Obama Revives Battle with Oil Industry

WASHINGTON (THE WALL STREET JOURNAL via Dow Jones Newswires), Mar. 26, 2009

The Obama administration's push to raise taxes on the oil industry is reigniting a battle the industry fought and won last year.

Under pressure to narrow projected deficits, President Barack Obama's 2010 budget proposal calls for raising more than $31 billion over the next decade by eliminating the oil and gas industry's eligibility for various tax breaks.

The plan would slap companies with a new excise tax on production in the Gulf of Mexico worth $5.3 billion between 2010 and 2019, and repeal the industry's eligibility for a manufacturing tax credit worth $13.3 billion during the same period. The industry says the final cost of Mr. Obama's proposals on petroleum production could top $400 billion, once his plan to put a price on greenhouse-gas emissions is factored in.

The Obama administration has generally justified its proposals by arguing that taxpayers deserve a better deal. Speaking to the American Petroleum Institute this month, Interior Secretary Ken Salazar cited a recent report by the Government Accountability Office that said the U.S. receives a low share of revenue for oil and gas resources compared with other countries.

In an interview Wednesday, Mr. Salazar signaled that the administration might reconsider some proposed tax increases on small, independent producers.

"If it is going to have a disproportionate impact on a mom-and-pop kind of operation, I do think that's something that should be taken into consideration," Mr. Salazar said. In general, he added, "the oil and gas companies have all the incentives they need" for exploration and production.

At other times, the administration has tied its proposals to its environmental agenda. Testifying before Congress this month, Treasury Secretary Timothy Geithner said, "We don't believe it makes sense to significantly subsidize the production and use of sources of energy that are dramatically going to add to our climate change."

The oil industry, which in its campaign donations has long favored Republicans, is taking its case to voters. A new ad campaign by the American Petroleum Institute in about a dozen states says new taxes would "hobble our ailing economy" and "cost thousands of American jobs."

"It's the public we need to educate," said Jack Gerard, the institute's president. "Public officials follow public opinion -- they don't lead it."

Mr. Salazar met last week with industry executives, but that didn't produce signs of compromise.

"I think we should pay our fair share of taxes, but I don't think we should look at this industry as the source of all money to pay for the renewable energy industry," said Peter Robertson, vice chairman of Chevron Corp. Mr. Robertson said Mr. Obama's tax proposals will discourage domestic oil and natural-gas production and undermine his goal of reducing U.S. dependence on foreign oil.

In recent years, surging crude-oil prices have led to record profits for major oil companies. A report by the Congressional Research Service last year said the top five major integrated companies -- Exxon Mobil Corp., Royal Dutch Shell PLC, BP PLC, Chevron and ConocoPhillips -- generated more than $100 billion in profits on nearly $1.5 trillion of revenue in 2007.

Last summer, when oil prices were near record highs, Democrats in Congress proposed slapping a windfall-profits tax on oil producers, rescinding various tax breaks for the industry and using the money raised to fund alternatives such as wind and solar power. The oil industry said the proposals would do nothing to bring down $4-a-gallon gas prices. The legislation died.

Now, oil prices are down 63% from their highs. Many companies are cutting back on investment in exploration and production. That is raising fears that the industry won't be able to respond quickly once the economy recovers and demand for oil returns.

Instead of raising their taxes, oil producers say the government should open up more territory for exploration, a step that the industry says would lead to billions of dollars in additional royalties.

But some Democrats note that recent government audits have questioned how effectively the U.S. tracks domestic petroleum production, and have found cozy relations between industry officials and government royalty collectors. They say those problems must be fixed before Congress approves an expansion in offshore drilling.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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