The familiar dog and pony show of calling oil company executives to Washington to testify before a pandering congress begins today:
Congress has big questions for Big Oil
WASHINGTON – Big Oil is once again being called on the carpet. Senior executives of the five largest U.S. oil companies were to appear before a congressional committee Tuesday where they were likely to find frustrated lawmakers in no mood for small talk.
Oh, that sounds serious. I wonder if those lawmakers have some solutions in mind? Let’s see, the last two times this happened – following Hurricane Katrina (oil prices were at $60) and then again in May 2006 (oil prices had risen to $75) – what exactly was accomplished? Well, a lot of fuel was wasted by flying all of these guys to Washington at taxpayer expense. Time was wasted. And oil prices have risen to over $100. Sooner or later congress is going to figure out that prices are rising for reasons other than a Big Oil conspiracy.
“These companies are defending billions of federal subsidies … while reaping over a hundred billion dollars in profits in just the last year alone,” complained Rep. Edward Markey, D-Mass., in previewing the hearing.
The lawmakers were scheduled to hear from top executives of Exxon Mobil Corp., Shell Oil Co., BP America Inc., Chevron Corp. and ConocoPhillips, which together earned about $123 billion last year because of soaring oil and gasoline prices.
Markey, chairman of the Select Committee on Energy Independence and Global Warming, said he wants to know why, with such profits, the oil industry is steadfastly fighting to keep $18 billion in tax breaks, stretched over 10 years.
Leave it to demagogue Markey to characterize a tax deduction as a subsidy. When you pay your taxes, but get deductions for your mortgage interest, for instance, do you consider this a subsidy? You are paying taxes, and get a break equivalent to a small fraction of your tax bill, but that’s a subsidy. It’s the same concept. And contrary to popular belief that this is an “oil industry tax break”, it is actually a tax deduction that was made available to all manufacturers. These manufacturers include industries with much higher profit margins than the oil industry sees.
What Markey and the panderers want to do is to insert language that says something like “Tax deduction for manufacturers – unless you happen to be an oil company.” They wish to single out one industry for punishment – and I think their reasons are clear: This will be popular with a public whose energy IQ is in the single digits.
I don’t see this as all that different from the moves Chavez has made. Rules were put in place. Projects in the oil industry take many years to complete. Projects were begun based on the rules that were in place, and now there is the threat of a rule change that would impact upon project economics. That’s what Chavez did: He changed the rules in the middle of a game that takes years to complete.
What kind of message does it send when we change our energy policy every couple of years? And I don’t say that only with respect to oil companies. Wind and solar companies see credits expire and then they are renewed. The credit for hybrids expires, and then is renewed on a whim. Long-range planning becomes very difficult if you have frequent, unanticipated rule changes. The only constant seems to be that we will subsidize ethanol consistently, as we have been doing now for almost 30 years. That is one tax credit that has never lapsed, and in my opinion will be in place for the next 30 years.
The answer to high fuel cost is easy — all we have to do is to quit using so much of it.
Congressman Markey is clearly presiding over a kangaroo court. The oil company executives are clearly guilty of something. Note that the companies have elected to send mid-level executives to this hearing, not the A-team. Last time around the senators tried to play “gotcha” by setting perjury traps. They asked a couple of the CEOs about specific trades of crude oil cargos during times of shortages.
You can watch the grilling at: House Select Committee on Global Warming and Energy Security today at noon eastern time.
These hearings have a clear purpose. Congress gets to posture in front of the cameras during an election year and collect checks from the execs as they head out of town, ensuring nothing will actually be done.
A sane policy would set royalties on a sliding scale. But then there’d be no need for hearings.
Robert – speaking of Chavez, the Democrat Party tax increases would exempt Citgo, a subsidiary of the state oil company of Venezuela. The increase would apply only to the 4 largest domestic oil and gas companies.
So in the Democrats Orwellian world, US companies are “big oil”, but national oil companies are not.
Note: the tax provision in question had to do with reducing taxes on foreign sourced items (like manufactured parts or crude oil). The tax came about beause an earlier tax provision was rejected by the WTO as an unfair trade practice. The US has the second highest corporate tax rate in the world. Reducing taxes on businesses who can relocate anywhere benefits US citizens. One could build a refinery in Ireland where the corporate tax rate is 12.5% or in the US where it is 35%. If the US gets no refinery, it gets no taxes.
Doggy – collect checks from the execs as they head out of town, ensuring nothing will actually be done.
Checks? Did you mean political contributions? Corporations can’t make political donations to parties or candidates. Corporate PACs are limited to $5,000. If you want a PAC donation from a company, calling someone to capital hill is a lousy way to get $5,000.
