Set aside that we’re in the season of rhetoric, half-truths and innuendos, and that the oil and gas industry is being kicked around like a football and POTUS prefers basketball (what did U.K. Prime Minister David Cameron really think about President Obama taking him to a play-in college game in Dayton in March?  I would expect the Prime Minister would reciprocate by taking President Obama to watch Grimsby Town play Lincoln City on the Blundell Park pitch in jolly ol’ Grimsby.)  Finding common ground in the oil and gas industry during an election year is proving elusive, and probably more difficult than ever before. With the intent of shedding more illumination on the subject, Oil & Gas 360® thought it would take a moment and bring a few more tax facts you can use at your next soirée.  Thanks go to the Western Energy Alliance  for providing us with some direction on the following points:

  • The Energy Information Administration did an analysis (EIA) of subsidies in 2007, and found that natural gas electricity generation garners roughly $0.25 per megawatt-hour (/MWH) in federal subsidies, compared to $23.37/MWH for wind and $24.34/MWH for solar.
  • The Tax Foundation performed an analysis on tax treatments for all industries.  Bear in mind that all industries have rules governing the classification and treatment of revenues, expenses, accounting for tax payment deferrals and accelerations, and yes, even tax credits (and, taxable profits are not the same as accounting profits, given the differences between cash and accrual accounting).  Apply whatever adjective you want to describe tax credits, but whether you call them – subsidies, loopholes, grants, credits, special benefits – Congress and POTUS provides them to ALL industries (not just oil and gas).
  • Tax policy is used to a) raise revenues to pay for social goods that benefit the general population (e.g., infrastructure, defense, etc.); b) encourage investment into industries that are marginal, but having strategic importance (i.e., oil and gas); c) provide benefits to a favored niche (e.g., campaign donors); or d) redistribute wealth.  At the moment, we believe the current administration is pursuing (c) and (d) at the expense of (a) and (b). However, much of the political rhetoric has been targeted to the industry paying its “fair share,” with great emphasis placed on “income taxes. ”  We’re all about fairness, so let’s take a look at what the industry pays in taxes.
  • There are no good reasons for someone to pay more than the tax laws require.  Just ask GE or Warren Buffett.  If paying more than is required was the case, Warren Buffett would have certainly paid in more than he has in the past?  So the Tax Foundation found that when it comes to the oil and gas business the specific tax benefits targeted to the oil and gas industry amount to about $2.8 billion annually. Their analysis shows the “green industries” enjoy subsidies amounting to about $11.3 billion annually.  First, it appears that the oil business needs better lobbyists.  But when you compare the $2.8 billion in tax preferences to the $31.3 billion paid in taxes, fees, royalties and rents paid by the oil and gas industry to the American people and governments, the business is certainly paying far more in taxes than it receives in benefits. And, what is “fair” and who defines it?  The industry represents 7% of the nation’s GDP.  Last yearExxon Mobil said on a conference call that the company pays more than a combined $6 of sales, state and local taxes for every $1 of federal income tax paid in 2010.
  • The Tax Foundation noted in their 2010 report that between 1981 and 2008, $1.1 trillion dollars was collected in excise and sales taxes on petroleum products.
  • In 2011, EIA updated their 2007 study, but because of political pressure caused by the embarrassment to renewables from the first report, they were not as clear in their comparisons among the energy sources. To overcome that deficiency, the Institute for Energy Research did a nice analysis, available here, so that you can likewise compare among the energy sources. They continue their analysis here.  They show that in 2010, wind’s $5 billion subsidies was better than oil and gas’ $654 million.
  • CNN Money wrote a piece on November 3, 2011, discussing how some companies pay no taxes.  The story notes that GE had a negative tax of 45.3%.  Of course GE was defensive: “GE paid billions of dollars in taxes in the United States over the last decade, and we expect our overall tax rate will be approximately 30% in 2011,” the company said in a statement. “We believe the U.S. tax system needs to be reformed to close all loopholes, to lower the corporate rate and to provide a territorial system like every other major country in the world.”  A last point here about GE – they’re in the oil and gas business.

