The U.S. petroleum industry is preparing for a campaign to head off proposed energy taxes in President Clinton's economic recovery package.
In the course of 5 years, the package is designed to raise $79.3 billion from a BTU tax on energy, $126 billion from higher individual income taxes, and $30.6 billion by boosting the corporate tax rate to 36% from 34%. Other tax measures would bring total revenues to $328.3 billion.
A number of energy and business groups quickly attacked the BTU tax proposal, saying it would place a heavier burden on oil than on other fuels. Among those in the energy sector who spoke out, only ARCO and Southern California Edison voiced support for the president's plan.
The debate over energy taxes will grow hotter when Clinton's proposals go to Congress, which will not hesitate to modify the package as lawmakers seek to protect their constituents from undue hardship.
Clinton's economic stimulus package calls for a short term $30 billion program to boost economic recovery by creating 500,000 jobs, a $160 billion long term investment over 4 years for sustained economic growth, and a $703 billion reduction in the federal deficit during 5 years.
WHAT'S PROPOSED
The Clinton administration proposed a 25.7cts/MMBTU energy tax with a "national security" tax of an added 34.2cts/MMBTU on crude oil, indexed for inflation.
The tax would amount to $5.57/short ton on coal, $3.47/bbl on oil, and 26cts/Mcf on natural gas, all based on average BTU content. Some analyses showed slightly different levies.
The tax would be phased in during 3 years, with one third of the tax effective July 1, 1994, two thirds July 1, 1995, and all of it July 1, 1996.
The tax rate would be 60cts/MMBTU for oil and 26cts/MMBTU for all other forms of energy.
The administration said energy taxes would garner $1.5 billion in 1994, $8.9 billion in 1995, $16.4 billion in 1996, and $22.3 billion/year when fully phased in.
The tax base would be the fuel's BTU content in the case of coal, oil, natural gas, and nuclear fuel. Electricity generated by hydropower would be taxed on the average fossil fuel BTU input required to generate equivalent electricity.
No tax would be levied on exported fossil fuels, those used for nonfuel purposes such as chemical feedstocks, and solar, geothermal, biomass, wind, and other energy forms. There would be a special exemption for home heating oil, taxing it at the 26cts/BTU nonoil rate for 1 year.
Tax collection points are to be at the minemouth for coal, at the refinery for crude oil, the import point for refined products, the pipeline for gas, and the utility for hydro and nuclear generated electricity.
The administration said the tax would increase the energy efficiency of the economy, reduce oil imports, improve the environment through reduced growth of fossil fuel consumption, and help the economy by lowering the federal budget deficit.
It said the broad base of the tax would keep the tax rate low and spread it evenly across regions, industries, and consumer segments.
It estimated the tax would hike gasoline prices about 5% or 7.5cts/gal, residential gas prices 4% or 26.5cts/Mcf, residential electricity prices 3% or $2.24/month, and home heating oil 8% or 8.3cts/gal.
The administration reckons energy expenditures of about $2,600/year for a family of four with income of $40,000/year will increase by about $120/year. Expenditures will rise by about $320 when the energy component of all goods and services is considered.
It said consumption will fall less than prices rise, representing modest conservation and fuel switching without shock to the real economy.
The administration said the tax will induce reductions in carbon dioxide emissions, helping the U.S. meet the goal of returning greenhouse gas emissions to 1990 levels by 2000.
Clinton cited his reasons for choosing a BTU tax over other taxes on fuels.
"Unlike a carbon tax, it's not too hard on the coal states, unlike a gasoline tax it's not too tough on people who drive a long way to work, and unlike an ad valorem tax it doesn't increase when the price of an energy source goes up."
The administration also proposed to extend a 2.5cts/gal federal gasoline tax that was scheduled to expire in 1995.
NATWEST ANALYSIS
An early study by Adam E. Sieminski and Fergus MacLeod of NatWest Washington Analysis voiced confusion about the effects of the proposed tax.
"Strangely," NatWest Washington said, "our projection for revenues when the tax is fully implemented is $32 billion/year rather than the $22 billion the White house is suggesting. We cannot explain this discrepancy without more information."
The study found the effect energy demand would be mild because:
- Phased in during 1994-96, the impact would be offset by the positive effect of economic growth on energy demand.
- Price increases for consumers would be relatively small-an estimated 8cts/gal of gasoline, for example. The tax is likely to slow, rather than prevent energy demand growth.
