The People of America's Oil and Natural Gas Indusry

Energy for the Economy

John Felmy
Posted January 26, 2011

America has always been a frontier nation. From the wilds of New England and Virginia we crossed the continent, plumbed the depths of the oceans and launched ourselves high into space in the pursuit of opportunity. In the process we built the strongest economy the world has ever known and achieved a standard of living unimaginable even a century ago.

All of this is why it was heartening last evening to hear President Obama's State of the Union push for a culture of innovation in building the America of tomorrow. The oil and natural gas industry is a leader in exploring the opportunities of tomorrow. The industry invested more in low- and zero-carbon emissions technologies from 2000 to 2008 than either the federal government or all other U.S.-based private industries combined. And American advances in the safe extraction of natural gas have led the International Energy Agency (IEA) to almost double their estimation of the world's natural gas supply.

We agree with the President that we need to get "behind innovation" but the way to do it is not to take money away from private sector innovation in order for the government to decide technological winners and losers. Taking money away from the people leading the way in energy innovation is not the way to invest in tomorrow's energy. This tactic was tried in the 1970s and failed miserably. The government took money from the oil and gas industry, which resulted in reduced U.S. oil production, increased imports and lost jobs. Then, they poured the money down the drain on technology that didn't work. Let's not repeat the mistakes of the past.

We also understand the practicalities of developing and producing in volume products that people want, need and can afford - after all we supply 60 percent of the energy that our nation - and our economy - uses every day. In just one 24-hour period, the oil and natural gas industry delivers: enough energy to heat 80 million homes; 382 million gallons of gasoline to service stations, enabling 200 million drivers to get to work, take their kids to school, and take vacations-- traveling 7.5 billion road miles every day; and 67 million gallons to airport terminals, enabling 30,000 flights to travel around the world. In providing these products the oil and natural gas industry supports 9.2 million American jobs.

Jobs that will be at risk with the imposition of higher taxes on energy companies. And that is where we must take issue with the President's remarks. There are simply not billions of taxpayers' dollars given to oil companies. The oil and gas industry receives few treatment policies that do not affect other industries. Singling out the oil and gas industry for special taxes makes no sense. The oil and natural gas industry helps sustain our economy without relying on the government for its survival or success. In fact, through royalties, rents and bonus bids, America's oil and natural gas companies are one of the largest sources of revenue to the Treasury. In 2009, our industry paid an effective income tax rate of 48.4 percent while all other S&P Industrials paid 28.1 percent. And business tax deductions for oil and natural gas companies are often lower than they are for other industries.

I would also like to take issue with the President's suggestion that the oil and natural gas industry's success independent of government support is something worthy of punishment. Calls for higher taxes or fees on the industry would come at the expense of the millions of Americans who are shareholders in these publicly traded companies. Less than 2 percent of ownership is held by corporate management, the rest by mutual funds, pension funds, individual investors and IRAs - supporting the retirement dreams of millions of Americans, many of them middle class.

That's not to say our industry couldn't provide even greater lift to the economy, and to the Treasury, than we do now. We recently asked Wood Mackenzie to look at two scenarios, the first would raise government revenues from fees and payments associated with increased access to areas that are currently off-limits to energy development, and the second would raise government revenue from an additional $5 billion per year in taxes on the industry. Comparing the total government revenue impact from the two scenarios (access versus taxes, 2011 to 2025) shows increased access generates an estimated $150 billion in additional government revenue. Under the higher taxation scenario, net revenues are estimated to decrease by $128 billion. In short, the negative economic consequences of higher taxes will, in the long run, more than offset any short-term tax revenue gains.

More importantly, as millions of Americans struggle to find jobs, total additional direct, indirect and induced jobs in 2025 could exceed 530,000 in the increased access scenario. On the other hand, the higher tax scenario would result in a loss of jobs, estimated at almost 170,000 in the peak job loss year of 2014.

While the President's goal of stimulating "green energy" such as solar and wind is a noble aspiration, we must remember that we will use oil for the foreseeable future. Solar and wind are electricity sources and we have 250 million cars that do not plug in to use electricity, so we will need oil products for decades. If we are going to use oil, we should produce it here to generate jobs, revenue for the government, reduced imports and increased security. This is a "win win" for all Americans.

I will close with API president Jack Gerard's thoughts on the State of the Union:

Tonight was a missed opportunity. The president focused on job growth through federal spending, but was silent on one of the best ways to create jobs: allow more energy development. Natural gas and renewables are important components of our energy mix, but we will need our nation's vast oil resources for decades to come. The oil and natural gas industry is a key driver of new jobs and economic prosperity Producing more oil and gas at home, which most Americans want, could create hundreds of thousands of jobs, reduce our deficit by billions, and enhance our energy security. Even better, the government wouldn't have to invest a single taxpayer dollar - just give industry a green light to invest its own money. ...The oil and natural gas industry provides over 60 percent of America's energy, and it will continue to be the energy leader for decades to come. We need to produce U.S. oil and natural gas resources. This means getting back to work in the Gulf of Mexico, access in Alaska, and opening up the Atlantic and Pacific coastal areas to exploration. This is an issue the president and the new Congress should address."

ABOUT THE AUTHOR

John Felmy is API’s Chief Economist. He is responsible for overseeing economic, statistical and policy analysis and has over twenty-five years experience in energy, economic and environmental analysis. John is a Pennsylvania native and received Bachelors and Masters in Economics from Pennsylvania State University and a Ph.D. in Economics from the University of Maryland. He is a member of several professional associations including the American Economic Association and the International Association for Energy Economics.