The Right and Wrong Side of the Energy Divide

Interior Secretary Ken Salazar talked about a divide in America between the “real energy world and the imagined energy world” during a speech Tuesday in Washington. He’s got that right – but it’s not like the administration is on the right side of that divide. Consider:

It dismisses calls for increased access, saying it takes years to develop oil and natural gas resources, and then takes credit for increased production.It says it wants more oil and natural gas when in reality its policies set back production in the all-important Gulf of Mexico and on federal western lands.It says 75 percent of America’s offshore resources are open for development when in reality 87 percent of areas are off-limits.It says oil and natural gas are the energy of the past even though they currently supply 62 percent of the energy we use and in 2035 will still supply about 60 percent.It repeatedly suggests that America is an energy pauper, when in reality the country has tremendous energy wealth, with ample supplies onshore and offshore.It claims the oil and natural gas industry doesn’t pay its fair share in taxes when in reality it sends $86 million a day to the U.S. Treasury in rents, royalties and income tax payments, and its companies rank 1-2-3 on Forbes’ recent list of those paying the most in income taxes. 

Now, the Interior secretary’ s speech was on-target in some ways. Salazar said that “overwhelmingly, Americans agree on energy.” They do indeed:

84 percent believe increasing domestic oil and natural gas production could enhance the country’s energy security, according to a Harris Interactive poll last month.64 percent in that same poll said they believe some in Washington are intentionally delaying domestic oil and natural gas development, potentially hurting the economy and leading to higher consumer energy costs.Anywhere from 56 percent to nearly 70 percent in other polls say they support construction of the Keystone XL pipeline that would bring upwards of 830,000 barrels of crude oil per day from Canada to U.S. refiners – which the administration continues to obstruct while pretending others are at fault for the delay. Here’s video of the secretary doing just that after Tuesday’s speech (courtesy The Daily Caller):

More Salazar: 

“Americans want to cut our reliance on imported oil. They know that a lot of factors affect gas prices – including world markets and international events – and that, unfortunately, there’s no silver bullet in the near term.”

No question, world crude oil markets play the biggest role in prices at the pump – 76 percent of the cost right now – and affecting near-term change is problematic. But market signals do matter. And it’s time to take charge of our energy future by choosing the right policies to affect the long-term energy equation. For too long opponents of accessing available U.S. resources have used the “no silver bullet” line to block sound energy decisions – like drilling in remote Alaska, which by now would be an important part of the energy mix if it had been undertaken when it first began to be debated more than a decade ago. 

Salazar once more:

“The energy world is changing … Whether it’s our oil and gas technology, our solar power plants, or our auto manufacturers, the pace of American innovation is staggering. The U.S. is determined to lead in the new energy world. So it’s no longer a question of whether you support renewable energy or conventional energy, or whether you favor the environment or the economy. The American people have decided to take an all-of-the above approach.”

The United States needs all of its energy resources, but a real all-of-the-above approach must do more than pay lip service to oil and natural gas production – today’s energy and tomorrow’s. The challenges are daunting, but historically Americans have risen to meet challenges with the help of strong leadership – in contrast to the rhetoric of resignation and powerlessness that frequently comes from the current administration. API President and CEO Jack Gerard, speaking last month at a congressional hearing on energy:

“With sound policy and bold leadership, we can put this country’s vast resources to work to change the current energy equation. … A strategy that confidently deploys resources here at home will send a clear message to global markets that the United States is serious about affecting supply. To the American people it will say help’s on the way. … With the right policies and strong leadership, we can secure our energy future instead of surrendering it to outside forces.”

View the original article here

Raising Energy Taxes – The Wrong Approach

Update: The U.S. Senate failed to reach the 60 votes needed to invoke cloture and the motion failed 51-47. (29 Mar 2012)

Today the Senate will vote to advance S.2204 sponsored by Sen. Menendez (D-NJ). This bill will raise taxes on major integrated oil and natural gas companies to subsidize other forms of energy and will do absolutely nothing to lower gasoline prices.

A new poll conducted by Harris Interactive, from March 9-13 of registered voters nationwide, found that 76% of voters believe that increasing energy taxes could increase consumer costs on a wide variety of products, including higher gasoline prices.

American voters overwhelming oppose higher taxes!

Additionally, this bill claims to end alleged “subsidies” for a handful of oil and natural gas companies. However, nothing could be further from the truth. The U.S. oil and natural gas industry does not receive “subsidized” payments from the government to produce oil and gas. In fact, the Wall Street Journal editorial board states “the truth is that this industry is subsidizing the government.” The US oil and natural gas industry on average pays over $86 million every day to the federal government in taxes, rents, royalties and lease payments.

