Taxes and Politics

Oil prices are highly volatile with political uncertainty, especially for refined products. Not only the political play within OPEC affects the prices but also the internal affairs in different countries. The US is a good example where oil-companies pressure politicians to ease taxes, fees and other restrictions on oil operations, while environmental-concerned organisations

try to push politicians towards more taxes and fees to divert production to more environmental friendly energy sources. The US oil politic has usually been friendly towards end-consumers and oil-companies. American consumers often drive fuel-intensive cars and the US politics on keeping the taxes and fees on gasoline low have been a public demand.

The figures in the table below given by IAE, show that the US has significant lower retail prices than other countries on transportation fuels like unleaded gasoline and automotive diesel. The price of unleaded gasoline in Norway (1.366$/litre) is approximately threefold of what it is in the US (0.443$/litre)

Table I: Petroleum Refined Product Prices Worldwide, International Agency, Key World Energy Statistics, 2004

However, the price difference on fuel oil for industry and households is not significant. This is maybe generally due to the lack of political willingness in most countries to impose extra costs for competition-exposed industry.

Cheap energy supply is often crucial in most industries. The EU and Norway have recently being using emission quotas that are tradable. Those industrial companies that invest in cleaning systems could reduce its emissions and sell its quotas. In fact, tradable quotas have emerged in the financial market and traded as other any financial goods. However, the US has traditionally regarded emission quotas and other governmental intervention of the market play to be a threat to American jobs. While European companies become more environmental focused, some Americans believe that this might make US companies less technology competitive and more vulnerable to potential environmental regulations in the future (Miller et Al. 2003).

Getting back to the low gasoline prices in the US, it is worth while noticing that a low gasoline price where taxes relatively consist of a lower part of the total gasoline price is more sensitive to changes in primary oil prices. Let us exemplify this: If the gasoline price to end-consumers is 1.4 $/litre in Norway and 0.5 $/litre in the US, a crude oil price increase of 0.1 $/litre gasoline will give an increase of 20 per cent (0.1$/0.5$) in US gasoline price but only about 7 per cent (0.1$/1.4$) in Norway. The US consumer would therefore be harder hit of a crude oil price increase. One should not under-estimate this political pressure that lies in US consumers as voters. George Bush, the President of the US, has earlier approved to release emergency crude oil inventory to the American market to reduce upwards price pressure on refined products. This may affect the worldwide crude oil prices and shows that the crude oil market and the refined market maybe is one integrated market as whole. We will be later discussing this relationship later.

For refineries like Mongstad, the main political uncertainty lies in the regulations in different countries on the physical content of refined products. Countries have different quality standards and requirements for fuel depending on how far they are in their environmental concerns. When Mongstad delivers its gasoline to the US, its content may be different from the gasoline served to the EU market. In fact, 20 states in the US have limits on the use of

MTBE¹⁶ due to danger of groundwater decontamination (EIA 2005). MTBE was used to replace lead as an octane enhancer because of the many health-risks connected, but it seems that the replacement itself is under the threat of being replaced. Mongstad uses MTBE to increase octane levels in their gasoline. This must be reconsidered if MTBE-limits are made federal since Mongstad delivers to the US market. Ethanol has proven to be a substitute for MTBE and is mostly a renewable source since it is made of corn or cellulose. The benefits of using Ethanol instead of MTBE are also made political by exempting it from taxes by 51 cents per gallon through 2010 (EIA 2005). The reason is that the ethanol production is mainly domestic based in the US due to its vast amounts of corn and thereby creating jobs¹⁷. It is clear that political and environmental issues are often made economical. They often affect the production decisions at Mongstad. As a refinery supplying petroleum products to Europe and the US, flexibility is required to match each order’s recipe that follow with each contract. Both giving away too much quality¹⁸ and not fulfilling the stringent requirements of each order may harm the refinery margin severely, in particular in the latter case in form of fines, contract cancellation due to contract violation, or economic compensation. Rigid quality systems and flexibility in production like blending components direct to harbouring ships and control the product to ensure that the purchaser receives the product of agreement.

However, the potential economic sanctions connected to product shortcomings do have a larger economic value in form of lost future sales and fines. That is why Mongstad can have buffers in the requirements in favour of the purchasers to avoid lawsuits or other sanctions.