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Finance...
Myths About Oil and
Gas
By Bob Beauprez
As voters around the country wince at rising gas prices, panicked
Democrats, in a rush to cover the failure of their all-or-nothing bet
on the alternative energy industry have started singing a familiar tune
– blame the oil and gas industry. Instead of facing the reality
of his owned failed policies, President Obama is calling for an end to
the “tax giveaways” he claims amount to $4 billion in “subsidies” to
the energy industry.
This tactic isn’t surprising given the effect that rising gas prices
have on the President’s approval ratings and his obsession with
re-election. But, less than truthful innuendos and political spin
hardly helps American working families that are getting hammered at the
pump.
If our leaders are going to have an honest discussion about energy,
it’s important to clear up a few rumors, misconceptions and outright
falsehoods being perpetrated about the oil and gas industry.
Let’s begin with three of the more common ones:
1. The industry doesn’t receive any
taxpayer funded subsides. None.
2. Rampant speculation and Wall Street
tricks aren’t driving up gas prices.
3. The oil and gas industry is not
dodging the taxes they owe and withholding “their fair share”.
I’ll say it again; contrary to popular opinion and the President’s
spin, oil and gas gets no taxpayer funded subsidies. The tax code
does allow them certain tax credits and deductions to encourage
continued investment in an industry that is heavily front-end loaded
with capital expense. These are the same kind of incentives
available to Coca-Cola, General Electric, Ford, and Micro-Soft and
other companies doing business in the U.S. Or, for that matter,
like the deduction for mortgage interest payments enjoyed by
homeowners. But, importantly these are tax credits, and markedly
different from direct taxpayer cash subsidies like the 45 cent per
gallon payment blenders get to put ethanol in fuel mixes.
When businesses invest in America, we all benefit. The oil and
gas industry plows about $300 billion into domestic projects per year –
that’s 75 times more than Obama’s phantom “taxpayer giveaways”
amount - and employees over 9 million people. Those are
real numbers; not Washington spin, and if government would allow and
encourage even more domestic production there would be more jobs and
more investment – and more total taxes paid, too.
Another argument that often circulates when gas prices go up is that a
phantom class of “Wall Street speculators” is to blame for the increase
of prices. So pervasive was this school of thought that in 2008,
President Bush commissioned an exhaustive review, via the Commodity
Futures Trading Commission, of the effect that speculators had on
market prices. Their conclusion was surprising, according to The
Wall Street Journal, “The agency concluded that speculators—otherwise
known as traders—were putting downward pressure on prices. The
liquidity they provide helps to smooth volatility.”
Not satisfied with the 2008 study, President Obama recently resurrected
this school of thought, even tapping Attorney General Eric Holder to
police perceived illegal activity and price gouging. Yet within
the Presidents’ own Administration, the Federal Trade Commission found
that the recent spike in oil prices is due primarily to normal market
forces, including booming demand from developing economies in India and
China and not because of any questionable behavior from Wall Street.
The third popular attack is that somehow oil and gas industry isn’t
paying its fair share in taxes. Democrat mythology aside, the oil
and gas industry pays a much heftier percentage of net income in taxes
(41.1%) than the average of all other S&P Industrials
(26.5%). Every single day, the industry is sending more
than $85 million to the U.S. Treasury for taxes and royalty
payments. Yes, the energy companies are profitable, but their
profit margins are right in line with manufacturing, aerospace, and
food industries, while computer, pharmaceutical, and the beverage
companies have triple the net income margins of traditional
energy.
I don’t like subsidies and I don’t like Congress or the IRS deciding
what is good economic behavior and what is bad. But, I do
understand that you get more of what gets incentivized, and less of
what is penalized. And, there is a huge difference in
“redistributing the wealth” through direct subsidy payments, and a tax
credit that encourages investment in much needed production that
creates jobs and taxable income.
If congress is serious about creating jobs and jump starting the
economy, they should lower the corporate tax rate, which is the highest
among the 34 OECD nations, rather than increase the tax burden on
energy or any industry.
Capital is fungible, and energy production is the prototypical global
industry. Plenty of nations around the world are providing a far more
welcoming business environment for energy production that the U.S.
already with a less onerous tax code and far less regulatory burden.
If increasing our domestic supply is really a national objective, then
this might not be the best time to send exactly the opposite message to
the people that provide the capital to drill the wells.
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