Oil & Gas

API's Dougher says tax break repeal will hurt industry's international competitiveness

As oil and gas companies continue to report record earnings, will Congress' attempts to repeal industry subsidies succeed? During today's OnPoint, Rayola Dougher, senior economist at the American Petroleum Institute, discusses the prospects for a tax break repeal and the impacts of such a move. She also discusses a new study that highlights what she says are the benefits to having subsidies in place.


Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Rayola Dougher, senior economist at the American Petroleum Institute. Rayola, thanks for coming on the show.

Rayola Dougher: Thank you.

Monica Trauzzi: Rayola, House Speaker John Boehner recently clearly acknowledged that larger oil companies do not need to have at least one of the federal tax benefits that they're currently receiving. Was this a misstep on his part or is there some truth to what he said? Are there certain tax breaks that your industry just doesn't need?

Rayola Dougher: Well, there's a lot of confusion about these so-called subsidies or they're characterized as subsidies. These are tax deductions that every business in the United States shares with us. And our industry has been targeted and they're called subsidies, but indeed, we do need these subsidies. They're a part of how we do our business and it would make a difference to us. We would not be able to invest as much as we can and it would erode our competitive -- our competition and our ability to compete internationally, as well as some of these smaller producers in the United States that bring a lot of supply to the marketplace. So when you go after the investment potential of this nation, what you do is shrink the tax base and what we want to do is grow the oil and gas industry in the United States. We want to bring more jobs, more investment and this would be really going in the opposite direction from that. So it's a cumulative effect, it's 4 billion this year, 4 billion next year, the year after that. You know, Washington right now is investing $2 billion in Brazilian oil. What's that about? We want to turn that around. We want to invest here and we want to bring the jobs here. So I know Washington is looking for money, but I think they're looking in all the wrong places. This is an industry that invests heavily and our earnings are big. We are big companies and we compete with nationalized oil companies around the world. So when they start whittling away different pieces of the tax code, it makes us less competitive, makes us less able to invest.

Monica Trauzzi: Senator Reid has indicated that repealing federal tax breaks will be at the top of the agenda when Congress returns to Washington. Will a measure like this have legs?

Rayola Dougher: I don't know. I certainly hope not. It's a mistake to go after these earnings of the industry. We are broadly owned by tens of millions of Americans. The profits of our companies go to these shareholders, their pension plans, their 401(k)s. These are folks, middle-class Americans that are heavily invested in our companies, retired firefighters, teachers. Ninety-eight and a half percent of the ownership of oil and natural gas companies are broadly owned by the American people. So you're going after those investors and you're going after our ability to bring more to the market. It will mean we will be more dependent on other sources for energy than we would have otherwise. We will import more if we can't develop domestically. So that 4 billion, or whatever number they want to come up with, does erode our ability to compete and it erodes our ability to bring product to the market.

Monica Trauzzi: What does it do for PR though, all this negative talk about the oil industry?

Rayola Dougher: Well, it's so easy to segue into that because I think consumers are so frustrated with these higher prices and then they hear earnings of industries and they hear, oh, $10 billion, or whatever it is, without fully comprehending that these are big industries and they're reinvesting 10 times as much. In terms of taxes, they're paying 2 1/2 times as much as their profits. Each and every day in America our industry contributes about $100 million a day in tax revenue. And you can look at the balance sheets of many of these big companies who are reporting now, look at the bottom line, look at how much they're paying in taxes. It's big.

Monica Trauzzi: So why have Exxon and Shell just reported big jumps then in their first-quarter earnings? I mean is it a result of higher gas prices, higher oil and gas prices?