It should not be with pride that the U.S. can produce another “We’re Number 1” foam finger for taxes.  Taxes?!  We’re talking taxes.  Not credits.  Not subsidies.  Not loopholes.  We’re talking taxes.

We try not just to preach to the choir; that’s easy. What is hard is finding common interests in energy policy among Americans of all political sensibilities, or at least with those having common sense. For the past 30 years Congress and multiple administrations have been criticized for their collective failures to craft and implement a common-sense, fact-based energy policy. Perhaps it’s because there is a lot of money sloshing around in the political process distorting priorities, and we bet there is a fair measure of extreme ideology, too. Putting those things aside for the sake of a balanced discussion, we offer these points that we believe thoughtful Americans can agree on:

  • Fund the good guys. In 2011, the U.S. is estimated to import approximately 66% of its daily crude oil needs, down from about 72% just five years ago. The decline is the result of both reduced demand from a more fuel efficient national fleet and lower employment (fewer workers driving). Despite big increases in domestic oil production driven by the Bakken oil shale and other unconventional plays, it is unlikely that the U.S. will ever supply 100% of its energy needs. Since our nation is going to import crude for the foreseeable future, let’s admit that it is better for our hard-earned dollars to go into the pockets of our Canadian friends up north instead of OPEC, consisting primarily of nations that are hostile to American interests at worst, and indifferent at best. Also, we’d say the U.S. would be well-served by strengthening relations and energy policy ties to friendly nations in the Western Hemisphere, including Brazil, Mexico, Peru, Colombia and Ecuador. Strengthening our friends increases our mutual energy security.
  • Increase American exports. Aggressively promote the construction of LNG export facilities and conversion of import plants to exportation. Natural gas fundamentals in the U.S. stand to remain weak for the foreseeable future and getting more American methane into the world market does a lot of good things for the economy, our petroleum account balance of trade and the environment. Exporting resources to faster-growing nations has many positive benefits — improved balance of trade, more jobs that pay above-average wages, increases American importance to the world economy and again improves our energy security.
  • Clean up our act. Solar, wind, geothermal and other non-hydrocarbon energy sources simply can’t supply the nation’s economy with all of the energy it needs at an affordable price or with the reliability provided by oil and natural gas. Natural gas is the bridge fuel to the future and it burns cleaner than oil or coal. That’s a big deal, and so far hydraulic fracture stimulation hasn’t been scientifically implicated in any systematic way of causing lasting environmental harm. We don’t think the government should play a direct role in expanding natural gas consumption by the power generation and transportation sectors, that’s better left to the private sector, but the administration certainly shouldn’t make it more difficult!
  • Stop talking about jobs. Sorry, this isn’t really common ground, but it is a point worth noting. As near and dear the industry is to us, it just doesn’t employ that many people. According to the Department of Labor, as of February 2012, approximately 859,000 people were employed in the “Mining, quarrying, and oil and gas extraction” industry. That number represents only 0.48% of the total workforce of an estimated 179 million. The top five employment sectors included education and health services (32.6 million), wholesale and retail trade (19.5 million), professional and business services (16.4 million), retail trade (16 million) and manufacturing (14.4 million). Yes, oil and gas jobs are good, and they pay well, but the jobs argument is a losing one against those who would prefer to replace “dirty” oil and gas industry jobs with those in “clean” energy, whether that clean energy is economic or not. Sure, increased hiring in the petroleum sector is a positive thing, but there are more compelling arguments to make without opening the door as to whose job is better.
  • Home grown, drilling our own. It seems obvious that the American economy would be more secure in a volatile world by reducing imports and supplying more of our own energy needs. We would still be subject to price spikes from supply shocks (weather or geopolitical), but availability would be increased, which all other things held equal, could mitigate the impact of those shocks.

We’re all Oil Men and Women.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services.  In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication.

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