The U.S. oil and gas producing industry is on the right track in its quest for a political response to slumping oil prices. Whether that track leads anywhere remains to be seen.
By confining its ambitions to what is politically achievable, the industry has scored unusual sympathy in Congress. It has focused on tax relief, not price support. The strategy is commendable, and not just because it has produced some success. It also happens to be right.
Price support for crude oil will not happen in the U.S. Low oil prices help more voters than they hurt. The issue needs no discussion beyond that and seldom receives it outside the oil producing states. It shows proper acceptance of political reality that oil producers aren't imploring their elected officials to seek the impossible from consumers. Tax relief for economically marginal production and exploration is a much easier case to make. But it must be made correctly.
NO BAIL-OUT
In the U.S., industry's opponents have been able to stymie past relief efforts by calling them bail-outs. Producers must be quick to point out that easing tax loads to preserve production serves not just industry interests but government interests as well. Many countries adjust fiscal regimes for producers when prices plunge - and do so for their own fiscal good. It is not too much to ask the U.S. government to adapt to economic reality in the same way that producers are to adapting to political reality now.
When falling oil prices force companies to shut in production or forestall exploration, the government suffers, too. It collects no royalties or taxes from shut-in production. It collects no bonuses or rents on federal acreage not leased. It collects no income taxes from laid-off industry workers, no corporate taxes from bankrupt companies. Current price levels jeopardize much production.
Industry must show that the production at risk represents taxable economic activity much of which will be lost forever if shut in.
Zero-sum thinkers in government will fret about what the government n-Light "lose" from relaxation of tax burdens on oil and gas producers. They will compare revenues generated under current and proposed rates of government take under assumptions of constant upstream business activity. But activity won't be constant. With prices low and fiscal conditions unchanged, activity will certainly diminish, and so will the government take. For a significant volume of production, the choice for government is not between constant and falling revenue but between falling revenue and none.
There are signs of hope. The Senate energy and natural resources committee has approved temporary suspension of federal royalties on new wells drilled in Gulf of Mexico waters 200 m or more deep. And 34 producing state senators and representatives began meeting with industry officials late in February to discuss ways to help producers. Measures under discussion center on tax relief for marginal production.
MORAL VICTORIES
Welcome as these developments are, they amount to moral victories won in friendly territory. Further legislative progress will depend on the industry's ability to change balky minds in the Senate and, especially the House. The active support of President Clinton will be essential.
It won't be easy. And it won't work if the industry fails back on old arguments no one wants to hear. Producers must pursue relief in the context of immediate national concerns: jobs, economic activity, and federal revenues. Success at the level of practical politics will advance the deeper message by implication: that national interests are linked with the ability to produce oil and gas.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
