Opinion Extra

Nelson: Taxing oil, natural gas, hurts U.S. economy

Does anyone think the job picture will improve if President Obama drives U.S. oil and natural gas production abroad?

The unemployment rate, which was below 5 percent just two years ago, is now at 9.8 percent, and the administration predicts it will stay at that level in 2010. You don't have to be an economist to recognize that too little is being done to help promote recovery of the job market - a market with six times as many people seeking work as jobs available. Widespread job losses affect every sector of the economy by reducing consumers' spending power, driving down tax revenues and threatening the recovery in housing.

But Obama is making the situation even worse by urging Congress to raise the taxes of the oil and natural gas industry, which supports more than 9 million American jobs - 68,303 in South Carolina alone - and makes significant economic contributions as an employer and purchaser of U.S. goods and services, according to a study by PricewaterhouseCoopers. Obama's budget calls for more than $80 billion over the next 10 years in new taxes on the oil and gas industry.

The companies hardest hit by tax changes on enhanced oil recovery and intangible drilling costs would be independent producers, weakening a critically important part of the energy industry. These producers, who are not big enough to go to private capital markets for money, must rely on cash flow to stay in business, and that cash flow has fallen off with the recent decline in oil and gas prices.

Thus, the president's tax proposals appear to be based on a myth that tax increases will have no adverse effect. But he is wrong. Tax increases have a negative impact on businesses. In the case of the oil and gas industry, it means less exploration and production, which historically has led to increased dependence on oil imports, less revenue and higher consumer costs.

Larry Nichols, chief executive officer of Devon Energy Corp., called Obama's proposal a contradictory tax plan "at odds with the administration's own carbon-reduction policy because it would discourage production of natural gas, our cleanest fuel." Natural gas is commonly used as a backup fuel to solar and wind energy systems, which operate only when the weather cooperates.

Raising taxes on oil and gas companies is part of the administration's goal of phasing out subsidies for fossil fuels. The Treasury Green Book states that the current tax treatment "encourages overproduction of oil and gas," which, it says, is "detrimental to long-term energy security."

How absurd to consider oil and natural gas detrimental, when in fact no economy in the world, especially not our own, could function without them. The consensus among energy experts is that U.S. demand for oil and natural gas will remain at current levels through mid-century.

Now companies will have to factor in the possibility of higher taxes and increased expenses for domestic production, and it's a good bet these issues could squeeze companies out of a lot of mature oil and gas fields.

For example, a new excise tax on Gulf of Mexico production would raise revenue for the government in the near term, but cost money in future years. The tax would raise the cost of finding and developing oil and gas.

Repealing the tax deduction for intangible drilling costs - which has been available since the inception of the tax code - would significantly raise drilling costs, with the result that capital budgets of independent oil companies are likely to decline by 25 percent or more.

The proposal to modify the rules governing the foreign tax credit that companies can claim for taxes or royalties paid to other countries would lead to double taxation. And repeal of what's known as the LIFO accounting method, a well-established method for determining taxable income, will raise the operating costs of domestic oil refineries, reducing their output. This is likely to favor foreign refineries, leading to increased imports of gasoline, diesel and other petroleum products.

Of course, what the government takes away, it also can give. The greens may find solace, since the winners would be producers of solar and wind energy, which are in line to receive the bulk of the money gained from raising taxes on oil and natural gas companies