A dumb idea: Penalizing profitable U.S. Firms won’t reduce foreign oil dependence

- Mark J. Perry FLINT, Mi. — With joblessness and serious economic problems rising, the last thing we need is public policy that makes them rise even faster. Yet, there is a danger this could happen if President-elect Obama’s proposed punitive taxes on the oil industry are enacted and lead to less energy development.

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New taxes on oil companies would drastically cut capital that otherwise could be invested in emerging energy technologies and the expansion of refinery capacity. Taxes would negatively impact domestic energy production, reducing American and revenues. And they would tilt the playing field against U.S. companies that compete globally. As demand for oil continues to rise, investor-owned oil companies are searching for new resources throughout the world, from sub-Sahara Africa to South America and the republics of the former Soviet Union. But major oil companies are increasingly being shut out of the high-stakes chase for oil. Today national oil companies of foreign governments like those in Iran, China, Venezuela and Russia hold 80 percent of the world’s oil reserves, whereas investor-owned companies control only six percent of the reserves. This is making access to oil resources ever more difficult for the major oil companies, principally those headquartered in the United States. Shut off from all but a small fraction of the world’s oil and gas resources, investor-owned oil companies are investing billions of dollars in high-risk ventures in the United States and abroad. Oil companies must drill for oil and natural gas in the ultra-deep waters of the Gulf of Mexico — and, the Atlantic and Pacific — unless Congress re-imposes drilling restrictions. They must develop unconventional resources like oil sands and shale oil if they have any hope of adding a substantial amount of new production to their inventories. Or they can gamble that political conditions in war-torn countries and Persian Gulf sheikhdoms will improve. Faced with such challenges, U.S. oil companies are investing huge sums — more than $1.2 trillion over the last decade or so — in a range of long-term energy initiatives. A sizable amount has gone to emerging energy technologies — everything from oil shale to solar and wind energy — to meet future energy demand with a diverse mix of resources. Yet House Speaker Nancy Pelosi wants the new Congress to impose billions of dollars in additional taxes on oil and natural gas companies. Others are calling for a windfall oil-profits tax. Never mind that the top 27 U.S. oil companies have seen their annual taxes rise to more than $100 billion — an 80 percent increase from 2004 to 2006. We cannot afford to repeat the mistakes of the 1970s — discriminatory taxes, price controls, and picking winners and losers among fuels — none of which have benefited consumers. We face far tougher energy competition and increased dependence on imported oil today as a result of those mistakes. It’s only fair to point out that oil companies aren’t owned by a small group of corporate insiders. Only 1.5 percent of industry shares are owned by management. Most shares are owned by tens of millions of Americans, many of them middle-class people with IRAs, pension funds, mutual funds and shares in oil companies. If you have a 401(k) or personal retirement account — and 45-million U.S. households do — there’s a good chance you are investing in energy stocks. What our country needs is an energy policy that learns from our past mistakes and attempts to ensure a secure energy future for all of us. We need to increase and diversify our oil and gas supplies, both within this country and overseas. We need a greater commitment to increased conservation and energy efficiency. And we need all the energy that is economically viable, drawing upon the full range of sources, including alternative energies. To do any less is to risk losing ground in the fierce global competition for economic and energy security. Mark J. Perry is a professor of economics at the Flint campus of the University of Michigan. Readers may write him at 4173 White Building, UM-Flint, Flint MI 48502 or e-mail him mjperry@umich.edu.

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