NSWA Join Renew
See More See More
<< Back to News

U.S. Oil Drillers Prepare For Punch In The Gut From Obama

Dr. Michael Economides
Sep. 20 2010 

The Obama administration’s proposed new taxes on the oil and gas industry may be threatening a consistently value-producing component of millions of portfolios and pension funds nationally. Energy stocks have remained one of the most fertile long term options throughout the recession, as companies have benefited from increased access to resources both domestically and abroad (until the recent moratorium).  Market uncertainty generated by proposed new massive tax hikes on the energy sector should have those invested in the industry on edge.

Specifically, two misguided tax proposals would increase oil and gas tax burdens in the states and double-tax the profits they earn overseas. A little known provision called “dual capacity” grants America’s internationally operating companies protection from double taxation, crediting them for taxes paid to foreign governments. Only India and France–neither of whom ranks among the top 10 in international competitiveness–double-tax international income, but the Obama administration wants to end dual capacity and double-tax U.S. companies.

The administration also wants to disqualify U.S. oil and gas companies from using a deduction authorized by the American Jobs Creation Act of 2004 that taxes domestic manufacturers in a manner consistent with the way foreign competitors are taxed.

Special Offer: BP is up 50% from its low. Transocean is up 43%. Did you reap these gains? Don’t miss out this time. Click here to follow the smart money into energy and gold stocks going higher in Block Trader’s Oil & Gold Monitor.

Recognizing the importance of energy for economic competitiveness, leading foreign powers, particularly China, are taking aggressive steps to secure access and control over vital fossil fuel resources.  Energy security is a cornerstone of national security and economic prosperity, but this new tax increase through the repeal of dual capacity credits would put U.S.-based companies at a serious disadvantage to foreign competitors, handicapping U.S.-based companies in the international energy market. A new IHS Cambridge Energy Research Associates (IHS CERA) study titled “Fiscal Fitness; How Taxes at Home Help Determine Competitiveness Abroad” explains:

Each dollar that a home government seeks to secure in taxation of repatriated profits is a dollar less that the company can offer to the resource holder. The more that the home governments subtract from the equation, the less competitive companies from that country will be when bidding for mineral rights.

Such a counterproductive measure would have negative effects beyond our oil and gas industry. A new study by LSU economist Joe Mason indicates that 154,000 jobs will be lost in 2011 should these taxes pass. Because of the integrated nature of oil and gas prices on the economy, as much as 38% of the job losses felt by new energy sector taxes would affect seemingly unrelated professional fields like education, administration, health care, real estate and the arts. Another 21% would hit manufacturing jobs for non-fuel related goods.

The repercussions for investments in the oil and gas sector will add an additional hit to the already under fire industry. An analysis by Woods Mackenzie speculates that $15 billion in investments are at risk should only one of these new tax proposals be instituted into law.

The picture painted by empirical research and economic studies such as those outlined above is clear; new taxes will push investments, revenue, and jobs abroad. With recent news revealing that 1 in 7 Americans were living in poverty last year, new taxes that remove value from the economy seem preposterous. The Senate denied one of these tax hikes in early September, refusing to fund an additional stimulus-related bill by destroying private sector jobs. Hopefully this sets the tone for proposed energy taxes, keeping domestic firms as a definite ‘buy’ for traders, and a stable producer in millions of American’s pension funds.