The energy quiz you referenced goes a long way to explain the TV news spots of truckers demanding that government “does something” about the price of fuel, and why the presidential candidates have little choice but to pander to them.
I agree with RR, the hearings are regrettable stagecraft.
Our capital markets are flawed, but good (if not perfect) free capital markets are way better than no capital markets.
The real blame for higher oil prices lies in the run of cruddy thug states that control the world’s oil, such as Libya, Saudi Arabia, Iraq, Iran, Russia, Mexico, Venezuela, and Nigeria.
We have no choice but to steer towards energy independence, given the complete lack of integrity that define the world’s oil despots.
Beating up on Big Oil is besides the point.
By the way, oil down below $100. Demand is faltering, supplies are up. I think the worst is behind us, and we can look forward to a long, long run of greater efficiency and alternative fuel production.
By the way, oil down below $100. Demand is faltering, supplies are up. I think the worst is behind us, and we can look forward to a long, long run of greater efficiency and alternative fuel production.
LOL! The worst is behind us untill the next time oil goes by $100/bbl. And I’m betting sooner, rather than later.
Benny said: “The real blame for higher oil prices lies in the run of cruddy thug states that control the world’s oil, such as Libya, Saudi Arabia, Iraq, Iran, Russia, Mexico, Venezuela, and Nigeria.”
The real blame is with the profligate way Americans burn motor fuel. One morning as I walked to work I counted how many SUVs passed me. In 45 minutes I saw 167 commuters driving SUVs, and of that 167, 161 were carrying only the driver — only 6 SUVs carried more than one person.
Do you realize how many tons of glass, metal, rubber, and plastic those people are pushing back and forth between home and office each day? Just look at the energy they are using to transport all that metal, plastic, and glass, and only 173 people.
Have you ever thought how inefficient it is for a 120 lb woman (or 190 lb man) to be driving a 5,000 lb SUV tens of miles to work and back each day? (Heard on NPR this morning that the average resident of Atlanta commutes 32 miles per day.) 120 lbs is only a bit more than 2% of the total load energy is being burnt to push. (Most of the energy that woman or man buys does nothing more than push 5,000 lbs of metal, glass, and rubber back and forth each day.)
The “cruddy, thug oil states” have nothing to do with our excessive demand and wasteful ways. If we ever got our demand under control, the price would start falling.
In fact, we could put a huge scare into those “cruddy, thug oil states” if we could just get demand under control. They are only taking advantage of an opportunity we have handed them.
Optimist and Anon:
I agree Americans guzzle gasoline, although they are only responding to previous price signals. Gasoline was cheap; people used a lot of it. You can’t blame consumers for reacting to price signals.
I advocate energy independence, and that is largely acheived through energy efficiency. We need to tax gasoline consumption, go to PHEVs, and develop shale oil, and biomass-to-gasoline.
All that being said, there is a chance oil prices will collapse again, as they did after the 1979-80 price spike.
And cruddy thug states are causing real harm to much of the Third World, where people just scrape by. Higher energy prices are a real burden in Thailand, a country I am familiar with.
I’m watching the hearing during lunch. The oil company executives are doing very well.
Congressional jerk of the day goes to Jay Inslee D-WA and John Larso D-CT for grandstanding and trying to play gotcha.
The killer argument is this:
Congress offered us tax and royalty relief at a time when oil prices were at historic lows. We took on substantial risk in making those investments which have now paid off. Congress now wants to change the rules in the middle of the game when the outcome is clear. Now you ask us to take a similar gamble on alternative energy. If congress can change the rules at will, why should we take on this new risk?
“I advocate energy independence, and that is largely achieved through energy efficiency.”
Efficiency yes, but there also has to be a change in lifestyle.
Americans don’t have a God-given right to commute 30 or miles each day in three-ton SUVs that get no more than 12-15 mpg. (Especially when 95% of the time they are carrying only one person.)
I’ve lived overseas — including in Third World countries — and the vast majority of Americans don’t realize how good we have it, nor how wasteful we are.
We could use far less energy and still maintain our lifestyle. I’ve spent time in the northern European countries. Most Americans I know refuse to believe this, but the standard of living in northern Europe is actually higher than ours, while they use only about half the energy per capita. (Look at Denmark — the world’s happiest country — they use less than half the energy we use per capita.)
* U.S. — 340 million Btu/person/yr
* Germany — 176 million Btu/person/yr
* the Netherlands — 258 million/Btu/person/yr
* Denmark — 153 million Btu/person/yr
(2005 data)
This just in – Hugo Chavez was unable to attend the hearing today, so he has released his testimony on behalf of Citgo through Congressman John Boehner’s office.
Hugo Chavez testifies before US House Select Committee
It is good that Chavez has at least some allies in the U.S.
