Thursday, April 2, 2009

What Happens When Taxes Are Raised On Industry?

In this case the industry is the oil and gas industry. The Obama Administration, and unfortunately many in Congress and the American people, have been led to believe that the oil and gas industry is an untapped gold mine. They seem to think they can reap Billions of dollars of revenue from the industry by simply raising taxes. This kind of thinking has dire unintended consequences which need to be addressed.

One obvious consequence is these taxes, these added costs to the industry, will be passed on to consumers, meaning higher prices of oil and gas for you and I. So the tax is essentially an added tax to us taxpayers. Is this really good for our economy?

Also, by increasing taxes on the oil and gas industry, and further hobbling them by limiting areas where they can explore for oil and gas, the consequence is a shortage of oil and gas, leading to higher prices and an even larger dependence on foreign sources of oil and gas. How is this good for the U.S. economy? How will it create jobs? The oil and gas industry should be encouraged, not discouraged.

Few people outside of the oil and gas industry understand the enormous cost and risk involved in exploring for and producing oil and gas. The industry is unique, I think, in that regard. Our government, by failing to understand the basic economic principle of risk vs. reward, does immeasurable harm to the industry, the economy, and American people.

The fact is, the risk (and cost) of exploration and production is so great that if the "reward" is removed, companies and investors will not take the necessary risk. Who suffers, who pays when this happens? Everyone, consumers, taxpayers, and ultimately the government itself. The following article in the Fort Worth (Texas) Star Telegram summarized the situation.

Obama's proposed tax increase would stifle drilling, energy executive says
By JACK Z. (source)

President Barack Obama’s proposed tax increases of more than $80 billion on the U.S. oil and gas industry over 10 years would crimp drilling activity and lead to higher energy prices for consumers, the CEO of the largest operator in the Barnett Shale said Tuesday.

Larry Nichols, head of Devon Energy and chairman of the American Petroleum Institute, said the higher taxes would reduce oil and gas companies’ cash flow, resulting in less money to drill wells. That would tighten supplies and raise prices, he said at a Fort Worth Chamber of Commerce luncheon.

"The strange thing is, they don’t realize the consequences," Nichols said, referring to Obama administration officials pushing for the increased taxes, which the petroleum institute estimates would cost the industry $84.4 billion.

Profits as 'gold bars’
In Washington, Nichols said, energy companies’ profits are considered "gold bars in the back room that we don’t know what to do with," rather than as a vital source of cash for drilling wells and creating jobs.

Supporters of the proposed tax increases counter, however, that they are equivalent to only a small part of energy companies’ revenue and profit. They stress that a single company, Irving-based Exxon Mobil, made a record after-tax profit of about $45 billion last year, an amount totaling more than half the proposed tax increases over a decade.
But energy companies’ fortunes have plunged this year as a result of a huge drop in oil and gas prices.

As a result, Nichols said, there has been an exceptionally rapid decline in drilling activity in recent months. Natural gas drilling in the Barnett Shale, while still substantial, has diminished to less than half its peak level. That’s setting the stage for a decline in production and a doubling of gas prices, Nichols said.

Offshore drilling
Nichols lamented the prohibition of offshore drilling off most of the U.S. coast, which he said have "really awesome oil and gas reserves." Soaring energy consumption in fast-growing developing nations such as China and India means that the world is "going to need more oil, and we’re doing to need more natural gas," he said.

More immediately, however, the industry is absorbed in staving off the proposed tax increases, Nichols said, putting the industry’s chances at "50-50."

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