The President’s Energy Tax Hikes: Section 199 Deduction

The president’s State of the Union address last month had lots of good stuff in it about domestic oil and natural gas production. Unfortunately, the president’s actions are speaking louder than his words.

His just-released 2013 budget includes proposals to increase taxes on oil and gas companies – more than $86 billion over 10 years – that would take the country in the wrong direction on energy. Research shows higher energy taxes would discourage production, lead to fewer well-paying American jobs and increase our reliance on imports.

Today, let’s take a look at one of his tax-hike proposals – repealing the Section 199 manufacturer’s deduction only for oil and natural gas companies. Benefit to Washington: $11.6 billion over 10 years.

Here’s what the president said back on Jan. 24:

“Let’s remember how we got here.  Long before the recession, jobs and manufacturing began leaving our shores.  Technology made businesses more efficient, but also made some jobs obsolete.”

Indeed, which is why the 2004 “American Jobs Creation Act” included the Section 199 deduction. It was extended to all U.S. manufacturers, to help address the very problem the president identified by benefiting employers who maintain and create well-paying U.S. jobs.

The president went on to talk about tax policies he said would foster more American manufacturing:

“If you’re an American manufacturer, you should get a bigger tax cut.  If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here.  And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.”

Too bad the president’s affinity for American manufacturing is more rhetoric than reality – demonstrated by his renewed proposal to eliminate the Section 199 deduction only for American oil and natural gas companies. Talk of tax fairness from the administration is especially hollow here. Under Section 199, a 9 percent deduction is available to all qualifying income from all domestic manufacturers – except that the deduction for the oil and gas industry is limited to 6 percent, and now the president wants to eliminate that.

If the objective, as the president said, is more domestic oil and natural gas production – creating more U.S. energy and more U.S. jobs – then raising taxes on these companies is the wrong way to go. Higher taxes on an industry that already pays more than $86 million a day to the federal treasury and which contributed $476 billion to the economy in 2010 would likely cost jobs, not create them, while undermining efforts to reduce imports.

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Bunk on Oil Issues

Normally, we don’t bother with blog posts from the Center for American Progress on oil issues because, to borrow from an old saying, there’s no point in fact-checking someone who puts out propaganda by the barrel.  But since this post yesterday sought to “debunk” our “claims,” let’s have a look at CAP’s. Warning: These point/counterpoint, counter/counterpoint things can get a little long.

From CAP:

CLAIM: “More domestic production is critical to putting downward pressure on gasoline prices — supply matters.” – Jack Gerard, American Petroleum Institute President and CEO, March 26, 2012

TRUTH: To test whether more U.S. domestic production would lower gasoline prices, the Associated Press just completed an exhaustive analysis of 36 years of monthly U.S. oil production and gasoline price data. AP found that there is:

“No statistical correlation between how much oil comes out of U.S. wells and the price at the pump. If more domestic oil drilling worked as politicians say, you’d now be paying about $2 a gallon for gasoline. Instead, you’re paying the highest prices ever for March.”

Actual Truth: First off, the U.S. is the third-largest producer of oil in the world, so it would defy the laws of economics if there was zero correlation between “how much oil comes out of U.S. wells and the price at the pump.” More on that here. But don’t take our word for it – here are some thoughts from others:

William O’Keefe, the Marshall Institute: “…a policy of NO and a self imposed moratorium on increased exploration has probably resulted in hundreds of thousands of barrels or more not being produced. Adding those unproduced barrels to the current global supply would put downward pressure on crude oil prices which translate into to lower gasoline prices. Instead, there has been a policy of NO to the eastern Gulf of Mexico, NO to offshore drilling, NO to Alaska’s coastal plain, and NO to Keystone XL. With a more enlightened energy policy our oil production over the course of this decade could increase by a million barrels a day or more. That is not trivial.”

Geoff Styles, energy analyst: “Traders have to think about how prices are really set, and they understand that it's the interaction of the last few million barrels per day of supply, demand and spare capacity that really count, along with inventories. An extra million or two barrels per day – a quantity of which North America is certainly capable – can make a huge difference in oil prices.”

Sen. Chuck Schumer and the White House also agree that signals and supply matters.

