Obama can’t spin away his en­ergy disas­ter

The Washington Times Weekly - - Commentary -

The last time gaso­line prices were as high as they are to­day was in 2008, and Barack Obama, the Demo­cratic can­di­date for pres­i­dent, made it clear that one of his ma­jor pol­icy goals was to make fos­sil fu­els ex­pen­sive, so that “al­ter­na­tive” and “green” sources of en­ergy would be more eco­nom­i­cally com­pet­i­tive. Three months be­fore he was con­firmed as sec­re­tary of en­ergy, Steven Chu con­firmed in an in­ter­view that “some­how we have to fig­ure out how to boost the price of gaso­line to the lev­els in Europe.”

With polls mak­ing it crys­tal clear that Amer­i­cans are not pleased with spik­ing gaso­line prices, Pres­i­dent Obama has de­ployed what might be called the “oc­to­pus strat­egy.” When an oc­to­pus is threat­ened, one of its sur­vival tools is to dis­pense a cloud of ink to con­found preda­tors. Like­wise, in re­sponse to ris­ing fuel prices, Mr. Obama has dis­pensed a cloud of ob­fus­ca­tion — one that scape­goats oth­ers for high en­ergy prices when his own poli­cies are at fault. His tar­gets are the usual sus­pects: “traders and spec­u­la­tors” and pre­dictably, oil com­pa­nies them­selves.

Of course, the scape­goat­ing of “spec­u­la­tors” is old hat. They were, for in­stance, blamed for the gaso­line price spike that oc­curred af­ter Hur­ri­cane Ka­t­rina but the Fed­eral Trade Com­mis­sion (FTC) never found ev­i­dence to sup­port claims of mar­ket ma­nip­u­la­tion at the pump or a sig­nif­i­cant pat­tern of “price goug­ing.”

The fact is “spec­u­la­tors” are not vil­lains; in­stead they play a nec­es­sary role in mak­ing the world en­ergy mar­ket more efficient. These in­di­vid­u­als are re­ally in­vestors who help smooth out mar­ket fluc­tu­a­tions by equi­li­brat­ing sup­ply and de­mand over time via fu­tures mar­kets. This func­tion is es­pe­cially im­por­tant for com­pa­nies with se­ri­ous fi­nan­cial ex­po­sure, e.g. air­lines and truck­ing com­pa­nies, al­low­ing them to hedge against ris­ing fuel costs.

The other tar­get of the pres­i­dent’s dem­a­goguery is “big oil.” As he re­cently said at a Ne­vada town hall meet­ing, “four bil­lion dol­lars of your money are go­ing to these com­pa­nies at a time when they’re mak­ing record prof­its and you’re pay­ing near record prices at the pump. It has to stop.”

What in the world is he talk­ing about? Does he in­tend to elim­i­nate the “ex­pens­ing” of in­tan­gi­ble drilling costs, which has been part of the tax code since its in­cep­tion? Al­low­ing an im­me­di­ate de­duc­tion for de­vel­op­ment costs rather than amor­tiz­ing them over a longer pe­riod has al­ways been un­der­stood to be nec­es­sary in or­der to pro­vide the cap­i­tal and cash flow in an in­dus­try where the risks are huge and re­turns are re­al­ized, if at all, over many years or even decades. Elim­i­nat­ing this de­duc­tion would hit an in­dus­try that em­ploys 9 mil­lion work­ers but which has a rate of re­turn on in­vest­ment sig­nif­i­cantly lower than other in­dus­tries.

The other “sub­si­dies” that Pres­i­dent Obama pro­poses to elim­i­nate are tax cred­its of­fered to all man­u­fac­tur­ers, not just to oil and gas com­pa­nies. Of course, if the pres­i­dent were truly con­cerned about wast­ing tax­pay­ers’ money on waste­ful sub­si­dies, he would kill the ethanol sub­si­dies that have driven corn and wheat prices sky high as well as those for wind and so­lar. Elim­i­nat­ing sub­si­dies ef­fec­tively raises taxes on oil com­pa­nies. But these taxes are al­ready ex­cep­tion­ally high. For ex­am­ple, when oil prices peaked in 2008, the largest U.S. oil com­pany, ExxonMo­bil, paid $36.5 bil­lion in in­come taxes world­wide, $34.5 bil­lion in sales taxes, and $45 bil­lion in other taxes, for a to­tal of $116.2 bil­lion.

Dur­ing the last quar­ter of 2010, ExxonMo­bil paid the U.S. gov­ern­ment alone more than $9.8 bil­lion, in­clud­ing an in­come tax ex­pense of $1.6 bil­lion. Over the past five years, ExxonMo­bil’s U.S. tax ex­pense of al­most $59 bil­lion was $18 bil­lion more than the com­pany earned in the United States dur­ing the same pe­riod.

And make no mis­take: High taxes al­ready con­sti­tute a far greater com­po­nent of the price of a gal­lon of gaso­line at the pump than oil com­pany prof­its. For in­stance, for ev­ery gal­lon of gaso­line or diesel fuel that U.S. oil com­pa­nies re­fined and sold in the United States dur­ing the last quar­ter of 2010, they made on av­er­age an ac­count­ing profit of about 2 cents. At the same time, to­tal fed­eral and state taxes rep­re­sent on av­er­age 48 cents per gal­lon of gaso­line.

The ad­min­is­tra­tion con­tin­ues its “slow roll” on is­su­ing new drilling per­mits for the Gulf of Mex­ico and the En­vi­ron­men­tal Pro­tec­tion Agency has de­nied per­mits that would al­low ac­cess to an es­ti­mated 27 bil­lion bar­rels of crude oil lo­cated off Alaska’s north Arc­tic coast.

The pres­i­dent and his de­fend­ers ar­gue that even if the gov­ern­ment were to im­me­di­ately lift re­stric­tions on ac­cess to do­mes­tic re­sources, the im­pact on world prices would be mi­nor and take time. But this claim il­lus­trates ig­no­rance of how mar­kets op­er­ate. The last time that world oil prices were this high in 2008, Pres­i­dent Ge­orge Bush an­nounced he was lift­ing some re­stric­tions on do­mes­tic pro­duc­tion. The world price of oil be­gan to de­cline al­most im­me­di­ately, thanks to the hated “spec­u­la­tors,” whose ac­tions in buy­ing and sell­ing re­flected the like­li­hood of lower fu­ture oil prices, driv­ing prices lower.

Pres­i­dent Obama’s oc­to­pus strat­egy can­not ob­scure the fact that nei­ther evil spec­u­la­tors nor un­der­taxed oil com­pa­nies are the cause of high gaso­line prices. His ink cloud can­not hide the fact that the United States has the world’s largest en­ergy re­sources, but be­cause of our gov­ern­ment’s fool­ish poli­cies, Amer­i­can oil com­pa­nies have ac­cess to very lit­tle crude oil. It’s time for the pres­i­dent to aban­don the oc­to­pus strat­egy and fix the real prob­lem: a dys­func­tional en­ergy pol­icy that shuts off ac­cess to vast do­mes­tic en­ergy re­serves.

Mack­u­bin Thomas Owens is pro­fes­sor of na­tional se­cu­rity af­fairs at the Naval War Col­lege and edi­tor of Orbis, jour­nal of the For­eign Pol­icy Re­search In­sti­tute.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.