In Oil Nothing is Certain Except Capex & Taxes.

(this is the way)

If you study cycles long enough then you start to see the patterns.

With oil prices settled above $100/bbl the left is coming out of the wood work calling for a profit tax on oil companies.

I promised myself I wouldn’t turn this post into a political rant…it’s really hard.

But I wanted to talk about two things:

1. How to actually bring down prices for the consumer.

2. Higher taxes isn’t necessarily a barrier for capex growth.

Let’s start with the second point.

The thinking goes:

Higher taxes = Less Cash = Less Capex = Less Supply = Higher Prices.

But if history is a guide that hasn’t really been the case.

In the chart below, I show the effective tax rate vs. capex growth rates for 6 major oil companies since 1934.

(Note that the data includes all of the acquired companies that make up present day XOM, BP, CVX, RDS, TOT & COP. So 40+ entities…a lotta data.)

Many forget that corporate tax rates were very high in the 1970’s cycle yet oil companies STILL GREW CAPEX at record levels.

Wow!

Capex lead to a supply side response despite the 70’s high tax rates!