- The Washington Times - Friday, July 30, 2010


The Gulf of Mexico oil-rig explosion in April is the source of the most extensive environmental disaster in the nation’s history. Untold quantities of crude oil have spilled into the Gulf, affecting the economic and ecological well-being of several states.

But the government’s response has been focused less on ending the crisis in the Gulf and more on using the disaster to advance a particular agenda. As President Obama stated during his June Oval Office address, the Gulf crisis offers an incentive to end “America’s century-long addiction to fossil fuels.”

In pursuit of this agenda, the Obama administration seems intent on creating a fuel shortage designed to raise energy prices for Americans in order to “save the environment” while enabling a transition to “green” energy sources. One thing is certain: This agenda will indeed raise energy costs.

The administration’s initial step in pursuit of this agenda was to impose a moratorium on further offshore drilling. When a federal court threw out the original ban as arbitrary (a ruling upheld on appeal), the administration issued a new one that banned drilling from floating rigs. This exacerbates the economic situation in the Gulf and ensures that many rigs will be moved to overseas locations. In addition, the moratorium will cost the country 200,000 to 340,000 barrels per day of output next year, reducing total U.S. production 20 percent by 2015.

As economically dysfunctional as the moratorium may be, many energy experts are more concerned about the impact of pending tax increases. The administration wants to raise taxes on oil companies by $4 billion a year, mainly by rescinding tax incentives that have been around for years and that in many cases apply to industries other than oil and gas as well.

In addition, proposed legislation would raise oil-industry taxes by another $20 billion. Any so-called carbon taxes that have been proposed as part of a “cap-and-trade” bill would be extra. These taxes would hurt domestic oil production, resulting in the loss of thousands of existing jobs, preventing the creation of new ones and increasing foreign oil dependence.

Many of these proposals are based on the claim that the oil and gas industry receives special breaks that are not available to other sectors of the U.S. economy. But consider these facts: The oil and gas industry generates 7.5 percent of the country’s annual gross domestic product (GDP), provides 9.2 million jobs and provides $550 billion in labor income. Meanwhile, it is far from undertaxed, having paid about $180 billion to federal and state treasuries in 2007-08.

Critics of the oil and gas industry argue that fossil-fuel producers benefit from a tax deduction of 9 percent of qualified income from oil and gas produced in the United States. But this is a deduction that applies to all sectors of the U.S. economy. And beginning this year, the deduction for the oil and gas industry will fall to 6 percent.

Indeed, the tax burden of the oil and gas industry is higher than for manufacturing firms in the United States. Income-tax expenses (as a share of net income before taxes) for oil and gas is 53.2 percent. For manufacturing, it is 32.2 percent. Because many U.S. oil and gas firms operate globally, they often pay more taxes in the United States than they receive in U.S.-generated revenue.

For the oil industry, a combination of higher taxes and a continuing moratorium on deep-water drilling is an incentive to move rigs overseas. It also will lead to increased reliance on foreign oil, a loss of jobs and revenue and higher consumer costs.

MacKubin Owens is associate dean and professor of national security affairs at the U.S. Naval War College in Newport, R.I., and is a senior fellow of the Foreign Policy Research Institute (FPRI) in Philadelphia.



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