U.S. oil and natural gas companies pay considerably more of its profits in taxes than the average manufacturing company. In fact, in 2010, the industry paid more in total taxes than any other industry sector while averaging a 41% effective tax rate. Also in 2010, oil and natural gas companies directly contributed over $470 billion to the U.S. economy in spending, wages, and dividends – more than half the size of the 2009 federal stimulus package ($787 billion) – only this stimulus didn’t require an act of Congress.

Below are more details on the specific negative effects of the tax provisions that are included in the Menendez bill:

Dual Capacity/Foreign Tax Credit denial: API’s one pager discussing how this will make American companies uncompetitive abroad is here and there are more in-depth studies on this topic here, here and here. Despite rhetoric, the provision they seek to modify ironically is a more stringent rule on taxpayers like the oil and gas industry that has, for the last 3 decades, ensured abuses do not occur. The foreign tax credit can only be used to offset foreign income taxes paid and not any other payment. Without this foreign tax credit, which has been in place since 1918, US-based companies would be substantially disadvantaged when trying to develop foreign opportunities. Specifically, companies would face the cost of double taxation on foreign operations, while their competitors would only be taxed once.Sec. 199 repeal: Section 199 is available to every single domestic manufacturer and extractive industry that qualifies and is in no way unique to the oil and gas industry. As seen here, the oil and gas industry is already penalized with respect to others as we receive a 6% deduction on income from qualified activities; everyone else receives a 9% deduction. This provision was put into place in the American Jobs Creation Act in 2004 to create and keep jobs in the U.S. – exactly what we are doing. We support 9.2 million jobs in the U.S. and contribute to 7.7% of GDP. By removing this provision from just a handful of companies it sends the message a job in the oil and gas industry is not as “valuable” as a job at Starbucks or the New York Times (both of whom get 199 at 9%). Studies have shown repealing Sec. 199 (and IDC below) for the entire industry could put 165,000 direct/indirect jobs at risk by 2020.Repeal of drilling cost deduction (IDCs): Just like the R&D deduction (comparison here) our companies can deduct costs associated with the labor and construction of a well. As you can see in this one-pager, these costs, typically 60-80% of the cost of a well, are simply cost recovery with respect to timing – there is no credit or government subsidy here. Cost recovery allows us to put that money back into projects, technology and high wages. The average upstream wage is approx $98,000/yr. This provision is not unique to the Code and could compromise thousands of jobs and billions of dollars worth of capital – in fact, this repeal along with (Sec. 199 above) could compromise 10% of America’s oil and gas production capacity by 2017.Percentage depletion: The major integrated US oil and gas companies (the target of this amendment) are not eligible for percentage depletion and have not been for over 30 years. IPAA has more on how this affects independent producers.Repeal of tertiary injectant deduction: The U.S. is a mature oil producing region but still contains many viable fields whose lives are extended through the use of tertiary injectants. These efforts secure additional U.S. production and enable many production companies to remain in business. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies. This deduction supports using carbon dioxide in enhanced oil recovery projects, one of the primary methods by which carbon dioxide is currently stored to prevent its release into the atmosphere.

Without unfair and punitive tax increases and unnecessary new regulations - we could create 1 million more new jobs in just seven years and increase revenue to the government by $127 billion by 2020. By 2030, this program of development could boost government revenue by $800 billion and increase daily production of oil and natural gas by 10 million barrels. Add to this more imports from Canada and increased domestic bio-fuel use and we could within 15 years have the capability to secure all of our liquid fuels from North American sources.

America’s oil and natural gas companies are owned by tens of millions of Americans. More than 29 percent of shares are held in mutual funds; 27 percent are held in pension funds; 23 percent are owned by individual investors; 14 percent are held in IRAs. Five percent are held by institutions and only 1.5 percent of industry shares are owned by corporate management. Raising taxes on America’s energy producers, businesses, and retirement plans is the wrong approach to rebuilding our economy. Therefore, these tax increases are nothing more than a billion dollar tax increase on America’s oil and natural gas industry, our employees, and our nation’s retirees.

View the original article here

Raising Energy Taxes – The Wrong Approach

Update: The U.S. Senate failed to reach the 60 votes needed to invoke cloture and the motion failed 51-47. (29 Mar 2012)

Today the Senate will vote to advance S.2204 sponsored by Sen. Menendez (D-NJ). This bill will raise taxes on major integrated oil and natural gas companies to subsidize other forms of energy and will do absolutely nothing to lower gasoline prices.

A new poll conducted by Harris Interactive, from March 9-13 of registered voters nationwide, found that 76% of voters believe that increasing energy taxes could increase consumer costs on a wide variety of products, including higher gasoline prices.

American voters overwhelming oppose higher taxes!