I don’t see any reason for the advantageous tax treatment, which is without a doubt a form of subsidy, to be extended to oil and gas companies. The law was designed to spur investment in the manufacturing sector and stem the loss of jobs and social displacement caused by trade. It was not designed to inflate the profits of companies, like the oil and gas sector, who have plenty of incentive to invest already. The only reason they got this tax treatment in the first place was due to lobbying a Republican controlled Congress and White House.
I too watched the hearings, off and on, this afternoon. Heard one Congressman say when he last talked with his constituents, they were more vocal about food prices and the corn/ethanol issue than they were about gasoline pump prices.
I also heard a Congresswoman get the oil companies on the record as saying it was 1:1, for every dollar taxed, there was one less dollar available for new exploration investment. I was not able to see her name.
And the oil company representatives tried their best to put some realism into the heads of those saying all they (th eoil cos.) needed to do was invest more in “alternative energy”.
I don’t see any reason for the advantageous tax treatment, which is without a doubt a form of subsidy
Anon – you have fallen into the Dems rhetorical trap. Where taxes are investments and tax relief is spending.
Take a look at the chart on this page: tax rates around the world . Now imagine you are an oil company CEO with operations in many of these countries. You are in charge of figuring out where to reinvest your earnings. Just based on corporate taxes, how does the US rank among other places in the world? How is the regulatory environment? Is it easy to get permits to construct things? Is there finality in permitting or can NGOs take you to court in endless delaying tactics?
Reducing tax rates to 32.5% on international goods puts the US on par with a country like France. If I spend 100% of my capital in France, the US gets NO tax revenue from those investments. Suppose I chose to invest in the US, then 32.5% taxes is better than collecting NO taxes, but not as good as 39%.
In the Dems world, the company who invested in the US got a 6.5% tax subsidy and isn’t paying their fair share. If that company does really well with its investments, rather than celebrating the success (congress got 32.5% of a lot instead of 39% of nothing), the Dems demonize the company.
This was the logic on display at the hearing today.
My fellow Houstonian gets it about right. Lou Minatti
Most Americans forget that congress has tried this tax and subsidize alternatives scheme before. Are any of you old enough to remember the US Synfuels Corporation? How about the massive investments in shale oil? The ethanol subsidy started in 1978 (that is a real subsidy) and continues today. Basically congress tried to fix the oil problem in the 1970s and really botched the job. Why does anyone believe that congress could do a better job today?
“Anon – you have fallen into the Dems rhetorical trap. Where taxes are investments and tax relief is spending. “
I said nothing of the sort.
“Take a look at the chart on this page: tax rates around the world . Now imagine you are an oil company CEO with operations in many of these countries. You are in charge of figuring out where to reinvest your earnings. Just based on corporate taxes, how does the US rank among other places in the world? How is the regulatory environment? Is it easy to get permits to construct things? Is there finality in permitting or can NGOs take you to court in endless delaying tactics?”
Your argument is pathetic. What drives exploration and production spending is bookable reserves in the ground. France could lower its corporate income tax to zero and oil companies still wouldn’t drill and oil companies are desperate to operate in Iraq despite the fact that the government can’t guarantee stability or security. The US has a great regulatory environment. Unlike many other places where oil companies can invest, oil companies can: book reserves, not have their contracts arbitrarily re-written, not have their assets seized, not have enormous bogus fines levied against them, not have to operate in areas of lawlessness, and have easy access to the largest market of services providers.
“In the Dems world, the company who invested in the US got a 6.5% tax subsidy and isn’t paying their fair share.”
Of course it is a subsidy. It’s a tax benefit specifically granted to a select classification of companies. My mother’s consulting business isn’t allowed to accelerate the depreciation of her equipment. Nor is my friends restaurant. Why should oil companies get special tax benefits when there is no extraordinary argument that these tax benefits work to enhance general welfare in a way that exceeds the foregone revenue?
“If that company does really well with its investments, rather than celebrating the success (congress got 32.5% of a lot instead of 39% of nothing), the Dems demonize the company.”
I don’t even know if you have a statement here, other than hyperbole. I doubt that oil companies investment is highly elastic. If it were, we wouldn’t have deepwater rigs being contracted out to drill in the United States Gulf of Mexico at over half a million per day (up from less than a 100,000 in the late 90’s). No doubt the oil companies will grumble about their subsidy being revoked. But at the end of the day they won’t change their plans. There is just too much money to be made with commodities prices this high and it would be irrational to write-off a profitable project merely because it got less profitable.
Funny how it’s a subsidy when ethanol tax is reduced 51 cents per gallon but not a subsidy when oil company taxes are reduced.