Back to CAP:

CLAIM: “Opposition to higher energy taxes is rising among the public. A recent ‘What is America Thinking on Energy Issues’ poll showed that 76 percent of voters think that higher energy taxes could equal higher gas prices.” – Jack Gerard, API President and CEO, March 26, 2012

TRUTH: A Center for American Progress Action Fund poll conducted March 10-13, 2012 by Hart Research provided respondents with fourteen policy options asked which “would help a lot to address the issue of gasoline?”  The following option was chosen by 55 percent of the respondents:

“Repeal the four billion dollars per year in federal subsidies that currently are given to the oil companies, and use that money instead to fund investments that will make us less dependent on oil.”

Another 22 percent said that this proposal “would help somewhat.”  The combined totals finished highest among all the options.

Actual Truth:  First of all, CAP’s response is a total non-sequitur. People can believe that higher energy taxes could equal higher gas prices and simultaneously believe that reducing oil use is needed to “address the issue of gasoline.” Second of all, this is a bit of a “garbage-in, garbage-out” question because oil companies don’t get subsidies. Here is a chart from EIA data:

Nor does the industry get tax credits (which reduce taxes dollar for dollar) or grants from the government. They get tax deductions for business investments that will generate tax revenues in the future. Unlike the case of credits or grants, the government will still be paid the full amount of tax owed on our operations. Which means the taxpayer is getting every dollar that’s owed. What the president is proposing is to front-load the tax collection, so that any increases in current collections come at the expense of future taxpayers.

And lastly, oil and natural gas companies are the largest investors in technologies that reduce greenhouse gases. So perhaps this question should be re-phrased: “Do you support the government taking private industry investments in new energy technologies so that the state can direct such research based on political whim?”

Back to CAP:

CLAIM: “API represents more than 500 oil and natural gas companies…that…supports 9.2 million U.S. jobs.” – Jack Gerard, API President and CEO, March 26, 2012

TRUTH: Using API’s NAICS criteria (codes for various occupations) with Bureau of Labor Statistics data, CAP estimates that there were 1,790,000 employees in the oil and gas industry in 2011. Of these, 828,000 – or 46 percent – worked at gasoline stations.

Actual Truth: Note that CAP focuses on employees (and is off by 400,000 there), ignoring the word Gerard actually used, “supports.” And CAP ignores that the industry’s job creation extends beyond the industry itself, as Caroline Baum notes:

“Oil-and-gas drilling crews need equipment, food, clothing and lodging. They want to frequent bars and restaurants in the makeshift boom towns sprouting up in areas of North Dakota, Montana, south Texas and Pennsylvania. Manufacturers of drilling equipment need raw materials, such as steel and chemicals. So there’s a natural multiplier effect. Think of it as fiscal stimulus without the government first taking from Peter to give to Paul…Every direct job created in the oil-and-gas extraction industry, for example, yields 2.3 jobs elsewhere in the economy, Franklin says. This is expressed as a multiplier of 3.3, higher than the average of 2 for the 195 industries tracked by the BLS. Petroleum-and-coal product manufacturing (refineries) happens to have the highest multiplier at 8.2. And yes, manufacturing industries are at once the most capital-intensive, the most productive and still have the biggest spillover effect when it comes to generating jobs.”

Back to CAP:

CLAIM: “Raising taxes will not lower energy prices for American families and businesses — in fact, the Congressional Research Service says this plan could cause gasoline prices to go higher.” – Jack Gerard, API President and CEO, March 26, 2012

TRUTH: A Congressional Research Service memo, “Tax Policy and Gasoline Prices” to Sen. Harry Reid (D-NV) determined that eliminating tax breaks for big oil companies would have little impact on the price of gasoline.

Actual Truth: So CAP is rebutting our use of a CRS report from March 2012 by quoting from a CRS memo from last year? But since CAP brings it up, here’s what that earlier CRS memo said: 

“… if the changes in taxes did impact domestic, or overseas exploration and development activity, that does not necessarily imply that less oil would be available in the U.S. market. More might be imported, with little or no effect on gasoline prices.”

In other words (which CAP apparently endorses), don’t worry – we can just import more!

More CAP:

CLAIM: The administration “says it is for natural gas, but 10 federal agencies are looking at new regulations that could needlessly restrict it.” – Jack Gerard, API President and CEO, March 7, 2012

TRUTH: Nothing of the sort is underway.  Minority staff of the House Energy and Commerce Committee thoroughly investigated this claim, and debunked it.

