Anyone bothered by scale and wanting to be taken seriously should avoid talking about energy. It's a big subject, an important subject, a subject that raises big questions about the future. It's also a subject encompassing enormous amounts of money—capital invested, costs incurred, profits earned, losses suffered. The money relates to need. Seven billion people in an industrializing world need lots of energy.
This won't change. The numbers won't shrink.
Investment needs
The International Energy Agency recently projected 30% growth in global demand for energy in the next 25 years. Other projections put demand growth over that period nearer to 50%. IEA says meeting the need it sees requires investment of $38 trillion.
If that much investment is to occur, if energy demand is to be met, people and institutions risking the capital must be able to expect competitive rates of return. They must have the chance to earn profits, sometimes very large profits. Any imposed limit on expectations for energy profits limits hope for meeting energy demand at predicted levels.
US Sen. Robert Menendez (D-NJ) proposes such a limit.
In support of discriminatory taxation of the five largest oil and gas companies active in the US, Menendez points to recent profits. Those profits are big. The companies are big. They do big work.
Menendez was lead sponsor of the Close Big Oil Tax Loophole Act, the latest version of which died May 17 after failing to win enough votes to avoid a filibuster. The senator has revived his populist antics by calling on the secretive Joint Select Committee on Deficit Reduction to do what open democracy would not. That group, better known as "the super committee," faces a Nov. 23 deadline for a plan to trim the federal budget deficit by $1.2 trillion. Failure would trigger automatic spending cuts.
Menendez wants to deny the five companies whose profits he so regrets access to six tax measures he persistently mischaracterizes as subsidies. In a Nov. 2 press release, he called them "super subsidies."
The tax changes come from the budget President Barack Obama has proposed in each of his three years in office but hasn't been able to push through Congress. Of the six, only percentage depletion can be considered a subsidy, and then only to the extent depletion charges exceed a property's cost basis. The five companies whose taxes Menendez hopes to raise don't fit that condition. They, like all integrated oil and gas companies, haven't been able to use percentage depletion since 1975.
To call the other tax measures subsidies strains credibility. Where's the subsidy in charging immediately to expense costs incurred during the drilling and stimulation of wells for materials and services that leave behind nothing of salvageable value? Where's the subsidy in a deduction available at a greater rate to companies in other industries? Where's the subsidy in a tax credit designed to prevent double taxation of profits earned abroad?
Alarming failure
In his press release, Menendez combined demagoguery over "subsidies" with his tilting at the profit windmill, relating the $21 billion he claims his tax measure would generate over 10 years to the $100.5 billion the five targeted companies earned together in the first three quarters this year. "We should not be spending 21 billion taxpayer dollars to unfairly reward their tremendous success," he said. The statement might have meant something if the companies' effective income tax rate fell below industry averages. It doesn't. According to the American Petroleum Institute, the oil and gas industry's effect tax rate is 41.1%; that of other industrial companies is 26.5%.
Raising taxes preferentially on big oil and gas companies because they earn big profits would be unfair. The proposal to do so should alarm all companies in all industries. It also reveals appalling failure to appreciate how much work humanity needs big companies to perform on energy. Failure on that scale by elected officials should alarm all Americans.
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