The People of America's Oil and Natural Gas Indusry

Energy Tomorrow Radio: Episode - 125 The State of American Energy

Jane Van Ryan

Jane Van Ryan
Posted January 4, 2011

In today's episode, I interview API President and CEO Jack Gerard about his "State of American Energy" speech. He stressed the need for sensible policies that create jobs, generate government revenue, and strengthen U.S. energy security.

Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.

00:17 At the beginning of every new year, people all over America tend to reflect on the past 12 months and think about what they hope to accomplish during the next 12 months. Here at API, we're doing something similar. We're examining the state of American energy and providing our thoughts on how domestic energy resources can help the economy grow and improve U.S. energy security. To talk about this today, API's President and CEO Jack Gerard has joined us in the studio.

00:50 You made a speech in Washington, D.C. today about the state of American energy. What did you tell your listeners?

00:56 Mr. Gerard: I explained the significant contributions of the oil and natural gas industry, including those to our domestic economy and went on to describe where it could contribute even further. Studies have shown that the industry generates billions in government revenue, creates millions of jobs and provides a major boost to our economy. Our industry supports more than $1 trillion in annual contributions to the U.S. economy--approximately 7.5 percent of U.S. GDP. Between 1982 and 2009, we paid more than $178 billion to the government in forms of rents, royalties and bonus payments. The oil and natural gas industry can generate another $1.7 trillion in government revenue if we were allowed to explore for and produce those oil and natural gas resources in the areas that are currently off-limits. The industry also supports 9.2 million U.S. jobs. Studies and analyses show that we can create another 160,000 jobs by 2030 if those off-limit areas were opened up for development. Other studies have looked at specific development opportunities, such as those in the Marcellus Shale. This could add another 280,000 jobs by 2030. Greater Canadian oil sands development could create yet another 340,000 new jobs. All of those are right here in the United States. Our broader message today, as part of my speech here in Washington, D.C., is that with millions of Americans out of work it makes sense for us to encourage policies that allow the industry to do what it does best--produce energy from all sources for Americans and at the same time foster job creation. This also means that our policymakers should avoid taking actions that potentially discourage our domestic energy production. We've had some who promote increased taxes on the industry and perhaps regulations. We believe these are excessive because both could harm our economic expansion, and candidly, the nation's energy security.

03:22 As you mentioned, some policymakers have tended to see the oil and natural gas business as a funding source. The president's proposed budget called for new taxes on the industry and some members of Congress have sought to raise energy taxes to generate government revenue. Why doesn't that make sense for the economy today?

03:41 Mr. Gerard: I think the public was very clear in the election. They said they had three priorities on their mind: jobs, jobs and more jobs. Too often our policymakers have sought to raise revenue by taxing the oil and natural gas industry. A new study by Wood Mackenzie shows there's a real danger in that approach. Wood Mackenzie compared the impacts of two fundamental scenarios. The first would raise revenues for the government from fees and payments associated with increased access to those areas I mentioned earlier that are currently off-limits. In other words, the sort of revenue that would come to the government from allowing us to develop America's oil and natural gas. The second would raise government revenue through an additional $5 billion in direct taxes on the industry. The results show us that not all revenue is created equal. When you compare the total government revenue impact from the two scenarios, the increased access scenario generates an estimated $149 billion in additional government revenue. However, under an increased taxation scenario, those net revenues are estimated to decrease by $128 billion. The negative economic consequences of higher taxes will in the long run more than offset any short-term revenue gains. But even more important than the revenues, are the total additional direct, indirect and induced jobs could exceed 400,000 jobs in the increased access scenario. Simply put, give us an opportunity to develop America's oil and natural gas resources and we'll generate many jobs and produce billions of revenue for the government at a time when we have high deficits. The higher tax scenario results in lost jobs and ultimately lost revenues. We think it's a pretty clear choice. Some want to punish the industry with punitive taxes, but this is the absolute wrong direction at this time.

06:25 There are critics that say the oil and natural gas industry should pay more in taxes because it's not paying its fair share now.

06:34 Mr. Gerard: We take issue with those folks because we believe the oil and natural gas industry pays more than its fair share today. Under the current taxation system, we pay almost twice as much as our peers in other industries. For example, in 2009, the effective tax rate for the industry was 48.4 percent and 28.1 percent for the rest of the Standard and Poors Industrials. Between 2004 and 2008, major oil and natural gas companies paid $300 billion in income taxes alone. Those figures don't include the $178 billion we paid to the government in rent, royalties and bonus payments for the rights to produce on federal lands. If you add it altogether, we're paying more than our fair share. We're happy to do so, but we think the best approach is increased access, not punitive taxes. That's the way to generate royalties and revenues during a tough time for the government. Back to what the public said in the last election--this approach creates jobs. These are well-paying jobs. That's the direction we should be going.

08:08 You mentioned what happened in the November election, but aren't there also polls that have indicated Americans do not support higher energy taxes?

