With the economy in full focus and an energy package expected later this year, the oil industry is bracing itself for another legislative battle on a windfall profits tax. During today's OnPoint, David Montgomery, vice president of CRA International and the author of a new report on the economic effects of a windfall profits tax, makes the case against taxing the oil and gas industries. The report, commissioned by the American Petroleum Institute, focuses on job and gross domestic product losses that could come about as a result of a windfall profits tax.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is David Montgomery, vice-president of CRA International and the lead author of a new study on the impacts of windfall profits taxes on the economy. David, it's nice to have you back on the show.
David Montgomery: Thank you, it's good to be here again.
Monica Trauzzi: David, this new report commissioned by the American Petroleum Institute contends that any new taxes imposed on the oil and natural gas industries in the U.S. will lead to hundreds of thousands of job losses. What's the basis for the conclusions you make in this report?
David Montgomery: The basis for the conclusions is really looking at how proposed taxes on oil companies or other policies that would affect their future investments change the return, the profits that the companies can expect to make on future investments. And that then leads to a, when those returns on future investments are reduced, leads to a reduction in drilling, a reduction in domestic oil production, a contraction of that industry, higher oil imports and generally higher costs for consumers. That then works through the economy to the rest of the affects we were describing.
Monica Trauzzi: And you looked at the legislation that was discussed last year in Congress specifically on the windfall profits?
David Montgomery: Yes, we looked at S2971, it's a complicated bill with some complicated formulas, but boiling it down to what we actually analyzed, essentially it taxes away 50 percent of the profits that oil counties could earn on any new investments in a period when they were actually able to make money.
Monica Trauzzi: And so then how many jobs are we talking about losing and what's the overall impact on the GDP?
David Montgomery: Are looking at a loss of several hundred thousand jobs by the year 2030 and an impact on GDP of somewhere between half a percent to maybe a shade under 1 percent loss, compared to what would otherwise be.
Monica Trauzzi: All right, so Exxon Mobil recently announced that their fourth-quarter profits for last year were down 33 percent. But they still made billions and billions of dollars, which is a lot more than a lot of U.S. companies can say for last year. So why should taxpayers essentially be footing the bill for their success?
David Montgomery: It's really the other way around. First of all, the U.S. has the highest taxes on businesses of any major developed country. So we tax businesses profits already very substantially. The second point is the oil and gas industry is a very cyclical industry, prices go up, prices go down. Right now prices are very low. Companies are reporting losses rather than gains and last year or the year before, prices were high and companies were reporting high profits. The problem is that the incentives for making new investments are profits and when legislation cuts the prospective profits in half there's less of an incentive for companies to do something. In fact, even in a period when prices are low, what keeps the investment going is the expectation that in the future prices are going to rebound, they always do, and it will be possible to make a profit. But if legislation cuts off half of those profits in the good years then you're only left with the losses in the bad years and that substantially reduces the incentives for making investments.
Monica Trauzzi: The timing of the release of this report is kind of interesting because it's sort of sets this up as a pre-emptive strike against what might happen in energy bill discussions this year. So you're sort of assuming that this will be a component of the energy bill that we see this summer?
David Montgomery: It's a perennial issue and part of it has to do with design of policies and part of it has to do with what you expressed, the notion that when oil companies are making profits, those profits need to be taxed. But last year we saw not just windfall profit legislation, tax legislation, we saw price gouging legislation which would essentially have the same affect on the ability of refiners to make profits during those rare periods when they actually are able to make some, the negotiations over the Alaskan pipeline with the State of Alaska are very much the same kind of thing. What's going to happen in the future if profits are there and how much will go to the state and how much will go to the oil companies? Is that enough for the companies to be willing to make the investments? So, it's a perennial issue. Probably any time is a good time to talk about it.
Monica Trauzzi: As you pointed out a couple of times, you feel that this tax policy would result in less domestic oil and gas production. But President Obama has said that he really has no intention to expand oil and gas drilling in the U.S. In fact, he recently reversed oil and gas leases in Utah. Is this a situation where the oil industry is sort of panicking because of this clean energy policy that the U.S. now has with President Obama in office?
David Montgomery: I can't speak for the oil industry, but I doubt it. Personally, I think we still need to see where the Obama administration ends up on access to prospective areas and drilling. The problem though is we have to run harder and harder to stay in the same place. So, the issue is not whether in many cases we're going to be expanding production in the U.S., it's how fast the production is going to be declining. There are some very attractive places like the gas shales where we could, I mean it's been a tremendous surprise in the last couple of years, at least to me, at how rapidly we've been able to increase natural gas production and it's taken a tremendous amount of drilling and a tremendous amount of expenditure. But it's not clear to me which way Obama's administration is actually going to go on this.
Monica Trauzzi: And the report points to problems with other taxes, other combinations of taxes that could be equally problematic. I'm curious if you're sort of hinting at what climate legislation could mean for this, if that sort of falls under that category of other taxes?
David Montgomery: It wasn't what I had in mind. In the study I think the focus that we had was on the taxation of profits from new investment. Now, it's clear that climate legislation will tend to discourage oil and gas production, will tend to discourage use of coal, will tend to discourage use of oil fossil fuels and change that market. One thing about climate legislation, if it's designed with any grain of economic sense, is it will be neutral between imports and domestic production, so that it will not be providing a disincentive for producing the oil in the United States while leaving consumers free to consume similar amounts and bring additional imports in. So there are certainly trade-offs in climate policy between energy security and environmental protection, but I would not expect climate policies to have as direct a negative impact on energy security as a tax which is purely directed at domestic oil production and actually encourages oil imports.
Monica Trauzzi: OK, well, it's an interesting report. I thank you for coming on the show.
David Montgomery: Thank you Monica, very good to be here.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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