The California Oil Tax Initiative

California produces one-eighth of America's oil, and it uses all it produces. An initiative has come up, Proposition 87, to add a severance tax to California oil of a few dollars per barrel. The money would push efforts to move away from petroleum, whether through conservation or alternative fuels. I'm against it, and part of the reason is geological.

_{California crude — courtesy of Matt Cohen}

Oil is heavily taxed throughout its life. Producers pay state taxes on their corporate profits and property taxes on the value of the equipment and the oil in the ground. Consumers pay federal, state and local sales and excise taxes at the pump or meter. Prop 87 would add yet another tax on producers, but this one cannot be passed on to consumers. Prop 87's preamble, pregnant with unstated premises, says it's about "the big oil companies" who must "finally pay their fair share."

But Prop 87's plain language (which yeson87.com has no link to) favors the opponents' arguments. Here's how I see it: The new tax is shunted out of the state budget into a separate pipeline operated strictly by a new agency, the California Energy Alternatives Program Authority (CEAPA). The directors of CEAPA are a cartoon-heroes gallery of experts appointed by a smorgasbord of politicians. It will have to spend $4 billion within 10 years in a rigid budget of five funds, but only the first has a concrete goal.

1. It must spend $2.296 billion to help us reduce gasoline and diesel use by 25 percent over 10 years. The remaining $1.704 billion must be spent as follows:
2. $1.07 billion to accelerate research and innovation
3. $390 million to accelerate commercialization
4. $100 million to train new workers
5. $140 million for public education

The official goal for 2 through 5 is merely to spend $1.704 billion! The agency can heap extra money on other state programs, which have to spend it. It has no incentives for success and no punishments for failure. If the money is wasted, too bad. Each of the five funds gets a nine-person "advisory review committee" appointed, so between them and the CEAPA directors there are some 50 political appointees. CEAPA can also issue 25-year bonds against the $4 billion in case the money comes in slowly. That's not objectionable to me, but No On 87 dislikes it. (See the initiative for yourself here, or see nooiltax.com's version annotating the objections big and small.)

Given that Governor Schwarzenegger and the legislature just made a huge agreement on greenhouse-gas reduction, I think this is not the time to launch a separate, unaccountable, uncoordinated, inflexible program based solely on a new tax on domestic oil drillers. Besides, the largest multinational oil companies—the "big oil" Prop 87 proponents want us to hate—will respond by importing more oil from their out-of-state fields. (California's foreign oil comes first (35 percent) from Saudi Arabia and second (25 percent) from the rainforests of Ecuador.) Refiners will buy whatever is cheapest. But the hundreds of smaller California producers will have no recourse but to eat the tax, which means shutting down wells, going closer to bankruptcy or selling out—probably to a cash-rich multinational. This would erode California's energy independence and resilience.

California oil is expensive for geological reasons (its crude is heavy and sour) and logistical reasons (ports are too shallow for larger tankers, for example), not because "big oil is gouging us." (The California Energy Commission gives details, and I have the basics of oil formation here.) The campaign for Prop 87 thus has a false basis and an incoherent logic. It would encourage more imported oil and endanger a long-standing domestic industry, and those who actually pollute the air—consumers—are being asked to think and vote like children, hoping not to have to pay for something they want.