OIL IMPORT FEE, TAXES ERUPT AS TOP U.S. ENERGY ISSUES

The battle lines are drawn over the prospect of higher U.S. energy taxes under the administration of President Clinton.

As the new administration grapples with the twin demons of a ballooning federal deficit and an economy still struggling in some sectors, it has slammed into a dilemma: how to tame the deficit by increasing revenues-namely, raising taxes-without harming economic recovery.

Some groups oppose any energy taxes, but the likelihood is growing the White House will put forth some form of energy tax as part of a comprehensive economic program.

Lobbyists, associations, companies, and public interest groups have launched a fusillade of claims and counterclaims about the respective merits and disadvantages of each type of energy tax proposal. No matter which choices are made, howls of protest are certain to result.

Clinton is expected to announce his economic program Feb. 17, and associations are teaming up in Washington to lobby against the inclusion of energy taxes in the package. Alliances have been formed to fight a gasoline tax increase and new broad based taxes on fuels.

Administration officials have hinted such taxes are under consideration as part of legislation to bolster the U.S. economy and reduce the budget deficit (OGJ, Feb. 8, p. 31).

Separately, independent producers are pressing for an alternative to gasoline and broad based fuel taxes: a fee on imported oil. Such a fee was proposed recently in Senate legislation (OGJ, Feb. 1, p. 15).

However, here are signs the resulting boost in domestic producers' revenues sparked by an oil import fee might prove a tempting opportunity for Washington to revive some version of the "windfall profits" tax if the latest scramble to find "revenue enhancements" falls short. In that case, producers could see scant benefit-if any-from an oil price increase.

With hints from the Organization of Petroleum Exporting Countries of a retaliatory price increase, a circumstance that caused the European Community to shelve its proposed carbon tax last year, Washington's temptation to disinter the windfall profits tax might become especially strong.

INDUSTRY'S DILEMMA

There is a wide range of opinion within the petroleum industry over new energy tax proposals.

Increased energy taxes in the U.S. likely will neither achieve intended economic goals nor provide sustained relief to U.S. oil and gas producers, critics contend.

Although some form of energy tax might be a genuine boon to certain sectors of the petroleum industry, any energy tax is likely to dampen petroleum demand while arousing consumer resentment toward the industry.

While conceding some type of increased energy tax is becoming more likely, critics say proposed new levies would stifle U.S. economic recovery and do little to create jobs or cut U.S. budget or trade deficits.

Officials said one proposed energy levy, a tariff on crude oil imported into the U.S., likely would increase briefly oil and gas well drilling and stimulate other upstream activity. But effects across U.S. society and the domestic petroleum industry would be inconsistent. For example, the tariff would harm consumers in the U.S. Northeast that rely on fuel oil for heat and refiners with heavy reliance on imported feedstocks.

Instead, some petroleum industry officials say, if more revenue must be raised, more broadly based measures are needed. But so far, most of industry's attention has focused on which energy-taxes are preferred-in some instances, least objectionable.

What has been conspicuous by its virtual absence in the debate is discussion of new U.S. energy revenue sources and jobs that might accrue from leasing and developing the Arctic National Wildlife Refuge Coastal Plain and most of the Outer Contintental Shelf now off limits to drilling.

Although the petroleum industry took pains to quantify those economic benefits when the Bush administration was cobbling together a national energy policy, the promise of economically painless new energy revenues apparently has been lost in the lobbyists' din. Industry officials might well take a look at the surprising changes occurring in attitudes toward oil revenues in California, a state historically hostile to the industry but now faced with perhaps the nation's most battered economy (see story, p. 40).

BROAD BASED TAX

Powerful groups are opposing a broad based energy tax that would apply to each energy source.

Arrayed against it are the U.S. Chamber of Commerce, National Association of Manufacturers (NAM), American Council for Capital Formation, American Petroleum Institute, American Gas Association, National Coal Association, Edison Electric Institute, and major consuming groups.

They recently warned Clinton, "Broad based energy taxes would have adverse effects on the economy, impede our nation's ability to compete in the international marketplace, and exacerbate class and regional inequities. Broad based taxes on the energy sector will raise the cost of U.S. based industrial production, making us less competitive. Gross domestic product growth will be lowered, jobs will be lost, and productivity dampened.

"This resulting decrease in economic activity will produce lower collection of individual income, Social Security, and corporate profits taxes."

PROBLEMS SEEN

Jack Blum, attorney for the National Consumers League (NCL), said, "One of the driving factors in energy tax proposals is the fantasy that energy taxes are simple to administer and simple to collect. Nothing could be further from the truth.

"In the past, every time the government has tried to use tax policy on energy-from the depletion allowance to the windfall profits tax to the oil import fee-there have been serious dislocations and startling unintended consequences.

