The classic superhero, a mysterious person of the night, who
anonymously swoops in to save the day without expectation of credit or monetary
gain, has time and again captured the American imagination. The BP spill
disaster has proved an opportunity for one such citizen to properly assess the
situation and help solve the problem without anyone discovering his true
identity. Unfortunately, more often than not, when persons are involved in a
situation they do not fully understand, they do not act as a problem solver but
a problem maker.
Over six weeks ago, Cal-Berkeley Professor Robert Bea
received an anonymous call from a mystery plumber late one night who had
designed a containment cap he felt could control the gushing well. Bea saw the
potential of the cap, which utilized on a larger scale the same techniques plumbers
use when repairing leaky pipes, and forwarded it to the US Coast Guard. More
than a month later, a similar containment cap was put in place, and has
successfully capped the main gusher. In this unique circumstance, someone
without any oil expertise was able to assist in problem solving however this is
a rare circumstance considering the complexity of offshore drilling.
President Obama has appointed a commission to look into the
causes of the oil spill and provide recommendations for the future of drilling
off the coasts of the United States. While this momentous task may not have the
tabloid appeal of the late night plumber, the conclusions of this commission
will shape future offshore drilling endeavors, acting to enhance or hinder
safety and risk management. Boring holes into underground reservoirs buried
miles underwater requires technical specificity the likes of which NASA has
used to travel to the moon. Engineers and experts need difficult degrees and
years of experience before being trusted to carefully plan and complete well
operations. Unfortunately, the Administration’s commission does not demonstrate
a respect for the difficulty of deep sea drilling, relying instead on
politicians and environmentalists with no prior drilling experience.
Though it is a savvy DC political move to appoint a
commissions whose conclusion is predetermined by its membership, in this case
it could backfire. Due to the complexity of deep sea drilling and exploration, and the rapid advancement in
technology and procedure, often work on an oil rig involves quick reactions, as
opposed to rigorous predetermined regulations that would act to bind the hands
of the crew. If the oil commission lays out a static set of procedures and
technologies for drilling, advancements in safety and risk control would come
to a halt. Furthermore, on an oil rig where flexibility is necessary when
facing a difficult set of circumstances, regulations could act as an impediment
and increase the risk of disaster.
Experienced offshore engineers are aware of the necessity of
flexibility mixed with rigorous safety requirements on a rig, but how could an
environmental lawyer, a former governor, or a physics engineer know about day
to day operations on an offshore rig. Not one person on the president’s oil
commission has any experience in the offshore industry.
The majority of offshore drillers follow a rigorous set of
industry standards. From the initial reports, it appears that BP habitually
ignored best practices in order to cut costs. Punishing an entire industry that
has had a near spotless drilling record in the last 40 years for the reckless
behavior of one company is overkill. More likely, this disaster that has caused
so much pain for our Southern shore is being used for political purposes by
those who naively want to eliminate drilling. Unfortunately, the anti-fossil
fuel crowd is sorely out of touch with reality. Clean and renewable
technologies are nowhere near a point where they could replace oil, natural gas,
and coal. Even environmentalists would acknowledge that the transition would
take at least 40 years, and even then these vital natural resources would be an
important part of the energy mix. If we were to eliminate drilling off our
shores, we would see increased reliance on foreign oil, lost jobs, a shrinking
economy, and a drop in the standard of living here at home.
As the president’s unqualified commission proceeds with the
investigation, let’s hope that it can take on a problem solving role as opposed
to one of problem making. We need oil and gas for years to come, and we
need to extract it safely. Adding onerous regulations that threaten this safety
would be disastrous, yet are a real threat as a result of the inexperienced
commission chosen by the White House. While the press certainly appreciates an
unlikely hero during a crisis, the future safety and success of the U.S. energy
industry demands the expertise of those with real technical expertise and
a memo recently cited by E&E news, communications firm CEW (which appears at the bottom of this post, and can also be found HERE)
possible method of using the New York Times as a centerpiece of a
“tactical campaign” to reframe proposed tax increases on American
consumers as “The Big Oil Welfare Tax”. This is a left wing campaign
strategy to use the New York Times as a tool to push a liberal
would increase taxes on energy companies and consumers. An actual
in the New York Times
seems to be one
example of this strategy in action. The article is riddled with
inaccuracies and misrepresentations that are easily spotted by anyone
basic understanding or background in tax policy. To understand the full
of the recent articles deception we have included counterpoints (below)
the flawed and false statements. The plain text is the actual NY
Times article while the italicized, bolded, and color-coded sections are the counterpoints
containing the facts. This type of dishonesty seems to be an
ongoing pattern with the far left and provides yet another black eye to
credibility of the Times.