“In a fact sheet supporting the 10-agency assertion, API lists numerous agencies that don’t even have legal authority to regulate hydraulic fracturing...”

Actual Truth: Um, that is sort of exactly our point – that a number of agencies with no business regulating hydraulic fracturing are jumping on the regulation bandwagon.

CAP:

CLAIM: “The industry receives not ONE subsidy, and it is one of the largest contributors of revenue to our government of any industry in America.” – Jack Gerard, API President and CEO, February 23, 2012

TRUTH: Numerous Republican leaders have noted that a tax break is the same as a direct government or subsidy, in a different form.  This includes President Ronald Reagan’s chief economic advisor, Martin Feldstein, former Senate Budget Committee Chair Pete Domenici (R-NM), House Ways and Means Committee Chair Dave Camp (R-MI), and Speaker of the House John Boehner (R-OH).

Feldstein: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

Domenici: “Many tax expenditures substitute for programs that easily could be structured as direct spending. When structured as tax credits, they appear as reductions of taxes, even though they provide the same type of subsidy that a direct spending program would…”

Camp: “‘Tax expenditures’ [are] provisions that technically reduce someone’s tax liability, but that in reality amount to spending through the tax code.”

Boehner: “What Washington sometimes calls tax cuts are really just poorly disguised spending programs.”

Actual Truth: Each in turn: There’s no loss of revenue for the government (Feldstein), they’re not tax credits (Domenici), they don’t reduce tax liability (Camp), and they’re not tax cuts (Boehner). See above.

And lastly:

CLAIM: “Oil production on federal lands is flat, and oil production on federally controlled offshore areas is down.” – API, “Energy Myths and Facts”, 2012

TRUTH: The Energy Information Administration reports that 3.7 quadrillion BTUs of energy from crude oil were produced from federal lands and waters in 2011. This is a 12 percent increase over the 3.3 quadrillion BTUs produced in 2008 under President George W. Bush. It is also more than was produced from federal lands and waters in 2006 and 2007.

Actual Truth: Interestingly, they really are into comparing 2011 to 2008, 2007 and 2006. Let’s have a look:

2011 doesn’t look so pretty now.  Especially compared to where we should be in some areas:

So, sorry CAP, your debunking is mostly just bunk. And speaking of bunk, here is what our current energy policy looks like, with all of its self-imposed limitations. Not bunk is what actual American progress looks like.

View the original article here

Recalculating the White House

Monday the White House had a blog post up saying:

“While profits soar, oil companies are receiving about $7,610 a minute in tax breaks.  That’s $4 billion a year of your money.”

During the latest economic downturn, when industries were shedding jobs and limiting spending, the U.S. oil and gas industry was doing the exact opposite.  Over the past few years we supported around 9.2 million U.S. jobs and, when given the opportunity, invested hundreds of billions of dollars into the United States to find new resources and generate the energy that American’s need.  So despite doing everything the Administration looks for in an industry – create jobs, invest in the United States, innovate – it does not appear to be enough.  The false argument now being made is that the industry is somehow not paying its fair share.

First, let’s put profit in perspective.  The oil and gas business generates revenue from its worldwide activities – however, it costs a huge amount of money to be successful.  That is why the real analysis for profits should be profit margin – how much profit does the industry earn on its sales.  In that light, during the most recent quarter the profit margin for “Major Integrated Oil and Gas” was 6.2%, which ranked 114th out of 215 industries.  So, I guess if profitability targets an industry, look out “Publishing – Periodicals” at 51.7%!

Second, let’s look at the claim that the industry is getting “tax breaks”.  These “breaks” are essentially deductions that the industry, along with many other industries, are eligible to claim.  They are not tax credits (which reduce taxes dollar for dollar) or grants from the government.  They are tax deductions for business investments that will generate tax revenues in the future.  Unlike the case of credits or grants, the government will still be paid the full amount of tax owed on our operations.