"The incentive for greater use of natural gas is smaller than Clinton's campaign talk suggested," Sieminski and MacLeod said.
"Although the BTU tax on oil is more than twice that proposed for natural gas or coal, the lower price of natural gas means that the percentage increase is little different from that for oil."
Congress may propose a higher gasoline tax in place of a cumbersome BTU tax, especially because this would encourage natural gas use, Sieminski and MacLeod said. They reckon a 22cts/gal gasoline tax increase would meet the administration's $22 billion/year revenue target.
Members of the Organization of Petroleum Exporting Countries may respond to Clinton's tax proposals "in a hostile way," especially if they encourage other members of the Organisation for Economic Cooperation and Development to raise energy taxes.
"The overall balance between a small negative impact on demand and a possible OPEC response suggests that these proposals are broadly neutral for oil prices and the industry, Sieminski and MacLeod said.
PROBLEMS AHEAD
Among critics of the Clinton plan, the Cleveland law firm of Jones, Day, Reavis & Pogue noted that a major difficulty with a BTU tax is the absence of a mechanism for its collection. It said the administration chose a BTU tax because consumers would see it as evenhanded, but it recognizes that the practical result may be different.
"For example," Jones Day said, "by taxing oil at the refinery level, the administration recognizes that the tax will be treated simply as another overall cost burden by refineries and spread among various refined products as market forces permit. The administration accepts this result, however, because the outcome will be controlled by marketplace economics rather than by regulation."
It said the administration also recognizes the tax will not guarantee reduced carbon dioxide emissions.
"For example, if refiners recover most of the tax from lighter ends, the tax will not result in as significant an advantage to gas in its effort to back out No. 6 fuel oil as anticipated.
"The White House appears nonetheless to believe that the tax will help make progress in these areas."
EFFECT ON REFINERS, PRODUCERS
Urvan Sternfels, National Petroleum Refiners Association president, said his group is "extremely disappointed" that the president chose a BTU tax to begin with and then chose to more than double the tax imposed on oil.
"It will be disastrous to all energy intensive industries," he said. "We suspect refiners will not be able to press through this tax in its entirety."
Sternfels said the tax structure will result in a flood of imported gasoline because it will be 0.8cts/gal cheaper to import gasoline than to refine crude into gasoline in the U.S., not including refining costs.
NPRA said ethanol and methanol would be taxed under the Clinton plan but at the lower nonpetroleum rate.
Philip Verleger Jr., Washington oil analyst, termed the BTU tax an ill advised energy policy. Instead, he advocated a value added tax (VAT).
Verleger said, "Domestic refiners will be seriously harmed by the tax. Losses imposed on this sector could exceed $1 billion/year. Refiners stand to lose as much as $500 million/year from their inability to pass the full amount of the tax through to product prices, especially on residual fuel oil.
"Increased refining costs incurred because the price of energy purchased by refiners has increased may also add as much as $500 million to refiner losses because market conditions probably will preclude recovery of these costs.
"The proposed tax will require refiners and marketers to pay taxes on their inventories, or 'floor stocks' as they are referred to by the tax writers. The cost of financing the tax on stocks will be about $300 million/year.
"Domestic refiners may also be adversely affected by a perverse incentive structure in the tax that has the effect of subsidizing imports. While undoubtedly unintentional, the BTU tax will impose tariffs of $3.60/bbl on crude oil imports, $3.15/bbl on gasoline, and $3.50/bbl on distillate fuel oil.
"The result is to tax imports of raw materials more heavily than imports of finished goods. The implications of this bias on the competitiveness of the refining industry in world markets seems obvious."
In addition, Verleger said, the tax on natural gas could increase the cost of operations for oil producers in the San Joaquin Valley of California, which produced 650,000 b/d of oil in 1992, or 7.3% of U.S. production.
Most production in the region is achieved by steam injection with 99% of the steam produced by burning natural gas.
Verleger said, "The BTU tax will increase costs of production in the area by roughly 50cts/bbl. This increase in costs will come at a time when many producers in the area are struggling to make ends meet because more and more of the heavy San Joaquin oil can no longer be refined in California. At the end of December, producers of two San Joaquin crudes, Midway Sunset and Kern River, received less than $12/bbl.
"The tax will impose an increasingly heavy burden. No one should be surprised if California production declines by 10-20% as a result of the tax. Such a decline in production would more than offset the reduction in oil consumption.
