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API: Proposed taxes short-sighted, unnecessary

Rather than proposing $44 billion in new taxes on its oil and natural gas industry, the US government should open the door to a common-sense energy policy, said John Felmy, chief economist with the American Petroleum Institute.

Energy policy can explain much of the difference between recent economic growth in Canada and Brazil vs. that in the US, Felmy said Sept. 22 in a conference call with reporters to discuss the economic impacts of US President Barack Obama’s budget plan, which includes raising taxes on oil and gas producers.

Canada and Brazil have been more successful in rebuilding their economies following the 2008 global economic downturn because of massive investment in oil and gas development. Each country’s unemployment rate falls below 7%.

In contrast, access restrictions and tax rules in the US are slowing the benefits that those countries enjoy, such as job creation, a rejuvenated economy, revenue generation, and energy security through reduced imports, Felmy said. US unemployment is currently 9.1%.

Felmy noted that in some parts of the US, oil and gas development is strong, as Texas, North Dakota, and Pennsylvania have been adding oil and gas jobs and increasing oil and gas revenue to the government.

“As a result, North Dakota, for example, has the lowest unemployment in the nation, and its state government is running a surplus. Nationally, the oil and natural gas industry added more than 9,000 jobs to the economy this summer, according to the US Bureau of Labor Statistics, at a time when new net job creation fell to zero,” Felmy said.

API asserts that by adopting a common-sense energy policy with open access and pre-moratorium permitting rates for drilling, the US economy would benefit. Rich reserves of oil and natural gas remain to be produced, and the industry is willing to make the investments to produce them. Unnecessary taxes, however, discourage new projects.

“More taxes on an industry that already supplies more than $86 million a day to the federal government and pays income tax at an effective rate of 41% compared with 26% for the rest of the S&P Industrials isn’t remotely fair,” Felmy said.

The boost in tax revenue the administration hopes to achieve by increasing taxes would only help for 5 years, he added. The administration’s proposed taxes would discourage US investment in new projects, and eventually there would be less industry-related income to tax and less energy produced on which royalties could be paid.

Also speaking on the call was Kathleen Sgamma, director of government and public affairs with the Western Energy Alliance.

Sgamma said Obama’s newly proposed oil and gas taxes could reduce by 35% the capital available for investment to find and produce energy in the US.

“Imposing tax increases hits western producers especially hard, since they already must spend more capital dealing with extra red tape on federal lands. Tax increases will take more capital away from finding and producing energy, and will likely render many supply fields in the West non-economic, particularly for natural gas,” Sgamma said.

The repeal of percentage depletion and intangible drilling costs (IDCs) will particularly affect small, independent producers in the West, she said. Despite the characterization of these deductions as subsidies or loopholes, Sgamma noted, the ability to deduct the cost of doing business is in line with every other industry in the US.

“IDCs, which have been part of the tax code since 1913, are all costs involved in drilling a well, including drilling contractors, ground-clearing work, hauling, and supplies, and are typically 65%-80% of the cost of a well. The mischaracterization of IDCs as a subsidy is disingenuous, since IDCs involve deductions of business expenses, not subsidies. Every other business and individual is able to deduct business expenses from their tax liability,” Sgamma said.


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