Blaming State’s Oil Industry for Underpayment of Royalties Oversimplifies Issue
While it makes sensational headlines to blame the underpayment of oil royalties on the oil industry, it is an oversimplification of what is a complex issue (“Audit Says Oil Firms May Have Underpaid Royalties,” April 13).
Yes, royalties would have been greater had prices not been depressed. Also, higher oil prices would have supported increased oil exploration and production in California, providing more jobs and work for supporting industries, as well as increased mineral tax revenues for local and state government. This is not news; the independent oil producers in California have been trying to deliver this message for the past decade.
Oil royalties are paid based on the prices posted (published) by major oil companies. All royalty owners (including the federal and state governments) and independent oil producers are price takers. There is little they can do about the price they get for the oil they produce or own title to. For the most part, these prices are determined by the lower quality of California crude oil, the regional oversupply of oil on the West Coast and by the cyclical world oil market.
The recently settled lawsuit filed by the City of Long Beach against the major integrated oil companies provided insight that “big” oil knew that it was in their best interest to keep wellhead crude oil prices low, thereby maximizing their overall profits. (Their greatest profits per barrel have come from the lower-priced heavy oil produced in California’s Central Valley.) They are at most at fault for taking advantage of the depressed market caused by the oversupply of oil on the West Coast.
The greatest damage has been caused by the prohibition of exporting Alaskan North Slope oil to the Pacific Rim, its market of economic choice. This created the regional glut of oil on the West Coast that forced down local posted oil prices more than the major oil companies could ever have done through their own efforts.
The federal government and its elected representatives alone are responsible for establishing and maintaining the ANS export prohibition under the Export Administration Act, and thus they are primarily responsible for the inequities it has caused.
JAMES C. (CHRIS) HALL, Torrance
*
The Times should know better than to print stories based on accusations rather than facts and sound economics.
The petroleum industry has been accused of artificially suppressing crude prices in California for many years, yet there exists no evidence except the fact that poor quality California crude oil fetches a lower price on the open market than other benchmark crude oils such as West Texas Intermediate or Alaska North Slope.
It is ludicrous to assert that crude oil prices are artificially set in California. Every good student of economics understands that the California crude oil market is one of the most competitive in the world, and prices for various grades of crude are set by market forces determined by supply and demand. Even so, The Times chose to print accusations levied by the Project on Government Oversight which are clearly based on draft Department of the Interior reports which even the Department of the Interior concedes are speculative and have not yet been completed.
We hope that in the future The Times will do more careful analysis of accusations made by groups like the Project on Government Oversight, and base stories on facts, instead of preliminary information.
DOUGLAS F. HENDERSON, Director, Western States Petroleum Assn., Glendale
