CLINTON'S PLAN HAS ADMIRABLE GOAL, BUT...

Richard J. Stegemeier
Chairman and Chief Executive Officer
Unocal Corp.
Los Angeles

Most Americans applaud President Clinton's determination to reduce the federal deficit.

But even with his ambitious plan to cut spending, increase taxes, and stimulate the economy, our national debt will continue to climb from $4 trillion today to nearly $5 trillion by the end of the decade.

Clearly, more spending cuts are necessary.

Even after these cuts are made, however, we may need to consider higher taxes, including a tax on energy. We cannot, in good conscience, exempt the energy industry or its customers from this national problem.

Some of us in the petroleum industry have argued for a value added tax. It would be the fairest and easiest to administer. Instead, the administration has proposed a broad based BTU tax on fuel and electricity.

TAX INEQUITIES

It is important for those of us in the energy industry to work closely with Congress and the administration to make the proposed BTU tax as fair and effective as we can.

Unfortunately, the BTU tax, as proposed, contains several fundamental inequities. The tax on coal, the dirtiest fossil fuel, is the same as the tax on natural gas and hydroelectric power, two of our cleanest energy resources. It is less than one-half the tax on crude oil.

This contradicts many of our nation's basic environmental goals. It would also send a powerful signal to the world's developing countries, particularly those that look to coal as a primary energy source, that America is unconcerned about greenhouse gases and possible global warming.

EFFECT ON CALIFORNIA

Here in California, heavy crude oil production would be particularly hard hit by the proposed BTU tax. These crudes represent more than two thirds of California's oil production of about 955,000 b/d. In the San Joaquin Valley, heavy crudes make up more than 75% of all petroleum production.

If the tax is assessed on crude oil rather than on finished products, the $3.50/bbl tax on California heavy oil would be about 30% of its market price. The same tax on West Texas intermediate crude oil would represent only 18% of its value.

Unless this inequity is changed, the price of California oil could drop by about $1.30/bbl. Furthermore, the BTU tax on natural gas used as fuel to steam drive heavy oil production could cause an additional decrease in value by 20-30cts/bbl.

At the refinery, the fuel use-and consequent tax-to convert these heavy oils into gasoline would be 25% greater than for lighter, more valuable crudes, further devaluing this type of oil.

Finally, heavy oils have about a 10% yield of low value petroleum coke, which is already sold at distress prices. Coke could not absorb its share of the tax on crude oil and compete with coal, which is taxed at a much lower rate.

The net result of the BTU tax proposal, unless changed, would be to decrease the value of California crudes and reduce the royalties paid to property owners and state and local governments. Some oil properties could become noncommercial and be shut down. This would tend to increase imports of lighter crudes and cause the loss of additional jobs in our state.

For California refiners that run heavy crudes, a BTU tax on crude oil would, in effect, be imposed largely on gasoline and diesel fuel because the other lower value products produced from these crudes could not support the added tax. As a result, California gasoline would be taxed at perhaps 15cts/gal, while imported gasoline would be taxed at just 7.6cts/gal.

For refineries facing billions of dollars of investment to produce reformulated gasoline beginning in 1995-96, this could cause severe economic difficulties.

Independent studies have estimated that reformulated fuels required by the Clean Air Act (CAA) and the California Air Resources Board (CARB) could add another 20-25cts/gal to the cost of gasoline manufactured in California in 1996. Add this to 15cts/gal for the BTU tax, and the cost of gasoline manufactured and sold in California could rise by more than 40cts/gal during the next 3 years.

The added cost to California consumers would total about $5.5 billion/year-more than three-fourths of the state's $7 billion budget deficit last year. For the California economy, already reeling from a prolonged recession, this would be a serious blow.

WHAT'S REQUIRED

Fortunately, the administration has shown a clear and sincere interest in listening to industry concerns.

On Mar. 12, I joined several other industry executives in a meeting with Treasury Sec. Lloyd Bentsen in Washington to discuss the proposed tax. I emphasized that the administration could change the proposed BTU tax and still achieve the president's goal of raising revenues. In particular, I discussed these improvements:

Eliminate any BTU tax on fuels used to produce fuels to avoid the problem of double taxation.
Levy the BTU tax at the terminal rack, where gasoline delivery trucks load, or as close to the consumer as possible.
Correct the inequity of taxing crude oil at more than twice the rate of coal.

The first two changes would help eliminate the penalties on heavy vs. light crude oils and on domestic vs. imported gasolines. The third change would reflect a more appropriate environmental message and avoid inequities between petroleum coke and coal.

I am encouraged by our discussions with the administration to improve the fairness and efficiency of the BTU tax. We must continue to support the administration's efforts to reduce federal spending, cut the budget deficit, and promote economic growth.