Additionally, this bill claims to end alleged “subsidies” for a handful of oil and natural gas companies. However, nothing could be further from the truth. The U.S. oil and natural gas industry does not receive “subsidized” payments from the government to produce oil and gas. In fact, the Wall Street Journal editorial board states “the truth is that this industry is subsidizing the government.” The US oil and natural gas industry on average pays over $86 million every day to the federal government in taxes, rents, royalties and lease payments.

U.S. oil and natural gas companies pay considerably more of its profits in taxes than the average manufacturing company. In fact, in 2010, the industry paid more in total taxes than any other industry sector while averaging a 41% effective tax rate. Also in 2010, oil and natural gas companies directly contributed over $470 billion to the U.S. economy in spending, wages, and dividends – more than half the size of the 2009 federal stimulus package ($787 billion) – only this stimulus didn’t require an act of Congress.

Below are more details on the specific negative effects of the tax provisions that are included in the Menendez bill:

Dual Capacity/Foreign Tax Credit denial: API’s one pager discussing how this will make American companies uncompetitive abroad is here and there are more in-depth studies on this topic here, here and here. Despite rhetoric, the provision they seek to modify ironically is a more stringent rule on taxpayers like the oil and gas industry that has, for the last 3 decades, ensured abuses do not occur. The foreign tax credit can only be used to offset foreign income taxes paid and not any other payment. Without this foreign tax credit, which has been in place since 1918, US-based companies would be substantially disadvantaged when trying to develop foreign opportunities. Specifically, companies would face the cost of double taxation on foreign operations, while their competitors would only be taxed once.Sec. 199 repeal: Section 199 is available to every single domestic manufacturer and extractive industry that qualifies and is in no way unique to the oil and gas industry. As seen here, the oil and gas industry is already penalized with respect to others as we receive a 6% deduction on income from qualified activities; everyone else receives a 9% deduction. This provision was put into place in the American Jobs Creation Act in 2004 to create and keep jobs in the U.S. – exactly what we are doing. We support 9.2 million jobs in the U.S. and contribute to 7.7% of GDP. By removing this provision from just a handful of companies it sends the message a job in the oil and gas industry is not as “valuable” as a job at Starbucks or the New York Times (both of whom get 199 at 9%). Studies have shown repealing Sec. 199 (and IDC below) for the entire industry could put 165,000 direct/indirect jobs at risk by 2020.Repeal of drilling cost deduction (IDCs): Just like the R&D deduction (comparison here) our companies can deduct costs associated with the labor and construction of a well. As you can see in this one-pager, these costs, typically 60-80% of the cost of a well, are simply cost recovery with respect to timing – there is no credit or government subsidy here. Cost recovery allows us to put that money back into projects, technology and high wages. The average upstream wage is approx $98,000/yr. This provision is not unique to the Code and could compromise thousands of jobs and billions of dollars worth of capital – in fact, this repeal along with (Sec. 199 above) could compromise 10% of America’s oil and gas production capacity by 2017.Percentage depletion: The major integrated US oil and gas companies (the target of this amendment) are not eligible for percentage depletion and have not been for over 30 years. IPAA has more on how this affects independent producers.Repeal of tertiary injectant deduction: The U.S. is a mature oil producing region but still contains many viable fields whose lives are extended through the use of tertiary injectants. These efforts secure additional U.S. production and enable many production companies to remain in business. Changing how these costs are recovered could force producers to shut in older fields and significantly impact local economies. This deduction supports using carbon dioxide in enhanced oil recovery projects, one of the primary methods by which carbon dioxide is currently stored to prevent its release into the atmosphere.

Without unfair and punitive tax increases and unnecessary new regulations - we could create 1 million more new jobs in just seven years and increase revenue to the government by $127 billion by 2020. By 2030, this program of development could boost government revenue by $800 billion and increase daily production of oil and natural gas by 10 million barrels. Add to this more imports from Canada and increased domestic bio-fuel use and we could within 15 years have the capability to secure all of our liquid fuels from North American sources.

America’s oil and natural gas companies are owned by tens of millions of Americans. More than 29 percent of shares are held in mutual funds; 27 percent are held in pension funds; 23 percent are owned by individual investors; 14 percent are held in IRAs. Five percent are held by institutions and only 1.5 percent of industry shares are owned by corporate management. Raising taxes on America’s energy producers, businesses, and retirement plans is the wrong approach to rebuilding our economy. Therefore, these tax increases are nothing more than a billion dollar tax increase on America’s oil and natural gas industry, our employees, and our nation’s retirees.

View the original article here

O’Reilly - Oh So Wrong On Exports

Bill O’Reilly was beating the drum again last night about oil exports, once again displaying his lack of rhythm.  Here are his arguments in a nutshell:

Many Republicans want to drill baby drill but what's the point if all the oil goes to China?...You are not making as much money in U.S.A. as you could in China so you are just whipping it out and throwing it over to China. Is that right or wrong?... And we own 12 miles of ocean offshore. That's the U.S. sphere of influence. We own that; it's ours. All the 320 million American citizens. The government doesn't own it. The oil companies don't own it. So they take the stuff out of our land, and they send it to China. Does that make sense to you?