"The BTU tax would have a similar impact on production from Alaska. By an accident of geology, large volumes of natural gas are produced in association with Alaskan crude.
"This gas is removed from the crude and reinjected into the field to increase the total amount of oil recovered. Some of the gas is used to generate electricity to operate facilities that are used to strip gas from the crude and pumps used to reinject the gas into the field.
"The gas used for this purpose would be taxed under the administration's proposal.
"By 1997 the liabilities could amount to as much as $100 million/year, a nontrivial sum. The tax could result in lower levels of Alaskan production in the long term. Put simply, the BTU tax may well increase dependence on oil imports."
DOE'S ROLE
The short term stimulus and economic investment proposals call for the Department of Energy to spend more on weatherization grants and programs for low income households, federal energy management programs, conservation and renewable energy, and natural gas and alternative fuel vehicles research and development.
Specifically, the short term package calls for spending $66.2 million more in low income and school and hospital weatherization grants, $13 million more for programs to reduce energy use in federal buildings, $94 million for cooperative research programs with industry, and $28 million for the purchase of 5,000 alternative fuel vehicles. The purchase is required by the 1992 Energy Policy Act.
Long term, DOE will spend $60 million year for low income weatherization grants in 1994 and $100 million/year in later years, $262 million more during 4 years to reduce the federal government's energy costs, and $3050 million/year for research partnerships.
It also will spend nearly $2 billion during 5 years for conservation and renewable energy R&D, $277 million in 1994-98 for natural gas R&D, and about $30 million/year for alternative fuel vehicles.
Energy Sec. Hazel O'Leary said natural gas R&D is part of the new administration's emphasis on that fuel.
DOE estimated improvements in efficiency and production could yield as much as 4 tcf of additional gas by 2010, backing out 2 million b/d of imported oil and providing 36,000 U.S. jobs.
DOE said the gas R&D emphasis will be on end use technologies, including electrical power generation, vehicle fuel, and industrial processes.
INDUSTRY GROUPS' VIEWS
Charles DiBona, American Petroleum Institute president, called the proposed energy tax "a thinly disguised gasoline tax," one that would seriously harm economic recovery and be a job killer on a mammoth scale.
He said the administration's estimate that the energy tax would raise $22 billion/year is far too low.
"Americans currently use about 6.2 billion bbl of oil annually, so a new tax of $3.47/bbl would produce $21.5 billion in revenue just from oil-almost equal to the administration's estimate for all the fuels it would be taxing."
DiBona said the tax would raise the cost of gasoline and jet fuel by 10-15cts/gal, "because we doubt the additional costs can be passed through uniformly on all products.
"Our calculations indicate that a tax of this size over 5 years would reduce the nation's gross domestic product by some $1.78 trillion and cost Americans some 600,000 jobs."
He said the tax would raise $33 billion/year, or about $475/year/family. The difference evidently stems from the fact that $22 billion is the net revenue the government would get, subtracting the loss of income from persons thrown out of work by the energy tax.
"A BTU tax like the administration is proposing will do serious damage to our fragile economic recovery. It will disproportionately impact some regions of the country and some energy intensive industries.
"In general, it will penalize suburban and rural consumers at the expense of those who live in cities. Thus it clearly fails the administration's own tests because it is neither fair nor equitable."
DiBona said the government should focus instead on cuts in government spending and, only if necessary, enact a European style VAT, "which would be vastly less damaging to the economy and to individual consumers than a BTU based energy tax."
Thomas Coffman, president of the Texas Independent Producers and Royalty Owners Association, complained in a letter to President Clinton, "This proposed burden comes at a time when the domestic petroleum industry is struggling to climb out of its recession that began in 1986.
"There is still considerable price correction to go before the industry will be able to recover replacement costs for oil and natural gas reserves. Collection responsibility for a new BTU tax that approaches 15% of wellhead value, and in some instances over 25%, surely will dampen prospects for further improvement."
Coffman said although the tax on natural gas is less than that for oil, "the natural gas producer is far more vulnerable (because) the tax is perilously close to the wellhead. Under current industry conditions, it is doubtful the tax could be passed on to the consumer."
He questioned whether independent power producers have the contractual right to allow the tax to be passed through, whether gas processing plant operators would be taxed twice on BTU value (at the wellhead and at the plant), and asked if gas imports from Canada will be taxed or exempted.
