After a bruising battle over cap and trade last year, President Obama has set his sights on another target — oil and natural gas companies. Vilifying “big oil” might be good politics, but it’s bad policy. If we’re going to get serious about energy solutions, we first need to separate the facts from the fables.
→Fable: Oil and gas companies aren’t paying their fair share of taxes.
U.S. oil and natural gas companies pay considerably more of their profits in taxes than other industries such as technology and financial services. In fact, the industry pays an effective corporate income tax rate that is 70 percent higher than roughly three in 10 S&P industrial companies.
As for those billion-dollar subsidies oil and gas companies supposedly enjoy, they don’t exist. The industry gets tax deductions, as any business does, but they are far less generous than those enjoyed by others in the energy sector. While oil and gas receive slightly more than 1 percent of government energy R&D funding, renewables receive 22 times as much funding.
→Fable: Oil and gas industry profits are “excessive.”
Many lawmakers have long pushed to increase taxes on oil and gas companies. After all, these companies are, in Obama’s words, “doing just fine.” Why not spread the wealth?
The trouble is, oil and gas companies aren’t as flush as lawmakers make it seem. Like other commodity businesses, oil and gas profits are cyclical, making them prone to booms and busts. According to PricewaterhouseCoopers, in all but four years from 1987 through 2006, oil and gas companies actually earned a lower return on their capital investment than other industries.
This is a key measure of comparative economic performance.
→Fable: Taxing oil and gas companies will reduce the national debt.
Senate Majority Leader Harry Reid and congressional Democrats recently proposed cutting tax breaks for oil and gas companies to help pay down the national debt. Besides the fact that oil and gas companies are already paying their fair share of taxes, there is another problem with this argument — namely, the oil and gas industry is a cash cow for government already. According to data from the U.S. Energy Information Administration, between 1981 and 2008, U.S. governments collected more in taxes from the oil industry than the industry earned in profits for shareholders. Raising taxes on the industry even more will only discourage investment, reduce exploration and production, and eliminate jobs.
→Fable: Raising taxes on oil and gas companies will bring us closer to a “clean” energy future.
Oil and gas companies pour billions into alternatives to conventional energy. University of Texas researchers found that from 2000 to 2008, the oil and gas industry invested more in alternative energies than the federal government and all other U.S. industry combined.
For all the finger pointing, the oil and gas industry is not the problem. If President Obama wants his new energy plan to succeed, he’ll abandon energy fables and start dealing with realities.