"To give you the flavor of the kinds of problems the government would face in collecting the BTU tax, consider these questions: Who will decide how to tax the different grades of coal with their differing energy content? What about the different kinds of fuel oil used in different settings for different purposes? Is the BTU tax on the theoretical BTU content of the fuel under optimal conditions or is it on the energy the consumer derives from it? Worst of all, who will keep the records and audit the returns?

"Among the issues proponents of a BTU or fossil fuel tax must face are how and when to collect it. For example, should a coal fired electric utility pay a tax on the coal, pass the tax through to consumers, then have its customers pay the tax again on the electricity they consume?

"Should the oil tax be imposed at the refinery gate or at the delivery terminal by the wholesalers? Would there be exceptions for farmers?

"In industries that use hydrocarbons as a fuel and a feedstock, such as the petrochemical industry, who will decide whether any tax is to be paid, and if so, how much?

"When a system of tax regulations to decide when a hydrocarbon is being used as a fuel and when it is being used as a feedstock is developed, how will the government know whether the tax is being paid without creating a mountain of paper and a small army to enforce the law?"

GASOLINE TAX

Congress last increased the federal gasoline tax in 1990, to 14.1cts/gal. State taxes currently average 18cts/gal.

Rep. Dan Rostenkowski (D-Ill.), chairman of the tax-writing House ways and means committee, has proposed a 25cts/gal increase to help pay for Clinton's economic stimulus and deficit reduction programs.

Higher gasoline taxes would be easy to impose because the collection system is in place, and each 1ct increase would raise about $1 billion/year.

Last week a broad coalition of groups launched a campaign to block gasoline tax increases.

They include NAM, NCL, National Grange (NG), National-American Wholesale Grocers Association, American Trucking Associations (ATA), American Automobile Association (AAA), Travel and Tourism Government Affairs Council, and Citizens for Tax justice (CTJ). API also opposes higher gasoline taxes.

ATA said, "The trucking industry, which has only a 2% profit margin, is in no position to absorb a fuel tax hike. More than 2,000 trucking companies, most of them small businesses, failed in each of the last 2 years. Higher taxes will lead to more business failures."

It added that the government already has imposed higher fuel prices for environmental purposes.

"Since Nov. 1, 1992, motorists in many metropolitan areas have been paying an added 5-7cts/gal for reformulated gasoline that meets stricter Clean Air Act standards.

"Next October, truckers must pay a similar 'environmental tax' when the price of fuel jumps 5-7cts/gal to cover the cost of new, low sulfur clean diesel. At the same time, new trucks capable of burning clean diesel will cost more to buy and maintain."

NG said, "In rural areas, each household generates more than 40 miles/day of auto travel, compared with about 25 miles/day of auto travel in large, metropolitan areas.

"In addition to more compact geography, metropolitan areas offer their citizens subsidized mass transit systems. As a result, rural America will shoulder a 62% greater burden, on a per capita basis, under an increase in the motor fuel tax than will residents of large cities."

AAA released a public opinion survey showing that 72% of Americans oppose a 25cts/gal increase in the gasoline tax, including 51% that are "strongly" opposed.

It warned, "Trying to balance the budget at the gasoline pump would hurt the economy and incur the wrath of consumers."

COUNTERPRODUCTIVE PROPOSAL

Charles A. Corry, chairman of Marathon Oil Co. parent CSX Corp., said taxing energy would have little effect on the U.S. trade deficit and would discourage U.S. industrial activity and creation of more and better jobs by cutting energy consumption. In addition, new energy taxes would make it more difficult for U.S. companies to compete in world markets.

Victor Beghini, Marathon president, said talk about raising taxes to reduce oil imports disregards the fact that the U.S. imports 18% of total energy requirements, while many other industrialized nations-notably the U.K., Italy, Germany, and Japan-import more than 40% of their total energy needs. In addition, he said, there are too many unanswered questions about how an import fee should be crafted, who would have to pay it, or who would be affected most.

Beghini said allowing exemptions to the fee would become a nightmare. For example, should it be imposed on oil imports from free trade partners Canada and Mexico?

In addition to creating problems with Canada and Mexico, Joe Stanislaw, managing director of Cambridge Energy Research Associates (CERA), said an oil import fee would create conflicts between the U.S. and other signers of the General Agreement on Trade and Tariffs (GATT).

OTHER TARIFF QUESTIONS

Beghini said import tariff proponents can't agree on whether the fee should tax crude oil, crude oil and refined products, or crude oil, refined products, and petrochemicals. And how would the tariff treat gasoline components such as methyl tertiary butyl ether required for oxygenated and reformulated gasoline?

