It's time again in California for a new batch of state ballot measures, which means that it's also time for a barrage of TV, newspaper, and poster ads urging me to vote for or against some measure that's bound to either save the world or bring it crashing down. This year's initiatives range from transportation, to education, to smoking, to disaster preparedness. But because of my interest in the area of alternative energy, Proposition 87 caught my eye.
Proposition 87 proposes to put a tax on oil producers in California to create a fund that would be dedicated to financing new alternative energy sources. The tax would range from 1.5% to 6%, depending on the price of a barrel of crude -- as crude prices go down, so does the tax. Over the course of the next 10 years, the bill hopes to bring in up to $4 billion to put toward alternative energy sources.
Of course the real questions are "Who's paying?" and "Will it really help?"
More than just Hollywood
Having grown up in the far-off land of New Jersey, I was surprised to discover that California produces 12% of our domestic oil. It's the third-largest producer in the U.S., just behind Texas and Alaska. Of course, the Golden State is no slouch in using oil, either; we're the nation's No. 1 consumer of gasoline, and No. 2 in jet fuel.
The history of oil in California dates back to the mid-1800's, just after the masses migrated to the state during the Gold Rush. (1999 wasn't the only time that people moved to California to get rich quick!) Although it's said that the first production oil well was put in place by the brother of Stanford University founder Leland Stanford, the California oil industry probably began in earnest in 1876, when Alex Mentry struck oil at Pico No. 4 in Santa Clarita, CA. Mentry was working with a company called California Star Oil Works, which eventually became Chevron
Today, Chevron is still the king of oil in California, having produced 72.6 million barrels of oil in 2005. But roughly four hundred additional producers are now also registered with the California state government, ranging from privately held Aera Energy (who produces nearly as much as Chevron), Occidental Petroleum
While these oil companies are taxed a number of ways by the state, there is currently no direct oil recovery tax in California. The backers of Proposition 87 claim that other major oil-producing states, including Texas, Alaska, and Louisiana, are already paying a direct recovery tax, and that it's reasonable for California to do the same.
Getting to green
The pro side of this political debate is headlined by a number of high-profile political and entertainment names, including Bill Clinton, Al Gore, Julia Roberts, Rob Reiner, and Robert Redford. But it's also championed by many prominent business names, such as Google co-founders Larry Page and Sergey Brin, John Doerr (of Kleiner Perkins Caufield & Byers), and Sun Microsystems co-founder Vinod Khosla. They contend that this measure will use the tax on oil production to fund new developments in alternative energy that will allow California to reduce oil consumption by as much as 25% over the next 10 years. Supporters hope that Prop 87 will ultimately reduce both pollution and dependence on foreign oil sources.
The opposition to the proposition includes a number of public groups like the California State Firefighters, but it's primarily bankrolled by the California oil interests. They claim that the proposal does little more than set up a bureaucratic entity with no mandate to show results. They also believe that the plan will raise oil prices and increase California's dependence on foreign oil.
Does Prop 87 get us closer to green? Well, the $47 million spent on the pro side says it will . and the $66 million on the con side says it won't. To the credit of Doerr and Khosla, both of whom I'm sure know a great deal more about green tech than me, this type of plan would probably work well in the venture capital world, where performance is everything.
Unfortunately, in the public sector, loosely structured plans like this tend to become very political, disorganized, and ineffective. Without a firm structure, $4 billion can be a lot of money to effectively put to work, especially in a burgeoning field like alternative energy. Dedicating funds for research and subsidization of a particular area of alternative energy could be a valid alternative, though.
Earlier this year, California introduced the California Solar Initiative, a $2.9 billion, 10-year program to subsidize the installation of solar photovoltaic, hot water, and heating and cooling systems. While most of the funding is dedicated to subsidies, 5% is being made available to put toward solar research. The program was closely modeled after the successful solar initiatives in both Japan and Germany. I suspect that a reworking of Proposition 87 along similar lines could be more effective.
So who wins?
If Prop 87 gets shot down, it's pretty obvious that the California oil companies, most notably Chevron, will have dodged a bullet. Just doing some quick back-of-the-envelope math here, assuming that Chevron produces another 72 million barrels of oil in California next year, at an average price of $58 per barrel, a 4.5% tax could take $188 million out of their pockets. Of course, legislation like this is a known hazard of the game for any long-term energy investor. Remember, too, that Chevron generated $185 billion in revenues in 2005.
On the other side, if Prop 87 gets put into effect, it's not certain which companies would benefit. Of the $4 billion to be spent over 10 years, 57.5% would go toward the purchase of alternative energy vehicles, incentives for producers to supply alternative fuels, and incentives for the construction of alternative energy infrastructure. Companies like General Motors
Regardless of which way you'd vote on this one (or will vote, if you're a California denizen), the moral here is that we're getting serious about alternatives. Whether you're talking about hybrid cars from Toyota, solar power from SunPower, or more exotic solutions from companies like Energy Conversion Devices, people are getting giddy about green.
Gorge on Foolish greenery:
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Fool contributor Matt Koppenheffer is a bit green with envy over the hybrid cars out there, though his Civic does get a respectable 30 MPG. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always high-powered and never political.