08:17 Mr. Gerard: Absolutely. In late 2008, when the price of gasoline rose to as high as $4 a gallon, the public looked closely at U.S. energy policy. I believe they asked themselves the question: why are we sitting on American's vast oil and natural gas resources and not producing our own and yet our prices are higher than they should be in this country? I think at that point, the public really began to look at the impact of our energy policy from a taxation perspective, as well as the access perspective. Recent polls conducted by credible groups, such as Harris Interactive, which is a nationwide, well known polling group, found that a clear majority rejects higher energy taxes. This is across the country--from Maine to the West and Midwest, to the South and Southeast. Another recent poll done by Rasmussen found that 54 percent of U.S. voters believe the administration's decision to shut down offshore development--the Atlantic, Pacific and eastern Gulf of Mexico--will not only harm our economy, but will raise gasoline prices. Clearly, the public understands the impact of these economic access decisions. The polling data shows that they do not want additional costs put on their energy. They want reliable, efficient low cost energy and that's what this industry has done so well. We hope that will continue to be the vision moving forward.

10:00 As you know, tax increases were not the only concern for the oil and natural gas industry in 2010. The very tragic Deepwater Horizon accident had a major impact on U.S. energy policies, as well as the American public. What are your thoughts on the accident and its impact on policies today?

10:19 Mr. Gerard: The Gulf spill was a tragic incident. Our commitment as an industry has always been zero accidents and zero injuries. The industry works very hard to make safety its top priority. Since the Gulf spill, the industry has rallied together quickly and has demonstrated its commitment to ensuring that safety is our top priority in all of our operations, practices and response capabilities. We created a number of industry task forces to identify and learn from any gaps in our operations and practices. We took those recommendations--at the request of the president--and shared them with the U.S. Department of the Interior and very quickly they adopted a number of them as part of the regulatory regime moving forward. Some of our member companies rallied together to develop new quick-response equipment to respond to an unfortunate tragic event. Our hope is that this equipment will never be used. It's going to be built and will be ready to go, demonstrating that we know our role and responsibility and we're prepared to meet it. We've also increased our transparency by making our industry standards and best practices available to the general public. We're happy to have their input and have them share their thoughts. We continue to work with the U.S. Department of the Interior and the bureau that regulates us to move forward with our offshore activities. In light of the tragic event in the Gulf, we have spent a lot of time and resources, and we recognize our responsibility as an industry. We're also moving very quickly to even further improve our safety and performance for the long-term. We owe it to our employees and to the nation that has put so much trust in us to develop these vast energy resources. We take our role as an industry very seriously and we're working hard to advance our performance moving forward.

12:37 Much has been written recently about the slow pace of the permitting process for oil and natural gas development in the Gulf of Mexico. As you know, the moratorium was lifted in mid-October, but very few permits for exploration have been approved by the federal government and that includes production as well. What are your thoughts on that today?

12:58 Mr. Gerard: It's been very frustrating. We think it's very important to enhance our safety and improve our performance, but we think the original moratorium that stopped the ongoing development activities in the Gulf was not a good decision. We think the decision was misguided and unnecessary. We can improve safety without shutting down the operations. We thought it was very appropriate to quickly move out and inspect the rigs that were there and those we're trying to move into the deepwater. It has been frustrating working with the U.S. Department of the Interior. We don't think things have moved as quickly as they could or should. Unfortunately, peoples' jobs are at stake. There have been a number of people who have lost their jobs. We believe we need to do everything we can to put our people back to work. Not only for their sake and for the benefit of their families they support and their local communities and small businesses, but the need to produce the energy the country needs. About one third of the energy we consume in the United States comes out of the Gulf of Mexico and approximately 80 percent of that oil and 45 percent of that natural gas is located in deepwater. The Gulf of Mexico is very important to us, to the well-being of the country and to energy security. We're anxious and strongly encouraging the U.S. Department of the Interior to move quickly to develop the regulatory framework. We understand the role as a regulator, but we do believe they can move quicker to approve permits, properly review those permits and to inspect our operations to get our people back to work.

14:47 No doubt that was one of the recommendations you had in your speech today, but were there others you'd like to mention?

14:55 Mr. Gerard: We urge the policymakers to understand the energy reality we deal with in our society, particularly here in America. The vital links that exist between the U.S oil and natural gas industry and our domestic economy. As I mentioned earlier, the industry currently supports 9.2 million jobs and more than $1 trillion in economic activity. We have the ability to create even more jobs and economic activity. The voters spoke loud and clear. They want jobs and economic recovery. But as we look to the future we have two choices, we can either take this moment in time, which is going to be so critical to the future of the country, and encourage more domestic oil and natural gas production to meet those demands I spoke of, generate more jobs and revenue. Or we can take a policy approach that discourages our domestic development. Unfortunately, that forces us to import more energy from other sources and spending more money overseas. Jobs will be created in the energy industry, if not here, elsewhere around the world because energy is the lifeblood of all of the economies around the world. We're really at a fundamental crossroads and we have a choice. Do we want to create and produce American energy or are we going to go elsewhere for our energy? We strongly encourage Congress and the administration to make commonsense policies and regulations that provide a fair and stable opportunity for us to produce the nation's oil and natural gas for the benefit of all Americans. We need a public policy framework to ensure future energy security for our nation and that means producing domestic energy for domestic purposes. We need to get it right. There's much at stake. We believe to do otherwise would be a mistake and would be a wrong direction. Let's get focused on energy, get beyond partisan ranker and partisanship of the country--energy is bipartisan.

17:34 Thank you for joining us today on Energy Tomorrow Radio.