As Oil Industry Fights a Tax, It Reaps Billions From
By David Kocieniewski
July 4, 2010
The New York Times
Copyright 2010 The New York Times Company. All Rights
When the Deepwater Horizon drilling platform set off the
worst oil spill at sea in American history, it was flying the flag of
Marshall Islands. Registering there allowed the rig’s owner to
significantly reduce its American taxes.
The owner, Transocean, moved its corporate headquarters
from Houston to the Cayman Islands in 1999 and then to Switzerland in
maneuvers that also helped it avoid taxes.
The United States taxes the worldwide income earned by its
residents. Most other countries only subject income earned within their
to their income taxes. For companies like Transocean, with worldwide
operations and major competitors based in countries that do not tax
their borders, this was likely a matter of survival if Transocean were
able to compete for non-US projects. For projects undertaken in the
United States, companies based outside the US and companies in the US
generally taxed the same, so it was unlikely a strategy motivated by
US taxes on work done in the US, including the Gulf of Mexico.
The issue this raises is the uncompetitive state of the US
tax law when applied to income earned completely outside the country.
Rather than trying to level the playing field and keep US companies in
surprisingly the current proposals of the Obama Administration would
make this even worse--likely prompting the US to lose even more
them bought out by foreign investors (e.g. the loss of Anheuser Busch)
their foreign operations acquired by foreigners, all of which result in
loss of US jobs.
At the same time, BP was reaping sizable tax benefits from
leasing the rig. According to a letter sent in June to the Senate
Committee, the company used a tax break for the oil industry to write
percent of the rent for Deepwater Horizon — a deduction of more than
$225,000 a day since the lease began.
Business income earned in the US is subject to a 35% net
income tax. The tax is due on all income in excess of the costs
in earning that income. These are the rules that apply to all
In drilling the well in the Gulf, BP hired the drilling rig
and paid a daily rental expense. That expense, just like when a
company rents office space, a restaurant rents its building, or a
company rents equipment, is "deductible" in determining BP's net
income in the US. (Note that the rent paid by BP was US income to the
rig operator and immediately included in its US tax return) The term
"write off" as used in this article is the way the New York Times has
chosen to describe the normal deduction of costs under our net income
tax. Note that BP was only allowed to deduct 70% of these costs as
and the remaining 30% are deductible over a period of years. So, as
compared with many businesses that can deduct 100% of similar costs as
incurred, the oil industry must defer the deductibility of some of these
Not exactly a subsidy compared to how other industries are treated.
With federal officials now considering a new tax on
petroleum production to pay for the cleanup, the industry is fighting
measure, warning that it will lead to job losses and higher gasoline
well as an increased dependence on foreign oil.
BP has committed to pay for the cleanup, and has agreed to
put into escrow $20 billion. If more is needed, they have committed to
that. Further, an oil spill tax already is in place, and proposals to
raise this tax to over 600% of the current tax, have not been opposed by
The total taxes to be collected over the next decade would be well over
billion. In addition to this, the Administration has proposed numerous
other increases in the taxation of oil and gas in the United States, and
understandable that increasing such taxes is not something that the
But an examination of the American tax code indicates that
oil production is among the most heavily subsidized businesses, with tax
available at virtually every stage of the exploration and extraction
This is an absolute fallacy, but it doesn't deter people
from making the assertion. In fact, the Center for American Progress,
quoted later in this article, notes that the total amount of "tax
subsidies" in the tax code amount to almost $1.1 trillion per year.
