Sunday, May 04, 2008

Brilliant Thinking

The Russian government is worried over the decline in oil production. So what does it do to reverse this trend? Well, they raise the tax on oil exports. That's brilliant! What better way of encouraging production than to tax it more?

Having these kinds of master minds running oil producing countries is definitely bullish for oil.

4 Comments:

Blogger flute said...

But why should they encourage production increases? Is it in Russia's interest? Decreasing production will lead to higher prices. And more oil will be left in the ground to pump up at a future higher price. In the long run, their policies seem smart to me. They save part of the oil income for the future.

10:45 PM  
Blogger stefankarlsson said...

Flute, first of all, the point here
was that it was stupid to raise taxes if you want to increase production, not necessarily that increased production was a good idea.

Secondly, there are good reasons to think it is in fact a good idea to increase production. Because Russia after all produces only a small part of the world's oil, the increase in prices will be a lot less than the decrease in volume production, meaning that revenues will be lower.

And while saving oil may be a good idea in the short to medium term, it will not be so in the long run because excess prices will encourage alternative sources of energy and increased production elsewhere.

11:04 PM  
Anonymous Justin Rietz said...

I believe there is another possible reason why Russia thinks export taxes are a good idea. Since production is decreasing, the assumption is that domestic prices of oil will go up. Taxing exports would appear to create an incentive for producers to sell domestically, thus keeping down domestic prices. This, in turn, keeps the populace happy.

Just a thought...

2:40 AM  
Blogger stefankarlsson said...

Justin: That is probably indeed a motive considering that they specifically chose to tax exports rather than production directly.

7:35 AM  

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