) Spend $500 billion invading a country and re-building it and then see it gain a surplus of $80 billion.  A country whose population, predominantly, would just as soon see every American dead.

Obama Plan

 

Our security interest lies in ridding our need for oil.  Let's take a leadership role in weaning us from oil so that we are not held hostage to the whims of third world dictators and Arab princes. 

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#7) On August 05, 2008 at 11:58 PM, devoish (96.36) wrote:

See you tomorrow.

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#8) On August 06, 2008 at 12:04 AM, rd80 (96.92) wrote:

Best answer to the undrilled leases I've read is from the president of the API here. I know, API will have a bias - so do the politicians complaining about undrilled leases.

On reflection, I shouldn't have dismissed the California story so quickly.  If they've truly done things to hold the line on energy consumption, there ought to be lessons the rest of the country can apply.

And I agree, no matter what your position is, the entire speech was worth reading.

Thanks for the reply.

Hopefully I can post this reply without double tapping.

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#9) On August 06, 2008 at 9:30 AM, devoish (96.36) wrote:

rd80,

I bet the Politicians complaining about undrilled leases don't feel the pressure to bias their views because of campaign contributions from API or oil companys as much as those trying to ignore the complaints do.

In answer to the undrllled leases issue I have to ask why an oil company paid for a lease if they did not expect to find gas there? They have 68mil acres leased for oil/gas rights. The API letter suggests some of those leases are drilled and found empty. Did they mention if that was 5 acres or 5million or 50 million? They also suggest some of those untested leases will be empty. Does XOM brag about being 90% accurate when they drill or 90% drywells? When I read an annual report what do the oil companys mean when they promote themselves as an investment using the phrases "proven reserves", and "unproven reserves" and ask you to invest?

Two years ago homebuilders desperately needed more land too.

 

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#10) On August 06, 2008 at 10:44 AM, devoish (96.36) wrote:

Ten minutes ago Devon energy reported a 98% success rate of drilled holes. I guess that means the risk associated with the expense of drilling a dry hole is less than 5%.

Expiring leases can be handled by doing an environmental review that covers the time you are drawing plans to drill and declaring that there are no environmental risks during that time. This gets you your lease extension but fails to consider environmen tal impacts of a drilling rig actually arriving and drilling.

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#11) On August 06, 2008 at 5:20 PM, rd80 (96.92) wrote:

"I bet the Politicians complaining about undrilled leases don't feel the pressure to bias their views because of campaign contributions from API or oil companys as much as those trying to ignore the complaints do."

Don't kid yourself, those politicians are under at least as much pressure to spin and present a biased picture as API. That's true for both sides.

In this case, I tend to believe API's explanation because it makes sense.  I just don't see what the motivation would be to sit on leases where a company could be producing.

As I understand it, the drilled hole success rate doesn't correlate to the percent of leases that have oil.  When they buy the leases, the oil companies don't know what's there - they buy leases that have a decent probability of having oil/gas, but no one knows until the exploration work is done.  They probably have some preliminary geological survey information, but have the rights to do any exploration work until they have the lease.

The first step after winning a lease is seismic surveys.  If the seismic work is promising, they move on to drilling.  After the exploration work is either complete on viable leases, they start development.  At any given time, some of the leases will be producing, some are being explored, some are waiting to be explored and some are sitting after it's been determined there either isn't any oil there or there isn't enough to be economically feasible to go after (that could change as oil prices climb). My understanding is that current seismic technology is very good, so the chances of drilling a dry hole are small.  But even when they find oil, it doesn't mean it's feasible to produce it. I may have left some steps out, if so hopefully someone will correct me.

The other piece of the whole lease issue is contractual.  I think it would set a very bad precedent if the gov't unilaterally modified a lease contract.  If they want to put milestone conditions and timelines on future contracts, have at it.  But, assuming oil companies are complying with the lease terms, what gives the gov't the right to change those terms in the middle of the contract?

Interesting link to the NRDC case.  That's part of those millions of acres that aren't being drilled.  If NRDC wins, the leasing company should be entitled to a refund of their lease payments from the fed gov't since the lease can't be used for it's intended purpose.

Thanks for the comments all.  Enjoyed the debate.


 

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