Of this amount, the "tax subsidies" related to oil and gas are around
one third of one percent--or just under $4 billion. And when we use the
term "subsidies", we certainly use it "loosely". The
main items that make up the so-called oil and gas subsidies fall into
(1) Deductibility of drilling costs, mostly labor and
rentals like the drilling rig mentioned above. No one disputes that
costs are deductible, and the only issue is the timing of the
deductibility--hardly what most people would regard as a
(2) The deduction for "domestic production
activities", enacted in the 2004 Jobs Bill and designed to give all
domestic producers and manufacturers, of all kinds, a deduction to
in the domestic producing an manufacturing sectors. This applies to
iron, all other mineral production, farming, manufacturing,
architectural services, computer software, and even the grinding of
beans at the local coffee shop and the cutting of keys at the department
store. In fact, oil and gas production activities only get two thirds
the level of the deduction that all others get. Somehow this is
as a "subsidy" to oil and gas, when in reality it is a penalty over
all others. You will note that later in the article Senator Menendez
refers only to the "manufacturing" part of this, but the law itself
clearly describes this as the deduction for "domestic production
activities", and includes manufacturing in that definition.
(3) Percentage depletion deduction for oil and gas
properties. This is a method of calculating the deductible costs in
determining net income from oil and gas activities. It applies to all
other mining and mineral activities as well. But, for oil and gas, and
again only for oil and gas, it is severely limited. First it is limited
independent companies and to royalty owners. Integrated oil and gas
companies, such as those generally referred to as Big Oil ( ExxonMobil,
ConocoPhillips, Chevron, Marathon, etc.), do not even qualify for it at
all. For those that do qualify, it is further limited to the equivalent
of 1000 barrels per day of production. No other mineral production is
limited in such a way. So again, to describe this as a
"subsidy" to oil and gas, when it is more limited than for any other
mineral producing industry, is outright wrong.
to the Joint Committee on Taxation in its Tax Expenditures Report for
2009-2013, oil and gas "tax expenditures" amount to under $4 billion
per year, but subsidies and expenditures for renewables amounted to over
times that amount per year. And amounts committed to renewables
and energy efficiency provisions in the six month period at the end of
early 2009 under stimulus provisions amount to over 25 years worth of
oil and gas amounts.
According to the most recent study by the Congressional
Budget Office, released in 2005, capital investments like oil field
drilling equipment are taxed at an effective rate of 9 percent,
lower than the overall rate of 25 percent for businesses in general and
than virtually any other industry.
This is a very arbitrary calculation that seeks to look at
the costs of making an incremental capital investment, and is hardly a
description of the tax rate paid by the industry on its profits. Under
this same study, homeowners are said to face negative tax rates. Try
telling a hardworking homeowner who pays taxes that he really is facing a
negative tax rate.
And for many small and midsize oil companies, the tax on
capital investments is so low that it is more than eliminated by various
credits. These companies’ returns on those investments are often higher
after taxes than before.
Again, the same highly artificial calculation.
“The flow of revenues to oil companies is like the
gusher at the bottom of the Gulf of Mexico: heavy and constant,” said
Senator Robert Menendez, Democrat of New Jersey, who has worked
Obama administration on a bill that would cut $20 billion in oil
breaks over the next decade. “There is no reason for these corporations
to shortchange the American taxpayer.”
These companies are hardly "shortchanging" the
American taxpayer, and the Senator knows better. The amount of taxes
by oil and gas companies is staggering, and as noted above, the
"subsidies" are far from special subsidies at all. This is
simply a way of using language to disguise what is a simple tax increase
domestic oil and gas industry, one of the few industries that, even
recession, has contributed large amounts of revenue to the federal,
Oil industry officials say that the tax breaks, which
average about $4 billion a year according to various government reports,
bargain for taxpayers. By helping producers weather market fluctuations
invest in technology, tax incentives are supporting an industry that the
say provides 9.2 million jobs.
