There is an old saying that we have all heard our entire lives that goes something like this, “If it aint broke don’t fix it!” It is certainly not hard to understand to the general masses but apparently the basic concept is foreign to the Obama Administration.
The domestic oil & gas industry is booming due mostly, if not rely to technological advances in an industry that has been around since Colonel Drake drilled that famous well near Titusville, Pennsylvania in 1859. Notice that I didn’t say recent technological advances, the fact of the matter is that hydraulic fracing has actually
been around since the late 1940’s and believe it or not there have been over 1.2 million wells drilled using the technology. Horizontal drilling has actually been around even longer, with the first successful horizontal oil well having been completed near Texon, Texas in 1929.
What has brought the industry up to boom status was mostly due to improvements in downhole motors and telemetry equipment dating back to the late 1980’s.
Then, in 1991 the first horizontal well was drilled in the Barnett Shale formation and the rest is history. Domestic production, once thought to be destined to a slow death, has spiked in the past several years causing a decrease in imports of foreign oil of some 15% since 2005.
So what does all of this mean to our economy? The Oil & Gas industry is well on its way to creating a million new jobs, and high paying jobs to boot. Production of domestic oil & gas is on the rise which adds substantially to the country’s Gross Domestic Product. Increased jobs and increased GNP equates to increased tax receipts and a pathway out of our economic woes.
Sooooo, what does the President opt to discuss in his recent State of the Union address. While acknowledging that domestic exploration and production of oil & gas was up and that oil imports were down, he suggests that we should strive to relieve ourselves of our dependence on fossil fuels and that the means to that end is to impose higher taxes on the oil and gas industry. Now in my little brain, I take that to mean that his philosophy is that we should remove (tax) revenue from one of the most efficient and highly taxed industries in our country and place that tax revenue in the hands of our politicians who have proven time and time again that they are incompetent at fiscal management and expect that it will help lead us out of the current economic mess we currently find our country in?? Did I get that right?
The Obama Administration, in their infinite wisedom, has proposed that they should repeal eight longterm energy tax laws such as the Manufacturing Tax Deduction (Section 199), the expensing of Intangible Drilling Costs, and the repeal of Percentage Depletion Allowance.
The Manufacturing Tax Deduction was enacted in 2004 as part of the American Jobs Creation Act to counteract low wages abroad. The law was passed with the intent of increasing domestic labor forces and increasing domestic manufacturing output. For most industries the allowance was set at 9%, but for the oil & gas industry the cap was set at 6%. While repealing this law would increase the tax burden of the oil & gas industry and put more money in the hands of our politicians, it is estimated that it would cause the loss of some 60,000 domestic jobs in the first year alone, not to mention a reduction in domestic production of as much as 600,000 barrels of oil per day according to a Wood Mackenzie report.
The expensing of Intangible Drilling Costs has been allowed by the IRS for decades. IDC’s are basically those costs incurred while drilling oil & gas wells and usually account for some 60-80% of the costs of drilling a well. The favorable tax treatment is an incentive to investors to put risk capital in speculative investments like oil & gas exploration. Without it, the Independent Petroleum Association of America estimates that capital available for drilling will decrease by some $3 billion in the first year alone. Less capital means less production and less jobs, not to mention less taxes.
Percentage Depletion Allowance has likewise been around for almost a century. It is analogous to depreciation, which is used in most types of businesses to account for the declining values of assets used in business and both result in the recovery of investment costs. Again, the Obama Administration in their thirst for our money, has proposed that the allowance be phased out which would cause a much higher tax burden on the industry which would result in the loss of available investment capital, jobs and production.
I urge that we support an industry which has proven to be at the forefront of American capitalism. The oil & gas industry is taking the lead in pulling our country out of its economic debacle. Rather than punish those taking the lead with higher taxes that the government has proven time and time again that they will squander, why don’t we provide support. This is the greatest country on earth, just not as great as it once was. Support the American way, lets get back on track and return to the greatness we once had.