As voters around the country wince at rising gas prices, panicked Democrats, in a rush to cover the failure of their all-or-nothing bet on the alternative energy industry have started singing a familiar tune – blame the oil and gas industry. Instead of facing the reality of his owned failed policies, President Obama is calling for an end to the "tax giveaways" he claims amount to $4 billion in “subsidies” to the energy industry.
This tactic isn’t surprising given the effect that rising gas prices have on the President’s approval ratings and his obsession with re-election. But, less than truthful innuendos and political spin hardly helps American working families that are getting hammered at the pump.
If our leaders are going to have an honest discussion about energy, it's important to clear up a few rumors, misconceptions and outright falsehoods being perpetrated about the oil and gas industry. Let's begin with three of the more common ones:
1. The industry doesn’t receive any taxpayer funded subsides. None.
2. Rampant speculation and Wall Street tricks aren’t driving up gas prices.
3. The oil and gas industry is not dodging the taxes they owe and withholding “their fair share”.
I'll say it again; contrary to popular opinion and the President's spin, oil and gas gets no taxpayer funded subsidies. The tax code does allow them certain tax credits and deductions to encourage continued investment in an industry that is heavily front-end loaded with capital expense. These are the same kind of incentives available to Coca-Cola, General Electric, Ford, and Micro-Soft and other companies doing business in the U.S. Or, for that matter, like the deduction for mortgage interest payments enjoyed by homeowners. But, importantly these are tax credits, and markedly different from direct taxpayer cash subsidies like the 45 cent per gallon payment blenders get to put ethanol in fuel mixes.
When businesses invest in America, we all benefit. The oil and gas industry plows about $300 billion into domestic projects per year – that's 75 times more than Obama's phantom "taxpayer giveaways" amount - and employees over 9 million people. Those are real numbers; not Washington spin, and if government would allow and encourage even more domestic production there would be more jobs and more investment – and more total taxes paid, too.
Another argument that often circulates when gas prices go up is that a phantom class of “Wall Street speculators” is to blame for the increase of prices. So pervasive was this school of thought that in 2008, President Bush commissioned an exhaustive review, via the Commodity Futures Trading Commission, of the effect that speculators had on market prices. Their conclusion was surprising, according to The Wall Street Journal, “The agency concluded that speculators—otherwise known as traders—were putting downward pressure on prices. The liquidity they provide helps to smooth volatility.”
Not satisfied with the 2008 study, President Obama recently resurrected this school of thought, even tapping Attorney General Eric Holder to police perceived illegal activity and price gouging. Yet within the Presidents’ own Administration, the Federal Trade Commission found that the recent spike in oil prices is due primarily to normal market forces, including booming demand from developing economies in India and China and not because of any questionable behavior from Wall Street.
The third popular attack is that somehow oil and gas industry isn’t paying its fair share in taxes. Democrat mythology aside, the oil and gas industry pays a much heftier percentage of net income in taxes (41.1%) than the average of all other S&P Industrials (26.5%). Every single day, the industry is sending more than $85 million to the U.S. Treasury for taxes and royalty payments. Yes, the energy companies are profitable, but their profit margins are right in line with manufacturing, aerospace, and food industries, while computer, pharmaceutical, and the beverage companies have triple the net income margins of traditional energy.
I don't like subsidies and I don't like Congress or the IRS deciding what is good economic behavior and what is bad. But, I do understand that you get more of what gets incentivized, and less of what is penalized. And, there is a huge difference in "redistributing the wealth" through direct subsidy payments, and a tax credit that encourages investment in much needed production that creates jobs and taxable income.
If congress is serious about creating jobs and jump starting the economy, they should lower the corporate tax rate, which is the highest among the 34 OECD nations, rather than increase the tax burden on energy or any industry.
Capital is fungible, and energy production is the prototypical global industry. Plenty of nations around the world are providing a far more welcoming business environment for energy production that the U.S. already with a less onerous tax code and far less regulatory burden.
If increasing our domestic supply is really a national objective, then this might not be the best time to send exactly the opposite message to the people that provide the capital to drill the wells.
John Ransom: U.S. Imams Plot to Murder & Maim (Top Story- HOT!)
Morales & Chris Kacher: Chasing Stocks After the Top (New)
Mike Shedlock: IMF Head Charged with Rape (New)
Mark Baisley: School Boots Boy Scouts for Mother Earth (Editor's Pick- HOT!)
John Ransom: This Week's Top Tweets
Mike Shedlock: Stop Torturing Us; Let's Come Home
John Ransom: Email, Hate Mail and Comments from Readers (Editor's Pick)
David Malpass: QE2 a Y2K?
George Friedman: U.S.-Pakistani Relations Beyond Bin Laden
John Ransom: Holder's Lame Victory
Larry Kudlow: Boehner Lays Down the Debt-Ceiling Gauntlet (Front Page News)
Morales & Kacher: A Year of Friday the 13th
Mike Shedlock: Real Estate Bust Down Under
Cliff Ennico: A 'Rich Guy' Speaks Out Against Higher Taxes (Editor's Pick)
John Ransom: Obama Saves/Creates Us!
Bob Beauprez: Myths About Oil and Gas (Editor's Pick)
Chuck Muth: The Tax War on Nevadans
Bob Goldman: Unforgettable
Mike Shedlock: Oil Crashes (Front Page News)
Larry Kudlow: Bernanke's Quantitative Neutrality
John Ransom: Crass and Cynical on Illegal Immigration
You can email John Ransom at email@example.com
Get John Ransom's daily market commentary at:
In Other News: Can We Ask Al Qaeda for a Refund on the Bowe Bergdahl Prisoner Swap? | Michael Schaus