"Tax breaks" is hardly how oil industry officials
would describe these rules. But it is clear that increasing the costs
doing business in the United States by raising the tax rates on the
will not help maintain or increase job growth--quite the opposite.
The American Petroleum Institute, an industry advocacy
group, argues that even with subsidies, oil producers paid or incurred
billion in American income taxes from 2006 to 2008, and pay a higher
of their earnings in taxes than most other American corporations.
As oil continues to spread across the Gulf of Mexico,
however, the industry is being forced to defend tax breaks that some say
being abused or are outdated.
The Senate Finance Committee on Wednesday announced that it
was investigating whether Transocean had exploited tax laws by moving
to avoid paying taxes in the United States. Efforts to curtail the tax
are likely to face fierce opposition in Congress; the oil and natural
industry has spent $340 million on lobbyists since 2008, according to
nonpartisan Center for Responsive Politics, which monitors political
Jack N. Gerard, president of the American Petroleum
Institute, warns that any cut in subsidies will cost jobs.
“These companies evaluate costs, risks and
opportunities across the globe,” he said. “So if the U.S. makes
changes in the tax code that discourage drilling in gulf waters, they
elsewhere and take their jobs with them.”
But some government watchdog groups say that only the
industry’s political muscle is preserving the tax breaks. An economist
for the Treasury Department said in 2009 that a study had found that oil
and potential profits were so high that eliminating the subsidies would
decrease American output by less than half of one percent.
“We’re giving tax breaks to highly profitable
companies to do what they would be doing anyway,” said Sima J. Gandhi, a
policy analyst at the Center for American Progress, a liberal research
organization. “That’s not an incentive; that’s a
Other industries, in fact, based on profit margin per sales
dollar, are far more profitable than the oil and gas industry, but the
more advantageous treatment they receive under the tax code is
ignored. Under this analysis, allowing a tax deduction to any profitable
company for its costs a "giveaway", but in fact, under an income tax
the costs of earning income have to be "deductible". Calling
deductions "tax breaks" is just wrong. Calling the oil and gas
provisions "tax breaks", or giveaways, when if anything they are more
restrictive than for any other industry, is also wrong.
Some of the tax breaks date back nearly a century, when
they were intended to encourage exploration in an era of rudimentary
technology, when costly investments frequently produced only dry holes.
of one lingering provision from the Tariff Act of 1913, many small and
oil companies based in the United States can claim deductions for the
value of tapped oil fields far beyond the amount the companies actually
for the oil rights.
This is the percentage depletion deduction described
above--which is more limited for the oil and gas industry than any other
Other tax breaks were born of international politics. In an
attempt to deter Soviet influence in the Middle East in the 1950s, the
Department backed a Saudi Arabian accounting maneuver that reclassified
royalties charged by foreign governments to American oil drillers. Saudi
and others began to treat some of the royalties as taxes, which entitled
companies to subtract those payments from their American tax bills.
repeated attempts to forbid this accounting practice, companies continue
deduct the payments. The Treasury Department estimates that it will cost
billion over the next decade.
This may be the most disingenuous claim of all. Under
rules in place for over 25 years, again the most severe and substantial
restrictions and limitations apply to the oil and gas industry in
the US taxation of income earned outside the country. As noted above,
US has a worldwide tax system and taxes the income earned outside its
But under that system, it recognizes that it should not impose full
such foreign income because that would amount to full double taxation.
