Sightline has some interesting information about the impact of Gregoire’s proposed “Barrel Fee”, which would be the major revenue source for her proposed transportation package.

If you’re out to raise money for transportation projects, one of the more clever methods is the so-called “barrel fee” that is the centerpiece of Governor Gregoire’s new transportation package. It’s structured in such a way that it minimizes impacts on Washington by effectively off-loading the costs to oil companies and out-of-state drivers. In fact, my back-of-the-envelope estimate is that for every dollar residents pay, the state will net roughly $2.20 in revenue.

Here’s where it gets interesting: Washington refines about twice as much oil as it actually consumes, and the governor’s barrel fee pointedly applies to petroleum products that are sold for consumption outside the state. That means Washington’s coffers can benefit from fees on twice as much oil as Washington consumers will actually pay for. (It’s similar, in some ways, to the way that some natural resource-producing jurisdictions benefit from extraction fees on products that are ultimately used elsewhere.)

So who picks up the other half of the tab?

For products that are refined in Washington but consumed elsewhere, the burden of the fee will fall on some combination of out-of-state consumers and oil refiners (and perhaps some oil distributors or marketers to a small extent). Certainly, the oil companies will try to pass the cost of the fee along to their customers, but in markets that are competitively supplied by other sources of fuel, it may be difficult for them to do so. That means the oil firms will have to carve the cost out of their profits.

Go here for the full post.

29 Replies to “Sightline: Cleverness of the “Barrel Fee””

  1. That was certainly interesting. Is there any risk of a Federal Commerce Clause challenge to fees on oil being shipped out of state? Would this fee put the refineries at a competitive disadvantage with any others such that Washington refineries reduce output or stop capital investments?

  2. It could end up with fewer oil refineries in washington in the long-run, if costs are higher here.

    1. Where are they going to go? They need to be next to the ocean to receive crude and we’re the closest port to Alaska. I seriously doubt Oregon would permit refineries given their extremely tight coastline protection policy. Shipping crude to California and then trucking it back up to the northwest would likely cost more than the surcharge. So really all it might effect is the boundaries at the margin of the current supply area.

      I’m not so sure about oil companies margins being thin. XOM is sitting on huge cash reserves. BP’s stock price took a hit following the spill in the Gulf but it still turned a profit and is paying dividends. It’s true that margins on gasoline for service station owners (usually a franchise) are very slim but the price of gas is also very elastic. Witness not that much change in demand when the price per gallon fluctuates between $3 and $4.

      Is there any risk of a Federal Commerce Clause challenge
      Given that the Gov was the AG I’ll bet she’s already thought of that.

      1. In the long run, eventually refineries will open and close and move and need to be refurbished, and there will be fewer here than otherwise

      2. U.S. Gov’t Agency Plans $2.84 Billion Loan for Oil Refinery… In Colombia

        according to NPRA, the last time a new oil refinery was built in the United States was 1993, when a small facility was built in Valdez, Alaska. The last time a new large oil refinery was built in the United States was 1976, says NPRA. Older U.S. refineries, however, have been upgraded and expanded in recent years.

        Eventually they’ll all close when it becomes uneconomical to pump oil out of the ground. Closer to home Idaho suspends oil refinery equipment shipments after accident on U.S. 95. The refineries aren’t going anywhere and would likely expand if WA let them. They can pass along the cost to service station owners who by contract have to pay whatever the oil company says they will.

      3. Also keep in mind that the US is now a net petroleum *exporter*. Yes, you read that correctly. As our appetite for refined petroleum products has waned, refiners have kept importing oil here and then export the refined product. Assuming we continue to improve our efficiency, there’s no reason to expect the trend couldn’t continue.

      4. VeloBus, we are actually exporting refined oil (gasoline/diesel, etc) from what I have heard and read.

        As for the the refineries leaving, remember that there is the infamous pipeline. That’s a tough piece of infrastructure to replicate elsewhere these days.

      5. Um… Isn’t that what I said? “refiners have kept importing oil here and then export the refined product”. Either way, on balance, we’re importing a raw material and exporting a finished good.

