The Corner

Relentless Energy for Mistaken Energy Policy

President Obama’s rejection of the commonsense Keystone XL Pipeline is just the latest in his quest to undermine the U.S. oil and gas industry at the expense of tens of thousands of job-seeking Americans. Among his other plans is a punitive elimination of deductionstargeting the oil and gas industry. This bad policy would give advantage to our international competitors (including rogue nations like Venezuela) in oil and gas resource development. Punitively increasing U.S. firms’ tax liability is a poor idea with unintended consequences beyond the significant job losses it will trigger.

U.S. energy firms already face a significant disadvantage against international competitors, many of whom are huge state-owned entities with the full support and monetary backing of their governments. Firms like Petroleos de Venezuela (PDVSA) or the National Iranian Oil Co. hold secure positions in the top five largest oil companies in the world. There are no U.S. firms, however, even among the top fifteen. Moreover, China National Offshore Oil Corporation (CNOOC), the number two oil and natural exploration company in Asia, has even flexed this financial muscle in Wyoming, Colorado, and Texas over the past two years. In addition to their larger size, these companies don’t always play fair.


For example, Venezuela nationalized an ExxonMobil project within their borders in 2007, costing the company an estimated $12 billion in damages. The U.S. firm took their grievances to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), where they held arbitration talks with state representatives. Upset with the outcome which held them liable for only $908 million, Venezuelan dictator Hugo Chavez had vowed to reject any ruling recompensing the U.S. firm for the assets that were seized. The state has finally agreed to pay ExxonMobil a meager $255 million

The White House threw a wrench in the Keystone XL pipeline, which would’ve brought Canadian crude oil to Texas refineries, and continues to be unenthusiastic about gigantic new domestic natural gas resources.  It also continues to threaten domestic oil and natural gas firms, trying to shake them down for $4 billion in additional taxes while ignoring the massive tax burden they already face: $42.8 billion for just the three majors in 2010.

But this approach will only reduce the size and scope of the industry in the U.S., eliminating jobs, decreasing economic growth, and costing an estimated $53.5 billion in government revenues by slowing their heavily-taxed operations. But the jobs and revenue won’t simply disappear. The wealth will transfer to foreign competitors whose policies don’t always align with the nation’s international interests.

Venezuela’s PDVSA would benefit significantly if U.S. oil and natural gas companies’ competition is diminished at the global level. This week, Venezuela’s Chavez met with Iranian President Mahmoud Ahmadinejad to discuss continued trade between the nations, despite international condemnation of Iran’s pursuit of a nuclear weapon and resulting trade sanctions. Trade between the two nations continues, and the two dictators shared a good laugh at international concerns over their atomic aspirations. This is not behavior we should support with our domestic energy policy. Chavez crony Ahmadinejad is already doing enough to disrupt U.S. oil prices without tax increases that disrupt domestic firms’ production.

Iran’s saber rattling over a looming embargo on their vast oil supplies put in place after U.N. monitors revealed that the nation has intensified its efforts to enrich uranium have caused per barrel oil prices to jump. Their threat to close off the shipping access point to the Persian Gulf has been enough to pressure domestic prices up to $3.38 per gallon this week. Either action by Iran would harm them more than anyone else, but they do not seem to care; this stand-off will only further elevate prices. As the U.S. looks to finally turn the tide on lingering slow job growth, another spike in oil prices could impose a serious setback.

The president has rightfully taken a strong stance on Iran to keep them from acquiring a nuclear weapon, but this policy has made it clear how reliant the U.S. is on foreign oil to keep prices low. We must take steps to encourage domestic oil companies to seek out and develop more secure resources, domestically and abroad, to diminish the grip that unstable foreign nations have on pricing. Sending jobs and revenue to the likes of Venezuela by increasing taxes on oil and natural gas companies will have the opposite effect.

Jack Rafuse, former energy advisor to President Nixon, is principal of the Rafuse Organization, an energy, trade, and security consultancy.


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