Thus, the US permits an offset for the US taxes otherwise due--only on
income--for income taxes already paid on that income to foreign
countries. The tax rules only allow an offset for income taxes paid
contrary to the assertion above, the tax rules forbid the claiming of an
credit for a royalty. Further, and most restrictive of all, the tax
place the entire burden of proof on the taxpayer to show that no portion
what it claims as an income tax offset is in fact a royalty. The
must overcome this burden by ultimately proving that up in an American
court. The Obama Administration would deny US taxpayers in this
the right to go to an American court to get a fair and neutral
determination. In other words, even where a taxpayer can meet the
highly restrictive rules and overcome the burden of proof, to the
of an American judge, the Obama Administration would deny that
opportunity. Rather than saying that the current rules will "cost
$8.2 billion over the next decade", it is more appropriate to say that
Obama Administration wants to simply raise $8.2 billion more from the
gas industry, on income earned outside its borders, on which in most
income tax burden approaching 50% has already been paid. This is a pure
and simple money grab, and it denies access to the judicial system to an
American taxpayer who believes the IRS has made a mistake. That is a
denial of a fundamental right, done under the "guise" of eliminating
a "tax break" to one taxpayer. The real question is why the
Obama Administration and Senator Menendez are afraid of allowing a US
review the actual facts, particularly given their call for transparency,
how denying the right to an independent review is consistent with sound
policy. If the Administration can deny this right of access to the
system for one taxpayer, what will prevent it from doing so for others
they may be out of current favor?
Finally, and perhaps most ironically, changing these rules
as proposed will actually reward the major foreign competitors of US
in the key, strategic world energy markets, including companies based in
Russia, and even in Great Britain or other European countries.
Over the last 10 years, oil companies have also been
aggressive in using foreign tax havens. Many rigs, like Deepwater
registered in Panama or in the Marshall Islands, where they are subject
lower taxes and less stringent safety and staff regulations. American
have also aggressively exploited the tax code by opening small offices
low-tax countries. A recent study by Martin A. Sullivan, an economist
trade publication Tax Analysts, found that the five oil drilling
had undergone these “corporate inversions” had saved themselves a
total of $4 billion in taxes since 1999.
They have not likely saved this tax on their activities
conducted in the United States, but they have avoided being taxed by the
their non-US income, in order to compete with companies headquartered in
countries. The punitive US tax laws applicable to taxation of non-US
income have forced these companies to leave in order to survive. The
of making such punitive rules even more punitive, in the face of what
force companies to do to survive, hardly seems the right strategy if we
trying to promote investment and jobs in the United States.
Transocean — which has approximately 18,000 employees
worldwide, including 1,300 in Houston and about a dozen in Zug,
— has saved $1.8 billion in taxes since moving overseas in 1999, the
Just considering the proportion of employees of Transocean
outside the US, and the fact noted in the following paragraph that
of its work is outside the United States, simply underscores that in
compete for that work against companies headquartered in other
Transocean determined, for its own survival, that it had to leave. A
system that creates that imperative is hardly in America's best
additional tax proposals that make current rules even more harmful will
counterproductive in the long run.
Transocean said it had paid more than $300 million in taxes
so far for 2009, and that its move reflected its global scope, with only
its 139 rigs located in the United States. “Transocean is truly a global
company,” it said in a statement.
Despite the public anger at the gulf spill, it is far from
certain that Congress will eliminate the tax breaks. As recently as
windfall profits for energy companies prompted even President George W.
— a former Texas oilman himself — to publicly call for an end to
incentives, the energy bill he and Congress enacted still included $2.6
in oil subsidies. In 2007, after Democrats took control of Congress, a
end the tax breaks failed.
This is again one of the pure fallacies. According to
a Congressional Research Service report (CRS Report for Congress,
2006), the Energy Act of 2005 actually increased taxes on the oil and
industry, including the refining industry, by over $1.3 billion; the
above takes one piece of the bill that was a benefit, without looking at
other parts of the bill that were tax increases. And one of the few
beneficial aspects of the 2005 bill was repealed in 2007 and 2008.
Mr. Menendez said he believed the Gulf spill was
devastating enough to spur Congress into action. But one notable
his bill shows the vast economic reach of the industry. While the
would cut many incentives over the next decade, it would not touch the
breaks for oil refineries, many of which have operations and employees
home state, New Jersey.
This sounds suspiciously like the health care bill with the
special "cornhusker kickback".
Mr. Menendez’s aides
the senator thought it was legitimate to allow refineries to continue
a manufacturing tax credit that he wants to eliminate for drillers
refining is a manufacturing business and because refineries do not
high oil prices. Mr. Menendez did not consult with New Jersey refineries
writing the bill, his aides said.
Clean Energy Works Memo