Stop Blaming Big Oil

Whether the reason is prices at the gas pump, record quarterly profits or a damaging spill, Big Oil is the perennial object of Washington’s wrath.

Most voters’ knowledge of the oil industry begins and ends at the self-serve pump, and Congress is a sucker for a villain in a black hat. In targeting bad guys, however, Congress is the original “Gang That Couldn’t Shoot Straight.” Its strategies to punish Big Oil usually miss the intended target, with a result that is as negative as it is predictable.

As recently as the 1970s, Big Oil was a clearly identifiable entity. The “Seven Sisters” (Exxon, Mobil, Chevron, Texaco, Gulf, BP and Shell) dominated petroleum supply globally and domestically. Today, their global role has been largely supplanted by the national oil companies of OPEC and elsewhere. Forced to focus on international operations, the sisterhood now numbers only four. Smaller upstream companies have filled the domestic void the major companies left behind.

One fact has not changed: oil and gas are pure commodities and as such they slavishly obey the law of supply and demand. Times of high prices lead to abundant, often excessive, capital investment. Increased drilling and better technology leads to expanding supply. Excess supply eventually sends prices lower. As less capital flows in, fewer wells are drilled and companies consolidate. Over time the surplus becomes a shortage, which in turn leads to higher prices. The cycle repeats.

When Congress aims to punish BP and other multinationals, it inadvertently punishes American companies with foreign operations. Under U.S. tax law, the foreign earnings of American companies are taxable, but the IRS can only tax the American earnings of foreign companies. So when Congress eliminates the credit for foreign taxes, it hurts domestic companies like Chevron, ConocoPhillips and Oxy that have significant foreign activity. The intended object of their wrath, BP, is unscathed.

When Congress targets Big Oil, it harms small domestic producers. The elimination of favorable tax treatment for certain drilling and production cost categories is of little consequence to the majors. They lost those tax breaks years ago to a prior crusading Congress. This time around, only the little guys will feel the pain. Few people realize that 10% of America’s domestic oil supply comes from low-volume, high-cost “stripper wells.” We could lose that supply permanently if the typical mom-and-pop operator bears a Big Oil whipping by proxy.

When Congress targets oil companies, it harms natural gas producers. In the eye of the tax man, there is little difference between oil operations and gas operations. Oil and gas are usually found together and most producers pursue both products. Therefore anti-oil tax measures are anti-gas measures, too. Natural gas is a clean, abundant and purely American fuel. Most thinking people consider gas to be the logical bridge to our energy future. A tax code which punishes domestic natural gas development is horribly short-sighted.

Intervention by Congress and various administrations has historically been unsuccessful in coercing the market to bend to their will. Ironically, the biggest boom time for the oil industry was during the Carter Administration—an era of oil embargoes, price controls, and the Windfall Profits Tax—when oil companies were as unpopular as ever on Capitol Hill. Conversely, President Reagan unleashed free-market forces by decontrolling oil and gas prices in the early 1980s, which led to low energy prices and economic expansion for a generation.

Any action of Congress or the Obama Administration which reduces the incentive to drill will mean less capital investment, fewer new wells and declining domestic supply. This may mean short-term pain for some producers; some may be forced to consolidate or go out of business. Despite all the “green” political rhetoric, no one expects petroleum demand to fall. At worst, the big multinationals will muddle through, in anticipation of the inevitable price rebound.

The big winners? The national oil companies and their controlling regimes will enjoy higher revenue due to price and market share, and more geopolitical influence. More imports also mean more tanker traffic, and more spills in our rivers, bays and estuaries.

Who pays the price? The consumer, the environment and American energy security.

For the good of the country, President Obama and Congress need to overcome their reflexive impulse to blame the Big Oil bogeyman.