"Once you decide to do that, where is the collection point going to be?" he asked. "Who is going to have to pay for the collection, and where will it be collected?" If the Clinton administration intends to cut the federal budget deficit, Beghini said, a better way would be a value added tax (VAT).

"A 1% VAT raises $40-50 billion/year," he said. "I think Mr. Clinton and his cabinet are going to have to decide whether they want economic growth in this country because the U.S. energy appetite is related directly to economic growth."

Stanislaw said an import fee could help reduce U.S. dependence on foreign oil but would be less effective at reducing the budget deficit or protecting the environment.

Stanislaw also cited the high cost of an import tariff program, about $10 billion/year, depending on the volumes of crude and products imported, adding, "It's a very inefficient way to achieve the main objectives which is to raise money."

ARTIFICIAL INCENTIVES

Victor Burk, managing director of Arthur Andersen & Co.'s oil and gas industry services, said many U.S. producers favor an import fee because it would increase the wellhead value of oil and gas. Higher wellhead prices could improve drilling economics and should increase activity.

"Also, I think there is the expectation that if oil prices increase, natural gas prices will follow, and many independent producers are primarily gas producers," Burk said.

However, he added, there has been mention recently of some type of resurrected windfall profits tax if the import fee comes into play, so some portion of the possible benefit to producers could be taxed away.

While many U.S. producers favor an import fee because of its presumed effect on domestic oil and gas wellhead prices, Stanislaw said U.S. refiners that import most of their feedstocks would suffer. In addition, key oil exporting countries could retaliate by awarding petroleum construction contracts to companies from countries with more friendly tax regimes.

Stanislaw warned an import fee might artificially encourage drilling in the U.S. but could be repealed as easily enacted. He said, "I think people would be cautious about moving too fast to spend what seem to be windfall dollars that can be removed very quickly. We all have learned the mistake of overinvesting because of an artificial incentive."

ENRON VIEW

Enron Corp. Chairman Kenneth Lay said a $5/bbl fee on oil imports "is not only good energy policy but a policy that is consistent with U.S. economic and environmental goals."

Lay suggested that half the revenues from an oil import fee be used to finance the U.S. Strategic Petroleum Reserve and half to cover other costs of imports, such as the military costs of keeping open sea lanes from the Middle East. He contended the fee would have the effect of reducing U.S. petroleum imports 16%, or 1 million b/d, by the end of the decade.

Further, Lay estimated that replacing all imported oil with domestic natural gas would add $37.5 billion in new capital investment, create 160,000 jobs directly and 960,000 jobs indirectly, reduce the trade deficit by $7.5 billion/year, and increase Government revenues by $7-10 billion/year.

Lay contended a BTU tax would do the least to reduce dependence on oil imports, improve the environment, and revive the U.S. oil and gas industry. While an import fee would have a "short term negative effect" by modestly hiking prices, he said, this could be eased by a payroll tax rebate to those most affected by the fee.

SAUDI TAX PERSPECTIVE

Saudi Arabian Oil Minister Hisham M. Nazer attributed proposals to implement a tariff on U.S. oil imports to "petrophobic" policymakers discriminating against oil under the guise of protecting domestic production.

"For us, a major oil exporter to the U.S. and a reliable supplier as well as a longtime friend, such an import fee would harm our exports and downstream investments in the U.S.," he warned.

Nazer, speaking last week in Houston at a CERA energy strategy conference, said such regressive policies by industrialized countries undermine international oil trade and market stability. Erecting another barrier to oil trade would run contrary to GATT principles and defy the logic of geology and economics, he said.

Moreover, a U.S. oil import fee would not significantly change prevailing supply patterns but would further aggravate dislocations within the U.S. economy and foster inefficient oil and gas operations.

"I thought the world had suffered enough from the perils of protectionism and realized the merits and advantages of moving toward a more liberalized trade regime," Nazer said.

"And I do not see why U.S. oil imports valued at $42 billion should be of special concern and require undue protection any more than other imports, like car imports, which are valued at $58 billion.

ASHLAND VIEW

Ashland Oil Inc. Chairman John R. Hall prefers a VAT to several energy related tax proposals.

Hall told shareholders at the company's annual meeting he does not believe it appropriate to try to reduce the U.S. budget deficit through a large increase in gasoline taxes, an oil import fee, a broad based energy tax, or a carbon tax. As a solution to the growing deficit, Hall suggests VAT or other forms of consumption taxes as replacements for existing taxes.

More than 50 countries now have VATS, including recent converts Canada and Japan. Twenty-one of 24 members of the Organisation for Economic Cooperation and Development have VATs. Within OECD, only the U.S., Switzerland, and Australia are holdouts. VATs are aimed at revising the tax system to encourage saving and investment and enhance the international competitiveness of U.S. businesses, Hall said.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.