With the oil industry reporting record profits last year, the Democrat-led House passed legislation last week that repeals several production incentives. During today's OnPoint, the American Petroleum Institute's chief economist John Felmy explains why he believes this legislation reverts to failed policies from the past. He addresses the role that ethanol could play in the United States' energy policy but urges caution in increasing its use. Felmy also talks about the petroleum industry's image issues and explains how it plans to combat misinterpretations.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is John Felmy, chief economist at the American Petroleum Institute. John, thanks for joining me today.

John Felmy: Thanks for having me.

Monica Trauzzi: The House passed energy legislation that repeals oil industry tax breaks and ensures royalty payments on deepwater Gulf of Mexico production. Overall, what's your industry's reaction?

John Felmy: This is an unfortunate decision. It basically reverts to failed energy policies of the past. It basically takes money from the oil industry, for whatever reason, and tries to spend it on alternatives. They tried this 25 years ago with the Windfall Profits tax where they drained $79 billion from the industry and then largely frittered it away. It resulted in lower production, increased imports and was a complete failure.

Monica Trauzzi: The White House says, "Industry should be taxed on a level playing field and that field should be leveled by lowering rates, not by raising them." It says, "It's inappropriate to single out this industry from all others for punitive tax treatment." Is the oil industry being set up to be taxed unfairly?

John Felmy: Absolutely. We're being singled out for no good reason. You know, when you have these provisions in place for all industries, including such industries as movie industries, why do you want to single out a real important industry for consumers and raise the cost of producing oil?

Monica Trauzzi: But the only way to increase alternatives, I mean if they have to take money from one to give it to the other, doesn't it make sense to take the money from oil taxes and use them for alternatives?

John Felmy: Absolutely not because the oil industry is already investing close to $100 billion over the last five years on the emerging energy. We're investing in alternatives such as frontier hydrocarbons, LNG, energy efficiency, and renewables. We're already doing it. There's no case they can make that the government can do a better job.

Monica Trauzzi: But your industry is also reporting record profits and has for some time now. Why shouldn't some of these tax breaks and other incentives be removed?

John Felmy: First because the industry profits are large because the companies are large. But as far as a profit rate, cents on the dollar, we're only slightly above the average manufacturing industry. Second, this money is owned by somebody. Our companies, as I like to say, are not owned by space aliens. They're owned by millions of retirees and other individuals who invested their hard earned savings. You're basically just taking money from retirees and trying to spend it on projects which could end up being earmarks and boondoggles.

Monica Trauzzi: The bill would deny new leases to companies that do not agree to thresholds or do not agree to pay new fees. Would your members sue the Interior Department if a lease/sale came along that they were unable to participate in because of the new rules?

John Felmy: I can't speak for individual members, but if you go back to the original legislation it is silent on price thresholds. So it's an open question on whether or not they should have been imposed in the first place. But the other thing is this forceful type of legislation basically puts us in the same camp as Bolivia where constitutional matters don't matter. In other words, rule of law is less important and that's really unfortunate.

Monica Trauzzi: What would the House changes do for domestic oil production?

John Felmy: Well, if history is a guide, we learned that when you impose taxes on the industry you reduce the incentive to be able to produce, you could see a drop in production, an increase in imports. And that takes us the wrong direction from what everybody wants to do.

Monica Trauzzi: Like I said earlier, the legislation passed in the House. What are you expecting in the Senate?

John Felmy: You know, I've been around Washington long enough that it's impossible to handicap Capitol Hill. But I will say that we've heard some very positive signs from some senators who are thoughtful, who are saying we're going to have a thorough discussion of this. We're going to see what are the merits of any of the proposals? What are the merits of the existing laws? And then move forward deliberately. This rush in a hundred hours was a bad way to proceed. There's no way you can make a case for rushing to change energy policy or any other policy for that matter.

Monica Trauzzi: Was in a rush though? Weren't the American people calling for it because they were sick and tired of paying high prices at the pump?

John Felmy: Well, you know, eat you need to inform the American people about what the facts are. Just because they're calling for it doesn't mean you should do it. There's no way you can make a case that raising the costs to our industry will help consumers. So in that sense, whether they were calling for it or not is irrelevant. The key thing is you need to do the right thing.

Monica Trauzzi: The provisions passed without much issue in the House, despite objections by the White House and by your industry and also an ad campaign, a television ad campaign that API was a part of. Does your industry have a PR problem?