Nicholas Bush, Natural Gas Supply Association president, said the tax on natural gas should be levied at the point of consumption and collected in utility companies' bills to consumers.
Bush said, "To do otherwise acts as a disincentive to gas production."
MOBIL "NO," ARCO "YES"
Mobil Corp. and ARCO voiced sharply differing views on Clinton's tax plan.
Allen Murray, Mobil chairman and chief executive officer, said, "Mobil does not support the enactment of energy taxes of any type since they are narrowly based and will adversely affect the economy and America's competitiveness worldwide.
"Moreover, the particular tax formula proposed by President Clinton would discriminate against one form of energy-oil-vs. others and therefore against industries and individuals more dependent on oil products for their fuel and transportation needs."
He said the government should cut spending and more revenue, if needed, should be raised through a broad based consumption tax such as a VAT.
"This type of tax encourages savings and investment and would not have any significant adverse impact on the competitiveness of U.S. businesses in global markets," Murray said.
Lodwrick Cook, ARCO chairman and CEO, said his company supports the proposed 2 percentage point corporate tax increase and a BTU tax on energy.
"These tax increases will be costly to ARCO and to consumers. Nevertheless, by spreading the cost throughout the economy as the president proposes, we believe no single sector of the economy or region of the country will be unfairly burdened."
However, he said, "We urge that every effort be made to streamline the energy tax plan to avoid clutter, confusion, and an expensive bureaucracy to administer it."
Cook urged the government to reduce federal spending even more.
OIL IMPORT FEE FAVORED
The Domestic Petroleum Council (DPC), a group of 22 medium size and large independents, complained the broad based energy tax would do little to reduce U.S. oil imports or encourage natural gas use.
Robert Keiser, DPC president and president of Oryx Energy Co., Dallas, said, "This tax would help reduce the federal deficit to some extent...and it may encourage some energy conservation, but it will not produce the benefits to the nation that would result from an oil import fee."
He said such a fee would help arrest the drop in U.S. oil production, reducing imports and the exposure to tanker spills while creating jobs, and encouraging conservation.
The Independent Petroleum Association of America said the tax package would impose a burden on U.S. oil and gas producers, especially those with marginal wells, and offer nothing to mitigate the harm.
IPAA Chairman Gene Ames said, "The administration's plan to collect natural gas taxes at the wellhead could have a devastating impact on producers. It will directly hit the bottom line and impose a huge administrative cost on the producer.
"The president has said there can be no recovery without jobs, and we agree. Our industry has lost more jobs in the past 10 years than any other American industry, nearly 500,000. That's as many jobs as the president hopes to gain in this stimulus package.
"Without some kind of investment incentive measure, the same kind of measures offered to similar businesses in this package, producers will be unable to compete for capital needed for drilling."
IPAA advocates an oil import fee.
GAS INDUSTRY WARY
Mike Baly, American Gas Association president, said the tax plan would be a setback for middle class families in cold weather states and harm many U.S. industries seeking to sell goods overseas.
Baly said a national consumption tax might be a better alternative.
"We are heartened that the president is taking steps in this plan, through an even greater tax on oil, to advance his environmental, energy security, and energy efficiency goals. However, any across the board tax on the heat content of various energy sources is a weak link in his package.
"The problem with any across the board energy tax is that it could cost more U.S. jobs in competitive industries that are energy intensive, such as iron and steel making, refining, and auto manufacturing. It also hits lower and middle income families the hardest, and it's regionally inequitable.
The Interstate Natural Gas Association of America said, "Significant federal spending cuts must be the key components of any deficit reduction package. While increased taxes also may be necessary, they must be consistent with the nation's overall environmental objectives and other goals.
"Ingaa's concern is that by proposing a BTU tax, the administration has chosen to focus mainly on how many dollars can be raised, rather than on what effect the tax will have on the environment and the nation's economic competitiveness."
John Bryson, chairman and CEO of Southern California Edison, called the proposal fair.
"Although nobody likes to see taxes go up, we should do our part. The proposed energy tax appears to be a sound, evenhanded approach to raising revenues without creating significant regional or competitive dislocations."
But Ronald Tilley, chairman and CEO of Columbia Gas of Pennsylvania, complained, "A broad based energy tax should take into consideration the fact that natural gas is better for the environment, good for the American economy, and is an abundant domestic fuel that decreases our reliance on imported oil.
"A BTU tax hits natural gas harder than some other fuels that are not as environmentally friendly or domestically produced."