Rayola Dougher: Absolutely! They're big producers of oil in the marketplace and they're receiving, as we all know, more for a barrel today than we were a year ago. And what that means then, when this money comes in you reinvest it. A lot of the energy we consume today is brought to us by investments made a long time ago. So when this money comes in, it's the market saying bring on supply, bring it on fast. And these companies take that money and they reinvest most of it. They pay a lot in taxes. Exxon's tax rate was 2 1/2 times what their earnings was and their earnings were substantial. And the rest of it goes to the shareholders. And, as I said, who are these people? So this is a positive thing, to have a strong, growing industry in the United States.

Monica Trauzzi: But you can understand consumers' frustration-

Rayola Dougher: Oh, I do.

Monica Trauzzi: When they're paying --

Rayola Dougher: I absolutely do.

Monica Trauzzi: Over four dollars a gallon every day to fill up their car.

Rayola Dougher: Absolutely!

Monica Trauzzi: And we're seeing Exxon and Shell reporting needs massive profits.

Rayola Dougher: Sure, sure, I do understand that, but it is a really solid, good thing for an industry that supports over 9 million jobs in this country and who has a good rate of return on investment for shareholders. This is not a negative for America. This really is a positive for us. It's a positive for pension people and it's a positive for 401(k)s for working Americans. And we have to be able to make that reinvestment. We have to be able to bring more product to the market and we have to remain competitive in the world's marketplace.

Monica Trauzzi: You've mentioned pensions a few times and I want to talk about the new study that API just released, specifically highlighting the benefits you say that the oil and gas industry is having on retirement plans for Americans. Steve Ellis, the vice president with Taxpayers for Common Sense, says it's the most ridiculous argument he's ever heard to justify subsidies for industry. His point there is if you guys are benefiting all these retirement plans because of your subsidies, then should we start giving subsidies to all industries that have high profits?

Rayola Dougher: Well, the premise is mistaken there. These are not subsidies. These are tax deductions, longstanding tax deductions that are shared by most of the rest of U.S. industry. Our industry, the oil and gas industry, is being singled out, is being targeted individually to go after these tax provisions in our tax code. Some of them there since the tax code started. This is the way that our investors and those folks that drill wells are able to recover their costs. All other industry in the United States is able to do this. This is a targeted attempt at the oil and gas industry. They're going after the manufacturers tax deduction that every manufacturer in the United States is allowed to take. They take 9 percent, they give the oil and gas six, that's being called a subsidy for our industry, but a legitimate tax deduction for others. So, this is shortsighted. It's taking us in the wrong direction. We want to grow this industry. You start whittling away our ability to invest, we will have less tax revenue to hand over.

Monica Trauzzi: Democrats have authored legislation that would force oil companies to speed up their projects on leases that they currently own. Why are there so many unused leases in the U.S. what it comes to domestic drilling?

Rayola Dougher: Well, I'll tell you. These leases are usually on a 5 to 10 year cycle. When you get a lease it doesn't come with a MapQuest the says drill here, this is where you're going to find the oil. And the permitting process alone can take years. These leases are called idle until you're actually producing something. But what you have to do first is get through the permitting process and you should ask Shell Oil Company about that up in Alaska. They forked over almost $4 billion so far, still don't have the go-ahead to go ahead with their project. So, that is a mistaken assumption that we are not using our leases. And we have to pay rent on them and if you don't, at the end of the rental period, at the end of five years or 10 years, whenever it is, if you haven't produced anything yet you have to turn the lease back to the government. And you have to pay rent on it. I guarantee you, there's not a company out there that gets a lease to sit on it. They get a lease actually to develop it and that is just politics, because the folks know better than that. Our Interior Department knows a lot better than that, they really do. And they know how long these leases take and they know what you have to do to develop them and there's no one out there sitting on them. In fact, you could have 100 leases and only one -- the average has been only one out of 100 is productive. So those other 99 will be unproductive. But that is just a mistaken characterization.

Monica Trauzzi: OK, we'll end it right there. Thank you for coming on the show.

Rayola Dougher: Thank you.

Monica Trauzzi: And thanks for watching. We'll see back here tomorrow.

[End of Audio]



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