The US has a great regulatory environment. Unlike many other places where oil companies can invest, oil companies can: book reserves, not have their contracts arbitrarily re-written, not have their assets seized, not have enormous bogus fines levied against them, not have to operate in areas of lawlessness, and have easy access to the largest market of services providers.
I’m hard pressed to see the difference between Hugo Chavez and the Democrat Party on this point. The Dems now want to rewrite the tax laws and royalty relief when they know the outcome of the investments.
The reason that the tax rules are different for oil and gas companies is because of the size scale and risk in the investments. Your mother’s consulting business doesn’t put billions at risk with a chance of zero return. I would gladly trade your mother’s effective tax rate with ours, sight unseen. With the exception of liqour, tobacco, and gambling, NO industry pays a higher effective US tax rate than the oil and gas business.
When I compared the US to France I was thinking of downstream investments not E&P. Projects are much easier to permit and build in Europe than they are in the US. There is a refinery expansion project that I have worked with that filed for an air permit in 2004 and is just now getting approval after having to negotiate with the State AG. A similar project in Germany got its permits in 6 months.
Changing the tax rate does change the amount of investment, for one if the top 5 US companies are singled out for $18 billion in more taxes, that is $18 billion less they have to spend on energy projects. Our investments are evaluated on an after-tax basis. Increasing the government take only makes US projects worse relative to the rest of the world.
Companies devote cash resources where it will generate the highest return. Given that companies like Exxon have been investing more in stock buybacks and dividends rather than exploration and production it is clear that they don’t have any projects that earn reasonable returns. To blame their lack of E&P spending on taxes is absurd given the recent commodity price increases. The true limitation is that the supermajors have not been focused on investing in technology, manpower, and leasehold. They have instead focused on schmoozing with other countries in order to gain access to their reserves. How is it that Chesapeake Energy is outspending cash flow while Exxon can’t even spend half of theirs? Why is it that none of the supermajors are leaders in unconventional gas? Why is it that the supermajors don’t have a leading position in the oil sands?
“The reason that the tax rules are different for oil and gas companies is because of the size scale and risk in the investments.”
The risk in the investments? There is an international cartel working to ensure their industries profitability. On top of the geological reality that unless companies invest production rates are guaranteed to fall (thus ensuring only short periods of unprofitability despite it being billed as a “boom and bust” industry). Do automakers or steel companies have that? The barriers to entry are also enormous. One of the most prominent being the capital intensity which you cite. The fact of the matter is that the manufacturing tax credit was designed to lessen the blow of globalization on manufacturing workers. The social and economic reasons which justify this for automakers and appliance manufacturers aren’t present in the oil and gas industry.
“I’m hard pressed to see the difference between Hugo Chavez and the Democrat Party on this point. The Dems now want to rewrite the tax laws and royalty relief when they know the outcome of the investments.”
Do you think anyone can take you seriously when you spew this? I can’t remember a single President who didn’t preside over Congress changing tax laws. Taxation levels change all the time.
There was an element of coercion involved in how the government got companies to agree to re-write their contracts. However, the contracts were a product of cronyism/lobbying or incompetence in the first place. Without all the the information I’m not one to rush to judgment.
Anonymous said,
What drives exploration and production spending is bookable reserves in the ground.
Actually, what drives exploration spending is the predicted return on investment.
Exploration has to compete for budget money with every other item on the proposed budget.
If exploration does not offer a greater return the money will be spent elsewhere.
TJIT
Regarding the US market anonymous said
not have their contracts arbitrarily re-written, not have their assets seized, not have enormous bogus fines levied against them
Actually, with these hearings, congress is in the process of arbitrarily re writing the contracts the oil companies where operating under.
As such they are acting like a typical corrupt govenment kleptocracy.
TJIT
Anonymous said,
we wouldn’t have deepwater rigs being contracted out to drill in the United States Gulf of Mexico at over half a million per day (up from less than a 100,000 in the late 90’s).
And promptly misses a very important point.
In spite of the run up in commodity prices project economics have not changed that much from when oil was cheaper.
The expenses for every input into a project has skyrocketed along with the price of oil.
The price of inputs has often overshot the price of oil and made previously economically feasible projects uneconomic.
TJIT
Anonymous and other people keep saying
There is an international cartel working to ensure their industries profitability.
The folks who say this really need to look at a plot of the price of oil from about 1986 on.
That plot pretty much kills the idea that there is a cartel keeping the price of oil higher then supply and demand would justify.
You can’t reconcile a cartel controlling prices with the decades long pricing of oil at under $30 per barrel.
TJIT
Could the folks who post as anonymous please leave some kind of handle at the bottom of their post.
That would make it easier to keep track of who is saying what.
Thanks,
TJIT