The People of America's Oil and Natural Gas Indusry

Energy Works - Why Break It?

Mark Green

Mark Green
Posted January 26, 2011

In the President's State of the Union speech last night, he highlighted innovation as a way to spur our nation into the future and focused on free enterprise, higher education and reinvention as integral steps toward our economic goals. The US oil and gas industry clearly supports this approach and has throughout its history. We have been providing consistent sources of energy to fuel our economy and innovative products to support our lifestyle for over a century. We would hope that we could continue to do so going forward. Unfortunately, the President appears to have other ideas. Clearly he supports increasing taxes on our industry - a step which will undermine our ability to innovate, hire and reinvent ourselves to continue supplying America's energy needs. The President didn't offer any specifics on what the $4 billion in tax increases would be, but we can look at past efforts as a guide. For example, the President has in the past classified the ability to currently deduct labor and other drilling costs as a subsidy. However, these costs represent our industry's research and development - one still needs to drill to see what is down there. Further, it is this very deduction that, like R&D in other industries, has spurred innovative approaches toward energy supply. New drilling techniques have changed the face of US energy reserves by unlocking trillions of cubic feet of gas in Pennsylvania and helping make North Dakota a major oil producing state. So it seems strange that similar costs should be deductible - and even in some cases supported by a credit - for other taxpayers in other industries but not ours.

In addition, another of the so-called "subsidies" targeted by the President is the domestic manufacturing/production deduction for the oil and gas industry. This deduction was instituted to keep manufacturing jobs in the US and help spur new ones - goals certainly in line with the President's objectives. Currently, it is available to all other US manufacturers (from grinding coffee beans to building turbines to printing papers) at rate equal to 9% of their US production income. However, while the oil and gas industry is also eligible for this deduction, it has been capped at just 6%. But the President's point is that this deduction is somehow a subsidy only when it applies to our industry. So much for reliance upon free enterprise.

The fact is that the oil and gas industry already pays significant taxes - generating an effective tax rate of around 48%, which is 70% higher than the rate paid by the rest of the S&P 500. It already provides almost $100 million a day in rents, royalty and tax revenue to the government. It already contributes a substantial amount to the US economy. And yet, it is seen as part of the problem rather than an avenue toward a solution. Apart from the political rhetoric, the US oil and gas industry is highly competitive and capital intensive - as a result it must also be innovative and use cutting edge technology. The oil and gas industry generates good paying jobs and substantial investment in the economy. These are all things that the President says is searching for in a US based industry - maybe he should recognize that he has one already.


Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.