        As for the pipeline, I assume you are referring to the Kinder Morgan Puget Sound pipeline that receives Canadian crude via the Trans Mountain pipeline? If so, no, it’s unlikely they will be moving those assets since they’ve been operating since the 1950s.

      6. Velo, I read your comment correctly but the headlines are a bit deliberately misleading to make it sound like the US is approaching anything close to energy independence.

        I didn’t know about either of the pipelines you linked to. I was wondering if Nebraska puts up too much of a stink if the Alberta oil might end up coming here instead. That would be both good and bad. Probably a little more good than bad. The pipeline I thought Erik was refering to is the infamous Olympic gasoline pipeline that blew-up in Bellingham.

      7. I wondered if he was referring to the Olympic pipeline but since that is a finished product pipeline I mentioned the Kinder lines instead. But yes, that’s one more set of expensive infrastructure that is unlikely to move.

        Apologies if I implied that we were getting anywhere close to energy independent. I absolutely know that to not be the case. As you know, the US has only recently tipped into being a next exporter of *petroleum products*. Given the large infrastructure we’ve created over the past 100 years to support an oversized fossil fuel habit, it makes sense for us to export jet fuel, gasoline, and diesel as our appetite has waned, while still importing the raw material for those products.

        Going forward, it will be interesting to see whether we tip back into being a net importer once the economy picks up. I have my hopes that we’ll continue switching to other fuels and become more efficient in our use of energy but I’m not naive enough to believe it’s a done deal.

        Fingers crossed. Oh, and here’s another article that discusses the trend a little more clearly, focusing on gasoline exports.

  3. The rule of thumb is that if you want to reduce something, tax it or regulate it. That’s not to say that taxes and regulations are bad in themselves, but it’s best to be careful. Oil company margins are so much slimmer than software, for example. Why not a fee for copies of Windows sold outside the state, or a surcharge on Amazon packages? Just a thought experiment.

    1. Actually it depends on what the purpose of the tax is. If you want to cut down on a socially negative thing like smoking then yes. But if you want a steady and inelastic revenue source tax something that is essential, like cell phones or food.

    2. Don’t forget, the State of Washington failed to collect more than $2 Billion in back taxes on Microsoft’s activities here and in the end gave up on trying to collect it. Pity for us when we have more than a $2billion short fall…

  4. What stops the oil producers from passing along the fee to those just in Washington state? They seem too smart to let the fee cut into their profits. And we’re their most captive audience with essentially no refining competition that others states might have.

    1. Why would they do that? Oregon has no refineries. I don’t think Idaho does either. The US hasn’t built any new refineries since the 1970’s and refineries are designed to process specific types of crude. It’s not a business where you can just pull up stakes and move just anywhere. If effect, we have them over a barrel :=

  5. Bernie is correct in that there is little to no threat of refineries moving. They just don’t build new one’s (too expensive, and why would they want to increase supply). Considering how each refinery has to be tailored to a specific kind of crude, and then the downstream supply chains, moving isn’t really viable either.

    There is a reason we build Multi Billion dollar pipelines and the largest ships in the world to move crude to our refineries, and fight wars to keep those Pipelines and shipping lanes open, and turn around and ship the refined petrochems back, instead of just building refineries at the source.

      1. That’s the spin Gregoire was putting on the per barrel oil fee. We put up with all the environmental impacts, jobs and B&O tax so it’s only fair the other states kick in. The real beauty of this idea is that it increases the gas tax without the political cost of actually increasing the gas tax and it’s not tied to “highway purposes”. That we get to stick it to other states is a bonus.

    1. Like what, a per bussel tax on potatoes? Maybe OR will allow Vancouver residents to cross the river and buy big screen TVs without paying WA State sales tax… oh wait, they already do.

      1. Except it is your “duty” to report and pay personal use tax on said purchase in your home state ;-)

      2. Oh yeah, slap me silly. Those Oregonisms think they’re pullin’ one over on us but we out smarted them we done did :-/

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