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Eye on the News

Max Schulz
Presidential Petroleum Prejudice
Obama’s budget discriminates against oil and gas producers.
2 March 2009

Selected Responses:

Sent by Michele Lefevre on 03-03-2009:

I think that record profits at the expense of the American people (during a time of hardship, no less) certainly constitutes a "tilted playing field." How about tilting it towards the people for a change? Encouraging domestic drilling will only hasten the day in which domestic reserves go dry and we place ourselves at the mercy of foreign markets. This is not just a tax on an industry that gouges American consumers, it is an incentive to energy producers to do the smart thing: invest in other, more ecologically beneficial, forms of energy production. How about thinking in terms of the long-term good of America instead of toeing a party line at the expense of our future?

Sent by Tom Young on 03-03-2009:

Excellent piece. You made a fine point and did not even have to mention the effect increased burdens will ultimately have on national security by limiting domestic exploration (and thus production) and increased dependence on our "friends" in oil-producing countries.

Sent by Kenny Komodo on 03-02-2009:

Again, this article just shows me that Obama has little or no understanding of the free market and the complex interplay between producers, suppliers, and consumers. Does Obama really believe that any taxes or fines or whatever that he imposes on the oil companies won't be passed right on along to the consumers? Or is it more simple than that - perhaps he doesn't care, as long as he continues to milk the cow in order to feed his seemingly insatiable appetite for new money to implement his neo-socialist agenda? Either way, we're screwed.

Last summer, when the price of oil rocketed nearly to $150 per barrel, presidential candidate Barack Obama scored political points by calling for a windfall-profits tax on the so-called “Big Oil” companies. Obama’s plan was to wallop them with extra taxes for every barrel they sold, so long as prices remained over $80 per barrel. By Inauguration Day, though, the global economic crisis and plummeting oil demand had driven prices to less than $30 per barrel, and with no windfall profits available to tax (and gas prices at the pump no longer an issue), the Obama team quietly dropped the idea. But now, in his proposed budget, Obama has found a new outlet for his desire to punish Big Oil—and, ultimately, the American public—with higher taxes.

Announced last week, the president’s budget aims to raise more than $31 billion from energy producers over the next ten years by assessing new levies, repealing existing tax deductions, and rejiggering accounting rules. Among the new charges is an excise tax on oil and gas production in the Gulf of Mexico, which the administration hopes will raise $5 billion over 10 years. Obama also wants to limit companies’ ability to deduct their oil and gas drilling costs, thereby raising their taxable income. And he would impose a fee on non-producing oil and gas leases in the Gulf of Mexico on top of the rents and fees companies already pay for leases.

This last item supports a dubious claim made by Speaker of the House Nancy Pelosi and others during last summer’s high-gas-price hysteria: that Exxon Mobil and its brethren were limiting supply and boosting prices by refusing to produce oil and natural gas from federal leases that they held. What the conspiracy theorists never mentioned was that companies must pay rents on leases whether they produce or not, and that companies buy leases from the government for the right to investigate whether the sites contain extractable resources. Often, of course, they don’t contain enough extractable oil or gas to make drilling worthwhile, though the government keeps all fees and royalties. There are other instances in which leases are legitimately non-producing. Leaseholders must negotiate an expensive bureaucratic maze to gather the necessary environmental permits to begin exploration and drilling. That can take years. Moreover, environmental organizations like Earthjustice and the Sierra Club routinely take leaseholders to court as a way to sow delay and drive up energy companies’ costs.

Perhaps the surest sign that Obama wants to go after the oil and gas industries is his proposal to make them completely ineligible for the manufacturing-tax deduction. Congressional Democrats have long sought this move, calling it a repeal of a special tax break that Washington supposedly gives the petroleum industry. The reality is just the opposite: the manufacturing-tax deduction is available to virtually every manufacturing industry in the United States, not just oil and gas producers. Denying the deduction to Big Oil won’t snatch away an ill-gotten favor in the name of fairness; it will unfairly penalize an industry denounced in recent years for the sin of making money.

Is burdening a particular industry with extra taxes really the way to make public policy, particularly when the economy is reeling? The result won’t merely be to penalize fat-cat corporate executives earning record profits. These new taxes will drive up the cost of producing energy resources, and those costs will wind up passed along to consumers as higher prices. Ultimately, the effects will be felt—and the taxes paid—by all of us.

The Obama administration is taking other steps, too, independent of the budget, which will end up boosting consumers’ energy costs. Interior secretary Ken Salazar has made clear his intention to limit offshore drilling, for instance, despite strong public support for drilling along the Outer Continental Shelf. Salazar also has nullified recently awarded leases for natural gas drilling on federal land in Utah.

When the economy finally picks up steam again, pulling global demand for oil and gas up with it, we may find ourselves in much the same position we were in over the last several years. Oil prices soared because strong global demand chased limited global production. The extremely tight margin between what was needed and what was available drove prices to levels that ultimately helped usher in the global economic downturn. High energy prices brought on by government policies limiting oil and gas production will act as taxes, every bit as much as those new taxes included in the proposed budget. A far better approach would be to craft policies that encourage domestic production of oil.

“There’s nothing wrong with making money,” Obama wrote in his comments accompanying the budget. “But there is something wrong when we allow the playing field to be tilted so far in the favor of so few.” Indeed there is, and it’s just as wrong when policymakers tilt the playing field so far in order to punish so few. Is it asking too much that the government merely seek a level playing field?

Max Schulz is a senior fellow at the Manhattan Institute.

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