First let’s go back to this chart:

That’s right in 2011 99.7 percent of the crude oil produced or imported into the U.S. was processed here.  We simply do not export crude oil in any significant way.  We do export products manufactured from crude oil, including motor gasoline.  Let’s have a look at that from both the supply and demand side:

Now this might be hard to see because gas exported is quite small compared to gas supplied to U.S. consumers, but where you see spikes in exports corresponds almost exactly to dips in U.S. demand.  In other words the gas we are exporting is not gas taken from U.S. consumers, but rather gas that U.S. consumers aren’t using.  As explained yesterday, this is a good thing.  Having an export market ensures that refiners can operate efficiently and maintain U.S. refining capacity. Contributing both to energy security and keeping our workers working.

There has been a lot of talk recently about the need to boost American manufacturing, well this is what manufacturing looks like.  Taking raw materials and adding economic value to them. In the case of exported petroleum products, the U.S. produces or buys crude oil, refines it at U.S. refineries and then sells finished petroleum products at significantly higher value.   Exporting petroleum products does not increase prices, as John Felmy put it:

…when supplies are available to export – as they are today because of weak U.S. demand – they put downward pressure on the prices of the gasoline and other products we import. Exports also mean jobs for Americans, including good paying U.S. refinery jobs, and a lower trade deficit.  but reducing the supply of the crude oil does.

If O’Reilly really wants to contribute to the gas price debate he should focus on real solutions, not free trade bogeymen.  Back to Felmy for what these solutions look like:

The industry must be allowed to develop at home more of its ample crude oil and natural gas resources. More U.S. barrels on crude markets would help drive down crude costs and reduce gasoline prices. We need policies that ease access to U.S. oil and natural gas resources, which are still very ample. We also need policies that add critical infrastructure, such as building the Keystone XL pipeline, to bring in more of Canada’s vast supplies of oil, and policies that keep regulations and tax policy reasonable.

View the original article here

O’Reilly - Oh So Wrong On Exports

Bill O’Reilly was beating the drum again last night about oil exports, once again displaying his lack of rhythm.  Here are his arguments in a nutshell:

Many Republicans want to drill baby drill but what's the point if all the oil goes to China?...You are not making as much money in U.S.A. as you could in China so you are just whipping it out and throwing it over to China. Is that right or wrong?... And we own 12 miles of ocean offshore. That's the U.S. sphere of influence. We own that; it's ours. All the 320 million American citizens. The government doesn't own it. The oil companies don't own it. So they take the stuff out of our land, and they send it to China. Does that make sense to you?

First let’s go back to this chart:

That’s right in 2011 99.7 percent of the crude oil produced or imported into the U.S. was processed here.  We simply do not export crude oil in any significant way.  We do export products manufactured from crude oil, including motor gasoline.  Let’s have a look at that from both the supply and demand side:

Now this might be hard to see because gas exported is quite small compared to gas supplied to U.S. consumers, but where you see spikes in exports corresponds almost exactly to dips in U.S. demand.  In other words the gas we are exporting is not gas taken from U.S. consumers, but rather gas that U.S. consumers aren’t using.  As explained yesterday, this is a good thing.  Having an export market ensures that refiners can operate efficiently and maintain U.S. refining capacity. Contributing both to energy security and keeping our workers working.

There has been a lot of talk recently about the need to boost American manufacturing, well this is what manufacturing looks like.  Taking raw materials and adding economic value to them. In the case of exported petroleum products, the U.S. produces or buys crude oil, refines it at U.S. refineries and then sells finished petroleum products at significantly higher value.   Exporting petroleum products does not increase prices, as John Felmy put it:

…when supplies are available to export – as they are today because of weak U.S. demand – they put downward pressure on the prices of the gasoline and other products we import. Exports also mean jobs for Americans, including good paying U.S. refinery jobs, and a lower trade deficit.  but reducing the supply of the crude oil does.

If O’Reilly really wants to contribute to the gas price debate he should focus on real solutions, not free trade bogeymen.  Back to Felmy for what these solutions look like:

The industry must be allowed to develop at home more of its ample crude oil and natural gas resources. More U.S. barrels on crude markets would help drive down crude costs and reduce gasoline prices. We need policies that ease access to U.S. oil and natural gas resources, which are still very ample. We also need policies that add critical infrastructure, such as building the Keystone XL pipeline, to bring in more of Canada’s vast supplies of oil, and policies that keep regulations and tax policy reasonable.

View the original article here