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Vinod Khosla Headshot

Don't Let the Big Oil Money Confuse You on Prop 87

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In my opinion Prop 87 is good for California and good for the country. If you agree with the discussion below (and a series of subsequent posts) please email a link to this post to ten California voters and ask them to email to ten others.

As Tom Freidman put it in the New York Times: "Here's the basic story: This Nov. 7, Californians will be asked to vote yes or no on Proposition 87, a ballot initiative that would impose a higher extraction fee on oil pumped in California. (Up to now, oil companies in California have paid a very low extraction fee compared with those in other states - a rip-off they want to keep.) The new funds raised by Prop 87, explained The San Francisco Chronicle, "would be used to finance research and development of alternative fuels in universities; education campaigns; and subsidies to consumers who buy vehicles that use alternative fuels and businesses that produce and distribute alternative fuels. ... Oil companies would be taxed between 1.5 percent and 6 percent on oil production depending on the price of oil per barrel. The tax would end by 2017 or when the tax generates $4 billion, whichever occurs first."

He goes on "Naturally, oil companies like Exxon Mobil - which just paid its outgoing chairman, Lee Raymond, $400,000,000 in his final year - are financing misleading ads to try to fool Californians into rejecting Prop 87". Oil companies, led by Chevron and Aera Energy, an operation of Shell and ExxonMobil affiliates, have poured $73 million so far into defeating the measure, claiming that it will raise gas prices at the pump. They are using all those dollars, the most expensive campaign in the country, trying to scare consumers into believing gas prices will go up.

So why won't oil prices go up?

(1) Oil companies have been saying world oil prices determine gasoline prices (even if one forgets the no pass through provision in Prop 87). They have run full page ads in the New York Times claiming they cannot control these prices. There is no way California production costs affect world oil prices in any material way. $400 million per year in fees in a greater than a trillion dollar market will make prices go up? How stupid do they think we are? And they are happy to talk out of both sides of their mouth. They are not responsible for world oil prices and yet world oil prices will go up if there is a fee in California. A Nobel Prize winning economist told me that he did not see how this fee would make a noticeable difference in oil prices. University of California energy economists have arrived at the same conclusion and neither got paid to arrive at this view. I suspect many oil company validators have had incentives to agree with the oilies.

(2) No pass through would be the law. If oil companies try to pass through this fee to consumer they will be breaking the law. But the oil companies keep scaring people into thinking they will break the law and pass it on anyway. Free markets will ensure, as described above, that they cannot even if they try to.

(3) At recent oil prices and expected future prices the fee will be in place much shorter than the maximum ten years that is allowed. This is too short a period for oil investments to change especially given they will all know that the fee is going away soon. Oil companies don't make investments for a few years only generally.

(4) The real deal is that each dollar invested in alternative energy is much cheaper in "oil production" than the dollar that wont be invested in oil production. Chevron's much touted Tahiti oil field will cost $4 or so for each gallon of capacity. The same investment would produce many times more ethanol capacity as a cleaner renewable fuel for the same capital investment. But the oilies will do everything to avoid investing in an alternative that loosens their stranglehold on our transportation fuel needs. And they make a lot less money if we get a cheaper fuel!

(5) The opponents assume that a 100% of that fee will go into drilling for new oil and if there was a fee the projects will not get funded. What % of the oil fee savings will go into digging new wells anyway? And even if there was a fee would they not do the project if there was a $3 fee and it cost them $18 to produce oil (as oil does roughly in California) when they can sell it for $50 or so? As for marginal wells there are special provisions in the initiative to exempt wells called stripper wells. Do they ever talk about that? Have they stopped producing in any of the states with much higher fees than are proposed in California? And why is California the only major oil producing state where they don't want to pay a fee? Is that fair? Or is it that their massive campaign contributions always let them get their way?

(6) Most importantly, prop 87 will reduce the demand for oil by creating oil alternatives like biofuels and reducing oil consumption through efficiency improvements like hybrid cars. The Rocky Mountain Institute has estimated that it costs $16 to save a barrel of oil while it costs about $60 to buy one at today's prices. But would an oil business like this reduction in consumption? There are cheaper alternatives the oil companies prefer we did not have because it would reduce their profits. In my opinion this fee invested in efficiency and production of alternatives produces much larger returns and far greater reduction in the demand for oil than the same dollars invested in producing oil.

The oilies are scare mongering with their massive dollars. Many of them don't want us to stop being hostage to oil. The American Petroleum Institute is constantly lobbying against alternatives. How do we stop them? If they thought they could pass the fee on to consumers would they be spending all this money to avoid the fee?

How do we get the cheaper, greener, more diverse fuels that are available but ones they will impede. President Clinton has said ethanol is 33% cheaper. I know it is cheaper to produce, even withteh subsidies oil currently manages to get. Why not have some fair competition?

Before I got involved with prop 87, I tried to see if there was anything material the oil companies would commit to do without an initiative, anything at all. They approached me to not get involved. I got lots of sweet talk and no real interest in anything that would make a difference on this critical issue. So here I am. In my next blog I will discuss "THE ONLY WAY WE GET LOWER PRICES FOR GAS". Later I will address the health care costs, the unfair oilie tactics, and the benefits to be had from freedom from their stranglehold.

As Tom Freidman says: "Passage of Prop 87 would be huge". Vote Yes on 87!