On Fortune magazine’s recent list of the most profitable companies in 2010, Exxon’s profit as a percent of revenues was 8.6 percent. By sharp contrast, Coca-Cola’s was 34 percent. Google’s was 29 percent.
Yet the Obama administration remains obsessed with raising taxes on oil companies.
A widely recognized economic principle is that when you subsidize something, you get more of it, and when you tax it, you get less.
Unfortunately President Obama’s guiding economic principle is to impose more taxes on profitable companies and subsidize those that can’t make a dime. It’s no wonder the economy is struggling.
Nothing better exemplifies the president’s economic principle than his continued effort to end “special tax breaks” for the oil and gas companies.
The industry is doing well right now. Royal Dutch Shell Oil’s profits were up 77 percent in 2010, and Exxon Mobil’s were up 41 percent in the second quarter.
But they are far from being the most profitable companies in the country. According to Fortune magazine’s recent list of the most profitable companies in 2010, Exxon’s profit as a percent of revenues was 8.6 percent, Chevron 9.7 percent, and Conoco 6.1 percent.
By sharp contrast, Corning came in first at 54 percent. Coca-Cola was 34 percent, Visa was 37 percent and Google was 29 percent. It’s no small feat to make such money in tough times.
Ironically, President Obama and his administration’s policies have played a significant role in the oil industry’s profits. When the value of the dollar declines, investors start buying commodities. Gold tends to be the first safe haven, but oil isn’t far down the list.
Of course, other factors ñ such as demand, supply and refining capacity ñ affect the price of oil. But the Obama administration and the Federal Reserve Bank have funneled trillions of dollars into the economy, lowering the value of the dollar, and consequently driving up the price of commodities like oil. That leads to increased oil company profits.
While President Obama supports increased drilling in Saudi Arabia and off the coast of Brazil, his opposition to new domestic drilling means the U.S. is dependent on other countries for about half of the nation’s oil needs. That reduced domestic oil supply drives up the price and forces the United States to buy oil from other countries, only adding to the U.S. trade deficit.
Now that President Obama’s policies and federal spending have created a budget crunch, he wants the oil and gas industry to embrace the “shared sacrifice” platitude that has become the watchword of his administration.
The fact is that the alleged “special” tax breaks are widely available to other industries. But, the president also wants to repeal the foreign tax credit for oil companies. When a U.S. company makes a profit in a foreign country, it pays foreign taxes on those profits. It’s perfectly legal for companies to claim a tax credit equal to their foreign taxes. This keeps them from being double taxed.
This tax break is available to all qualifying companies. It’s the president’s proposals that would create the inequities.
It is a mystery why the president is so intent on demonizing an industry with such deep American roots and huge American payrolls. The oil industry directly employs over 2 million Americans, both blue-collar workers and well-trained scientists and engineers. It’s also growing ñ 17,200 new oil field jobs were added in just the second quarter of the year. There are also millions of manufacturing, construction, mining and other indirect jobs the industry supports. To the extent the industry is allowed to drill here, it keeps jobs here.
The industry also invests here. According to the Oil and Gas Journal, some $284 billion was invested right in America in 2011. If the industry were allowed to explore in more domestic areas currently off limits, there are estimates that another 1 million jobs would be created.
The oil and gas industry’s stability and profitability make it a haven for public and private pension funds. Nearly 100 million Americans are industry stakeholders through their pensions, IRAs, 401k plans and mutual funds. Indeed, oil and gas stocks and mutual funds have been one of the stock market gushers. How would the market react to the news that President Obama was hitting the oil and gas industry with a slew of new taxes?
Economic policy may not be one of the president’s strengths, but he needs to understand that rewarding failure and punishing success is bad policy. The oil and gas industry is an American success story – let’s hope President Obama leaves it that way.
Institute for Policy Innovation