EAST-WEST CENTER
Fereidun Fesharaki of the East-West Center, Honolulu, said the president's tax proposal was surprisingly mild, amounting to less than 8cts/gal for gasoline, rather than the expected 10-12cts/gal tax increase.
"The president will be accused of discriminating against oil by proposing a lower BTU tax of under 26cts/MMBTU on coal, natural gas and nuclear power vs. 60cts/MMBTU for oil. However, natural gas probably will lose out most in percentage terms.
"The tax will amount to about an 18% price increase for gas but about 10% for oil at current wholesale prices. At the retail level, the impact on gasoline prices will be about 5-10%, depending on state taxes.
"The proposal is expected to shave 350,000 b/d from oil demand by the end of the decade. In fact, in 1993 alone, U.S. oil demand is expected to rise by 350,000 b/d. All the proposal will do is to shave off one single year's demand growth, not a terribly convincing argument for energy security or for helping the environment."
Fesharaki predicted, "No one will like the proposals. It is not serving any of the stated goals of the administration. It will not please the energy industry, it will not please the environmentalists, and it raises too little revenue to be worth the 'sacrifice.'
"The discriminatory nature of the proposal, the lack of consultation with Democratic and congressional leaders, and the onslaught of lobbyist forces will ensure significant opposition to the proposals in Congress.
"All in all, it is a weak and generally ineffective proposal, one that will face a tough fight. For the oil industry, it is not good news, but the negative impacts will be marginal. It could have been worse."
VAT PUSHED
In a Senate energy committee hearing last week, Chairman Bennett Johnston (D-La.) urged the administration to abandon the BTU tax and adopt a VAT on all U.S. goods.
The finance committee, not Johnston's energy committee, has jurisdiction over tax legislation in the Senate.
Sen. Malcolm Wallop (R-Wyo.) also supported a VAT. "What we are being asked to do is tax the people of America to finance a wrong-headed environmental campaign." He said the BTU tax would cost the U.S. much marginal production.
Robert Reischauer, director of the Congressional Budget Office, told the committee, "A VAT on a broad base of consumption goods would be more neutral among industries, regions, and households than energy taxes designed to raise the same amount of revenue.
"However, a VAT would cost much more to administer, to the point of not being cost effective unless rates are high enough to raise much more revenue than the president's proposed energy tax. A VAT would certainly not serve environmental or energy security objectives."
He said the administration's BTU tax proposal would cause U.S. oil imports to fall 150,000 b/d in the first year after full application, causing a 50cts/bbl drop in world prices.
Reischauer said the BTU tax on oil would have little effect on crude oil prices to producers and demand for domestic crude because the marginal source of oil is imported and domestic prices are determined by world markets. "As a result, the burden of the tax would fall heavily on oil consumers."
MANUFACTURERS HIT
Jerry Jasinowski, president of the National Association of Manufacturers, said Clinton's program relies too heavily on tax increases and not enough on spending cuts to reduce the deficit.
He called the BTU tax "an unfortunate choice."
He said, "Although it appears to be a well intentioned attempt to tax consumption, in reality it would amount to a major tax on industrial production.
"Our preliminary estimate is that a minimum of one third-possibly more-of the total BTU tax would fall directly on industrial production processes. It would increase the cost of energy used by American manufacturing firms in making their production.
"The tax would unilaterally increase the cost of U.S. produced goods relative to foreign produced goods, thereby impairing U.S, competitiveness in domestic and overseas markets.
An NAM simulation of the tax found it would reduce industrial output $38 billion when phased in, costing 610,000 jobs and increasing U.S. energy prices by about 9% in the mid-1990s.
"The BTU tax does considerable damage to the economy and is extremely inefficient at reducing the deficit."
Jasinowski urged congress to consider a VAT at a uniform rate across the broadest possible base of goods and services. "Its burdens would be spread more equitably over the entire U.S. economy, rather than being unfairly concentrated on (the oil production) sector that is already suffering disproportionately from large nontax burdens imposed by government fiat, such as the rapidly escalating costs of environmental regulation and the severely decreased opportunities for domestic exploration and production."
The Chemical Manufacturers Association also opposed the BTU tax, although it would exempt petroleum used for feedstocks.
CMA pointed out that energy costs are a significant portion of manufacturing costs for many chemical products, and "any new energy tax that raises the cost of U.S. based production relative to that of foreign based production damages the international competitiveness of U.S. manufacturing.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