To illustrate let’s take a look at one of the deductions the president proposes to change, that for Intangible Drilling Costs (IDC). Currently large integrated oil companies can currently deduct 70% of their IDC costs over the first year and the rest over the next four years, under the president’s plan companies would have to spread the deduction over time – let’s say seven years. So for a well costing $5,000,000 the deduction schedules look like this:

Under both plans the amount being deducted will be the same, which means the taxes ultimately being generated would be the same.  The industry however uses the cash flow from the deduction to invest in equipment and jobs as they continue to drill and develop energy here in the United States.

Finally, let’s put the $7,610/minute point into perspective.  The oil and gas industry pays substantial amounts to the federal government in rents, royalties, bonus payments and, oh yes, taxes.  In total, these payments have been around $86M/day or $59,000 a minute!  An over 700% return on their “investment”.  So, at the end of the day, it is not the government supporting the industry, but the industry supporting the government.

Additional taxes or royalties may raise this amount in the short term, but it will eventually drive away investment.  This shouldn’t be surprising, by being able to reasonably recover costs, companies are able to drill more, and drilling more produces more American energy and more revenue for the government, not to mention more jobs.  The president’s plan will actually produce less, less, and fewer.

So while the White House tries to shape the numbers on the industry, the real numbers are as follows:

View the original article here

Throwing Down An Energy Challenge

Let’s talk about a fundamental difference of opinion on the key energy issue of the day.

We say crude oil supply matters – in the context of global-market pricing, which affects fuel prices because the cost of crude accounts for 76 percent of what Americans are paying at the pump. More supply alters the energy equation, exerting downward pressure on crude prices. Energy Economics 101.

The president seems to disagree, saying there’s no “silver bullet,” while suggesting there’s not much that can be done to affect global markets and offer hope to beleaguered consumers. At the same time he tacitly acknowledges market forces work – but only from the side of the equation that reduces demand through efficiency and other measures.

We’re all for greater efficiency, but the president is ignoring the effect on markets of increasing demand. Or is he, because even as he scoffs at the notion of greater development of domestic oil and natural gas resources, there are conversations with the Saudis about increasing their production, talk of releasing oil from the Strategic Petroleum Reserve and pledges to Brazil that we’ll be customers for their offshore oil when it comes on line – all implying that, yes, supply matters.

Here’s one thing that’s absolutely clear. America’s oil and natural gas companies have a positive, pro-development, pro-jobs strategy to produce more energy right here at home. They believe America has energy options, not unending limitations, and they’re ready to accept the challenge of producing more oil and gas. API President and CEO Jack Gerard during a conference call with reporters this week:

“Despite what you may hear, we are an energy-rich nation, the world’s third-largest producer of oil. We have vast resources that we have not even begun to explore. And by safely developing our own resources of oil and natural gas, we can send a strong signal to the markets that America will control its energy future.”    

Here’s what Gerard is talking about:

Changing policies that are limiting offshore energy development to less than 15 percent of available federal areas.Returning the Gulf of Mexico to pre-2010 production levels.Reversing the downward trend of leasing and permitting on federal lands (so that public areas can match production on state and private lands in places like North Dakota and Pennsylvania).Approving the full Keystone XL pipeline, to bring upwards of 800,000 barrels per day of Canadian oil sands crude to U.S. refiners.Curb government’s enthusiasm for new regulatory layers on the development of the country’s ample shale resources.Shelving punitive proposals to raise taxes on a few oil and natural gas companies.

Each of the above would acknowledge what the government’s own data shows, that oil and natural gas are mainstays of this country’s energy present and future – rejecting an off-oil strategy that’s rooted in unreality.

Gerard:

“Sending a clear message to people who buy and sell crude oil that the United States is committed to reasserting itself as one of the world’s major oil producers would immediately put downward pressure on gasoline and other fuel prices.”

Gerard called out the administration on its energy claims:

“The administration says it’s already doing a good enough job promoting oil and natural gas development. Check the numbers, it says. We did, and they show oil and natural gas production on federal lands and waters has lagged behind development on private and state lands.”

And issued a challenge:

“Our industry would not be urging the administration to open the door to more development unless it was prepared to walk through that door, unless it envisioned investing its own capital in more projects that could produce more supply and jobs, just like the development that’s already occurring. … We once again urge the administration to act to promote more domestic resources of oil and natural gas. … If the administration will do these things, our companies will produce more American oil and gas.”

Additional resource: Talking energy with Fox News.

