Archive for July, 2009

U.S. Tax Changes Bad For Everyone Except Foreign Oil

Posted by Blacky on Monday, July 20th, 2009

In an effort to raise tax revenue, the Obama administration is searching every source of commerce and consumption activity. The “No New Taxes on people making less than $250K” went by the wayside with the large new tax on tobacco products. This establishes the criteria for the segments of the populations slated for new taxes. Basically, go after the economic and vilified minorities. By following this strategy, fewer will complain, and since our citizens have been taught to embrace class envy, no large groups will resist new taxes on the industries and people the media, special interests, and government have trained us to hate.

Primary among the industries the populace has been taught to hate is the oil and gas industry. The portrayal of the oil industry seems to have begun during the Arab oil embargos of the 1970s, was reinforced by the television show “Dallas”, and cemented by the Exxon Valdez spill in Alaska.

This popularized disdain for the single most vital industry in the world, makes this industry the target for major change in tax treatment in the U.S. Keep in mind big oil no longer explores for oil in the U.S., because of high taxes and unreasonable regulation. Independent oil companies and family businesses make up 80% of the U.S. oil industry. Many of these oil businesses very much resemble family farms and ranches in the U.S., but certainly do not share the same public perception as American agriculture. Politicians have found that demonizing the oil industry, while talking warm and fuzzy about family farming, is a winning formula for getting votes.

Oil is the single most important commodity to the planet’s populace. Without oil, the production of food would fall far short of that required to feed the world. Over 80% of food production relies on petroleum. In order to secure ample supplies of oil and gas, the industry must invest heavily in new technologies and search in ever more hostile environments and deeper oceans.

The oil industry is the most capital intensive business known to man. Companies of all sizes, from the smallest to the largest, rely on outside capital to spread the risk for all investors. Investors in oil and gas projects range from the purchase of stock in public companies; to individual investors who invest in oil and gas projects by purchasing fractional working interest direct from oil and gas exploration and production companies. While the risks are higher in oil and gas investments than most other investments, the possible rewards can be huge. This already puts oil investors in the top tax brackets.

Oil and gas investors are among the boldest investors in the world. Taking on the risks encountered in oil and gas exploration sets these investors apart from investors in most any other business. While the risks are high, the rewards can be proportionately high. When a well is drilled that does not encounter commercial reserves of oil and/or gas(A Dry Hole), the well is plugged and abandoned, and has no value. When most businesses fail, there are tangible assets that still have value. For 70 years, the U.S. IRS code has allowed oil investors to deduct, as an expense, the cost of unsuccessful wells in the tax year the money was invested. This is referred to as “Intangible Drilling Costs” (IDCs). Compare the IDCs to, say, the expenses of a store that sells food. The store requires electricity for its coolers and freezers. The cost of electricity to operate these appliances is a deductible expense for the store in the tax year the electric bill was paid. Who would argue that this is a legitimate business deduction? Yet, the IDCs provision for the oil investor is slated for elimination from the IRS code. This will substantially reduce exploration for American oil and substantially raise dependence on foreign oil.

Who will complain if the oil industry is hit with an unreasonable tax burden? I can tell you who will not complain, that is the foreign oil producers. Again and again greedy, misguided big government is the problem, not the solution.

Every government in Central America allows 100% of legitimate business costs to be 100% expensed the year the costs are occurred. This is what will make Latin America another source of America’s imported oil, and should we hate oil companies for it. We should all consider our part, by the votes we cast, in forcing businesses of all kinds to seek opportunities overseas in order to survive U.S. tax agencies and unreasonable anti-business regulation. Perhaps we should not vote for the kind of “change” that weakens America.

Jim “Blacky” Pryor – Wildcatter