Let's Not Miss a Golden Opportunity

Oil field in Long Beach, 1920 (Photo credit: Wikipedia) For the first time since the 1970s when citizens brought campaign finance reforms to Long Beach, two ballot measures have qualified with signatures requiring the City to conduct an election this coming November.

This means that the City must now spend over $300,000 to conduct this election -- we have no choice because the ballot measures qualified. The good news is that we can place additional measures on the ballot without much additional expense -- a factor that has kept the city from putting items before the electorate.

This would be an opportune time then to fix two serious problems in the City's "oil production tax."

First problem:

• The city has two oil production taxes. The first was enacted by the City Council in the late 1990's and places a 15 cents per barrel tax on all oil produced in Long Beach. That was when oil was $24 a barrel. So this .15 cents (which has not increased ever) amounts to .006 per dollar.
• In 2006, the voters approved Prop H which set a .25 cents a barrel fee to be used for police and fire. An inflation factor was added based on the Consumer Price Index. Unfortunately, the CPI does not reflect the real increases in crude oil. Instead a Producer Price Index (used by the City of Signal Hill for their oil production tax) is more accurate. Had we used the PPI -- the City would have realized an additional $1.9 million from this tax since 2006.
• Unfortunately, the two taxes were not combined -- so any inflation factor is only applied to the .25 cents a barrel and not the entire .40 cents a barrel.
• Today, the crude oil produced in Long Beach (the 3rd largest oil field in the US) is selling at $96.00 a barrel. This means that currently the City of Long Beach is only getting .004 cents per dollar on its production tax.
• The City needs to combine the two production taxes so that it receives the appropriate amount of revenue.

Second problem:

• The City's oil production taxes are based upon the number of barrels of oil produced. Production has decreased since the late 1990s because early aggressive drilling removed alot of the oil However, new techniques promises to produce a steady supply. A per barrel tax on decreasing production results in decreasing revenue stream as the number of barrels decreases.
• Concurrently and historically, the price of crude oil has steadily increased.
• So, the City will continue to see less revenue if the oil production tax is only based upon number of barrels produced.

Additional information:

• The price paid to oil producers is posted daily by the refineries which purchase the oil. (See this link: http://www.crudemarketing.chevron.com/posted_pricing_daily_california.asp)
• Any taxes placed on the posted price DO NOT get passed along to the consumers -- or at the pump as the phrase is stated. That's because the tax is paid before the oil is sent to the refinery so no additional costs are added to that price.
• The high cost of crude oil which is refined into asphalt is making it impossible for the City to fix its streets.
• Signal Hill is now at @ .83 cents a barrel (because it uses the PPI inflation factor).

So what could we do right now with a ballot measure:

• We could ask you the voters to approve consolidating the two taxes and changing the inflation factor so that it keeps up with the true cost of oil   OR
• We could eliminate both taxes and set a new one that is either $1.00 a barrel or 2% of market value (which ever is the greater).
•  A flat $1.00 a barrel or 2% of market value for oil severed and saved by or for the owner or operator would mean that revenue derived for Long Beach can sustain the ups and down of a volatile market. 

For instance:

• a flat $1.00 a barrel when oil is $90.00 a barrel with production @ 12 million barrels, results in @ $12 million for the City; 2% of market value when oil is $90.00 a barrel with production of @12 million barrels results in @ $21.6 million.
• When oil goes to $100 a barrel, with a production rate of 9 million barrels, this results in  $1 dollar x 9 million barrels which equals $9 million for the City; 2% of market rate value when oil is $100 with production at 9 million barrels would result in $ 18 million. (By the way this calculates out to be .02 cents a gallon.)
• When oil goes down to $55 a barrel, with a production rate of 9 million barrels, this results in $9 million with the per barrel rate; and $9.0 million for the market rate.
• When oil goes down to $45 a barrel, with a production rate of 9 million barrels, this results in $9 million with the per barrel  rate; and $8.2 million for the market rate.
• When oil goes to $110 a barrel, with a production of 8 million barrels, this results in $8 million with the per barrel rate; and $17.6 million for the market rate.

Again, an increase in the Long Beach production tax will not increase gasoline at the pump because gasoline prices are set based upon the "Brent crude" index which is the price of overseas oil and which is used to price 2/3rds of the world's crude supplies. The oil produced in Long Beach is valued based upon the West Texas Index and traded on NYMEX. Much of the oil produced locally is used for asphalt.

Keep in mind just how small of a tax is being proposed on Long Beach oil if we go to $1 a barrel or 2% of market value x number of barrels. Today, oil is at $96.00 a barrel -- so $1 a barrel would mean the producer is left with $95 a barrel or 98.8% of the value. A 2% of the market rate would be $1.92 and leave $94.08 a barrel or 98% of the value.

Each barrel contains 44 gallons so the above scenario results in Long Beach receiving .04 cents a gallon.

Keep in mind Long Beach's major oil producer posted a $1.6 billion (that's billion) dollar profit for the 1st quarter of this year.

For what uses will this revenue be used? I suggest we work out a formula whereby we apportion the following:

• Police and Fire (50%)
• Street Repair (25%)
• Libraries (10%)
• Recreation (15%)

I also suggest that a citizen oversight committee be headed by the City Auditor and appointed by the Mayor and Council to ensure that the funds are spent appropriate.

Because the City has to conduct an election this November I think we should put this measure on the ballot so that this additional needed revenue can be made available.

What do you think?