John Felmy: We have had an image problem since the days of John D. Rockefeller and Ida Tarbell. And it's because we haven't told our story. If you look at the facts of the industry and you carefully look about what goes into pricing gasoline, what are the costs, what are all the issues involved, most people will give us a fair treatment. The problem is, is we've done a lousy job of that and we're going forward. We're going to try to do a better job.

Monica Trauzzi: And how you going to do that? Are you going to keep coming out with these TV ads and try to educate the American consumer?

John Felmy: We are going to continue to tell our story. We're doing it such as things I have done, for example, I do dozens of editorial board visits. I visit with the media of major markets. We'll continue to do advertising that tells our story that says these are the facts of the industry. We'll meet with legislators at all levels and with anybody, basically, who's willing to hear an economist such as Rotary clubs and chambers of commerce. And so we've been told that we need to tell our story and we're going to do it.

Monica Trauzzi: What do you think is the single biggest misrepresentation about the oil industry?

John Felmy: The biggest misrepresentation is really how big our earnings are. People do not know what the price of crude oil is for example. They don't know that yesterday crude was a little over $50 a barrel, so it works out to $1.20 a gallon. They don't know that they're paying 46 cents in taxes, so they don't know that the base cost, for example, of gasoline, crude and taxes, is $1.66 before you refine, market it, transport it, and delivered it. And then when you take all those costs out we make a little over nine cents on a dollar. So that's the biggest misconception.

Monica Trauzzi: And let's talk about the price per barrel, because it did drop below $50 and a lot of people are saying why aren't we seeing those prices reflected at the pump? Is there price gouging?

John Felmy: Well, they are seeing the prices reflected in the pump. If you look at the national AAA data you'll see that gasoline prices, since the relative high point, are down about 15 cents a gallon. Crude oil, by comparison, is down about 30 cents, so you're seeing gasoline prices following crude prices. And as the DOE said yesterday, this is a typical relationship with a lag.

Monica Trauzzi: The president has his State of the Union address coming up and last year he said America was addicted to oil. Are you expecting his comments to have a similar focus on oil and the negative impacts of oil over use?

John Felmy: I don't know. I'm not tied into what's going on in the White House. But I will say I would hope to see a visionary proposal that says we need to move forward with energy policy that follows the following things. We need to increase supplies. We need to improve energy efficiency and reduce demand and we need more infrastructure. That includes alternatives such as ethanol. It includes some renewables. It includes frontier hydrocarbons. I would hope that that's what the message would be.

Monica Trauzzi: Let's talk about ethanol and biofuels. This year's farm bill is likely to include biofuels incentives. A lot of people think ethanol is the way to go to reduce our addiction to oil. What's your industry's reaction to this push for biofuels?

John Felmy: Well, we're the biggest user of biofuels. We're using about five billion gallons of ethanol a year in the gasoline supply. Ethanol will continue to play a growing role as we go from 5 billion to 7 1/2 billion as required by law. But you've got to be very careful about how big a role it can play because when you get to 20 percent of the gasoline supply you're using 100 percent of the corn crop. We've already seen corn prices double. We've seen impact on livestock feeding. We've seen a whole host of cost increases because of this increase in ethanol already. So let's be very, very cautious about how much we want to do with that.

Monica Trauzzi: Once the technology for cellulosic ethanol comes along is that going to be an issue?

John Felmy: Cellulosic ethanol could be a holy grail. If we can develop the technology to be able to convert waste into fuel, that would be a wonderful thing. But it's a question of when or maybe if. The chief economist of the USDA last week indicated that that technology could be years, if not decades, away. So we still have a long way to go. We don't have a commercial operation. We don't have a plant. We know how to make it in the lab, but that's not the same as producing it in huge volumes.

Monica Trauzzi: We're seeing many different emissions reduction legislation coming forth now. What kind of legislation would your industry support?

John Felmy: Well, we have strongly supported doing things on climate change. We've strongly supported increasing technology development, improving efficiency, and doing things that make sense irrespective of what you think of the climate science. We would advocate going forward with those types of things. We don't advocate emissions caps that can impose considerable costs on the economy. While they are an efficient way of imposing a costly policy they still do impose costs.

Monica Trauzzi: OK. We're going to end it on that note. Thanks for joining me John.

John Felmy: Thank you.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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