The dramatic effect of price increases and subsequent taxing of profits is obvious for small oil operators who are attempting to produce marginal oil and gas properties. The Red Mountain oil field and associated leases in the San Juan basin of New Mexico are a prime example of the recent “yo-yo effect” of oil and gas pricing and subsequent taxing.
An analysis of the profitability of these operations, and its subsequent effect on oil field employment and purchases of equipment, are a clear, if small, example of the impact recent government policies have had throughout the oil industry.
Increases in the price of oil and gas made operations temporarily economic, and inspired additional drilling. This activity actually resulted in discoveries of new oil and gas sands and increased oil and gas reserves. However, the effect of a positive price has been partly or totally cancelled by taxing through the “windfall profit” tax. “Windfall profit” taxes have had a negative effect by shutting down additional exploration, cancelling planned waterflood projects, and generally hindering profitable operations.
This microstudy can be multiplied by hundreds and perhaps thousands of similar examples throughout the United States, with the effect of shutting in millions of barrels of oil, which would otherwise have been discovered and recovered. This is a prime example of illogical and arbitrary taxing procedures and policies.
The ramifications are felt not only by the oil and gas operators but also by suppliers, oil field workers, and their families. The economics of the area, and thus the state and the nation as a whole are adversely affected.
To compound this problem, we pay over $40 per barrel for imports to make up for the oil we have in these areas but do not recover. This $40 per barrel would have been paid to Americans, in America, and would have bought American products and paid American labor. This in turn would have increased the American labor force and the American inventory, and would have used American goods to find and increase American reserves.
Instead this money is diverted to foreign lands where it buys foreign goods and services. When, and if, it is reinvested in America it may be used to buy political influence, or buy control of American lands and industry. This microexample shows the economic insanity of such a program.