View the original article here

Fear Mongering on Exports

Kevin Hall, of McClatchy, writes:

“U.S. demand for oil and refined products - including gasoline - is down sharply from last year, so much that United States has actually become a net exporter of gasoline, unable to consume all that it makes.”

So far so good.

“Exports of U.S. refined product averaged 2.928 million barrels per day over the four weeks ending on Feb. 10, compared to 2.190 million barrels per day for the four weeks ending Feb. 11, 2011, the EIA said. This category is primarily gasoline, but it includes unfinished oils, fuel additives, ethanol and other blending components.”

Um.  No.  This category is not primarily gasoline.  Using the EIA data this is what we see:

Then we get the export fear mongering:

“The export picture suggests that when domestic demand rises, American motorists might be competing with drivers elsewhere for U.S.-made gasoline, which fetches a higher price as an export.”

Hall covers himself with the wiggle words, “suggests” and “might be” but this statement is still incredibly irresponsible given “the export picture” suggests no such thing. And we don’t even have to look elsewhere for proof, as this is made clear in the article! In his lead paragraph Hall makes clear that we are making more refined product than we are consuming and that exports are simply picking up the slack between domestic production and domestic demand.  Hence exports are up, and this is a very good thing:

Flexibility to export product in times of market imbalance helps refiners operate efficiently and maintains U.S. refining capacity. This contributes to U.S. energy security.  Not to mention keeping workers working.Refining enhances the U.S. economy by adding economic value to the raw material: In the case of exported petroleum products, the U.S. produces or buys crude oil, refines it at U.S. refineries and then resells finished petroleum products at significantly higher value.  This increase in value is what GDP measures.In 2011, fuel and other petroleum products were a significant part of U.S. exports (7 percent) as measured in dollars, at $107 billion. This was due in part to reduced domestic fuel demand (because of the lagging economy, increased use of renewables in finished petroleum products and more fuel-efficient cars) and in part because the industry produced at or near record amounts of gasoline and diesel in 2011.

Then article keeps the fear coming:

"To the extent that there is this export market that wasn't there before, it is certainly ... keeping prices higher than they otherwise would be," said [energy analyst John] Kilduff. "Exports were not material. Now they are becoming material."

Actually, the export market has always been there, providing refiners with a market when U.S. demand for various products is low.  But it isn’t keeping prices higher.  The EIA notes that in January 2012  refining costs AND profits made up 6 percent of the cost of a gallon of gas.

So refiners are getting only 20 cents a gallon of gross margin, of which, on average, 15 cents covers costs leaving a 5 cent per gallon profit. And yet we are to believe that taking away 8 percent of their market* would lower prices?

For too long the energy debate has been dominated by this sort of liberty with the facts.  And while it may sell newspapers it sells the American people short, and it isn’t going to lead to policies that get us where we need to go.

*Exports represent just 8 percent of the motor gasoline and ULSD produced in the U.S.

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A Natural Solution for Oil Seepage

The LA Times had an article yesterday on the effect of oil naturally bubbling up off the coast of California:

"Oil seeping from the ocean floor off Santa Barbara is taking a toll on seabirds that are turning up by the dozens along the Southern California coastline coated in crude oil and tar. The naturally occurring oil bubbles up and afflicts birds every winter, but wildlife rescuers in recent weeks have seen an unusual influx of oiled seabirds stranded on the shore as far south as Orange County…Scientists believe the murre population is growing and expanding south, putting the football-sized birds at greater risk of diving into waters slicked by Southern California's oil leaks, the most significant of which are found in the Santa Barbara Channel near Coal Oil Point, where thousands of gallons of oil seep into the ocean each day...The hypothermic, malnourished birds lose energy fast. So they either die offshore or, in an act of desperation, plant themselves on the beach."

An unfortunate situation, but one with a remedy, as Christopher Helman points out:

"What’s entirely missing from the story is any hint of how this bird killing could be stopped. The solution is simple: allow drilling off the coast. Stick a few wells into that shallow reservoir and within a few years enough oil would be safely recovered that it would no longer leak out to kill birds. I guess that’s such a political non starter in California that the reporter doesn’t even bother mentioning it…Occidental Petroleum has for decades produced oil from a handful of wells in Los Angeles harbor. California should be smart about this and open up the seepage area to drilling…"

View the original article here