Tax squeeze too saucy for America

Michael J Economides
Saturday, October 1, 2011

After a trillion-plus dollar stimulus package that seems to have fizzled, after forays towards ‘bipartisanship’ which often meant agree with him or nothing, and after seeing his approval ratings drop like a rock, US president Barack Obama unveiled his next plan to save the American economy and create jobs to boot. On 19 September the president proposed a plan that would cut $3 trillion from the federal budget over the next 10 years. The plan includes spending cuts but also new tax revenues, the often repeated tax on the ‘rich’: households with more than $250,000 annual income. But Obama also said this too: ‘Our tax code shouldn’t give an advantage to companies with the best-connected lobbyists. It should give an advantage to companies that invest in the United States of America and create jobs in the United States of America. And we can lower the corporate rate if we get rid of all these special deals.’

It did not take long to identify the special deals by name. It is pointedly the oil & gas industry. The White House plan would raise $41 billion over 10 years by eliminating oil and gas tax incentives. These would include routine things like the price of repairs, site preparation and hauling supplies during drilling. It would eliminate a long-held item present in the extraction of all exhaustible resources, the depletion allowance of oil and natural gas wells. More important it would prevent oil and gas companies from claiming a domestic manufacturing deduction, available to all other US industries. Companies operating internationally can no longer claim a tax credit on tax payments to foreign governments. After-tax income making it into the US would be taxed again as if no taxes were paid elsewhere.

Well the die is cast. After a year-long attempt to inch towards the center the latest move is a decided foray back into the president’s economic and ideological left-wing roots. But the singularly punitive treatment of the oil & gas industry packs a number of potent punches from the hatred towards Big Oil encompassing almost uniformly Obama’s core supporters to the environmentalists clamoring for a post-fossil fuel green future to, hopefully for the president, low- to middle-class independents suffering from the price at the pump.

The oil & gas industry is poised for a fight and it promises to be a protracted one. With the Republican House majority squarely against the president’s general budget proposals and with Texas Governor Rick Perry leading the polls of the Republican slate of presidential hopefuls, US energy issues and energy future (along with climate change) promise to be a seminal rallying cry in the next presidential election. It has all the political, economic, philosophical and ideological elements that have defined the American (and to some extent world) debate for two decades.

Understandably, the oil & gas industry had a vehement reaction to Obama’s proposal, one that went over the actual amounts of money involved. Jack Gerard, president of the American Petroleum Institute, said the president’s plan ‘would destroy jobs and drive investment out of the United States.’

Gerard reminded the president that a much bigger revenue source for the country would be increasing oil and gas activity by opening more public lands and waters for exploration and production. ‘It’s ironic that in his search for revenues, the president overlooks the revenues available from increased access to domestic oil and natural gas,’ Gerard said. ‘Rather than raising taxes on a single industry, he could raise revenues, create jobs and strengthen our energy security.’

One of the unique elements of Obama’s assault on the oil & gas industry derives from the widely held misconception, perhaps his own, of who actually produces America’s oil and gas. Ten companies produce about one third; 200 companies produce the next third and 10,000(!) companies produce the last third. For example, in natural gas production, ExxonMobil is number one (thanks to some recent acquisitions) but numbers two to five are Chesapeake, Anadarko, Devon and Encana, big and successful independent companies but not quite household names outside of the oil patch and clearly not the classic boogeymen of Big Oil.

In fact, one of the greatest examples of American can-do attitude is the work of the 10,000 companies. This is clearly the envy of the world and why all over the rest of the world production, often controlled by national monopolies, is inefficient and corrupt. A great recent example is shale gas, arguably one of the biggest successes of the domestic American energy scene in the last thirty years. In five years it went from zero to more than 25% of total US natural gas production. Outside of Canada, the rest of the world has yet to start. Shale gas is the product of these little companies not the big ones. And the small companies are the ones to suffer the most from the Obama proposals. Big Oil will take care of itself, including the possibility of relocating their headquarters.

Obama is clearly biting the hand that feeds America with its energy needs. It is unlikely that the president will succeed. Instead it will probably cost him his job. OE

About the Author:

Michael J Economides is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE’s position.

Categories: North America Regulations Activity Energy

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