Did you hear the news?
This year’s government budget included a new tax on oil producers.
Bad timing, if you ask me. What, with oil prices sitting around $100 a barrel, the last thing I’d think the government would want to do is reduce incentive for oil producers.
But hey, who am I to say? I’ll let the numbers have the podium…
Already, drilling is down 43% compared with last year. Even though it may be a little early to start tallying drill stats, it’s easy to see that many large drillers are now concerned about the fiscal practices of the government.
What’s next? Nationalization?
Funny thing, though, if you weren’t a tuned-in Outstanding Investments reader, you’d think I was talking about the U.S. government and drilling in the Gulf of Mexico.
Luckily, the news above comes to us direct from our neighbors across the pond in the U.K. And the drilling stats are coming straight from the North Sea, where drilling is slowing and prices are rising.
It paints quite a picture, doesn’t it?
The government increases taxes from 50% to 62% on oil producers’ profits. Thinking shortsightedly, as most governments do, this is an attempt to boost tax revenue and help spur the economy and lower debt.
But in the long run – with sound economics as our guide – all they are going to do is create higher oil prices. Companies like BP and BG Group have already gone on the record saying this may significantly decrease investment in the U.K.’s North Sea.
In our global energy economy, these big oil companies can look elsewhere – places with less tax and more oil.
Unfortunately, I feel this story coming from the U.K. is a precursor to what’s set to happen in the U.S.
What’s the Real Price of Oil – WTI or Brent?
There’s been a big ole hullabaloo over the difference in price between Brent crude oil and West Texas Intermediate (WTI) crude.
The price difference at some points has been nearly $20 a barrel between the two geographically separated markets. For instance, earlier this year, Brent prices were close to $115, while WTI was sitting closer to $95.
What’s the reason? In this case, it’s just simple story of supply and demand. In Cushing, Okla., where WTI oil is piped and stored, there’s a glut of supply. Oil being piped down from Canada’s oil sands, along with other marginal North American production units, is weighing down WTI prices.
In the meantime, North Sea production is stuttering, so naturally, Brent prices are a healthy bit higher.
With overregulation running rampant in the Gulf of Mexico and Alaska – along with a lot of greedy government eyes looking for any revenue stream they can find – the big oil companies operating in the U.S. seem to have big targets on their backs.
Indeed, there’s already quite a buzz growing around Washington whether or not to repeal the Bush-era tax breaks that oil companies receive.
Repealing those tax breaks would give us the same doomed situation that the U.K. is starting to experience. It’s clearly not the best policy action to take.
This all brings me to my main point: If you get away from energy, you lose.
The energy sector creates jobs, increases GDP and lowers the cost of living (among other things.) That’s a triple-whammy you won’t find in any other industry.
Take the natural gas industry, for example. With increased shale gas coming online, massive amounts of jobs are being created, revenue streams are flowing and the price of natural gas has dropped for customers. Win. Win. Win.
This applies to both onshore and offshore oil and gas. Without a “permitorium” or increased taxes, these industries can give the U.S. the lift it needs.
Looking at the big picture, here’s what the American Petroleum Institute’s president and CEO Jack Gerard had to say:
Total employment related to offshore Gulf of Mexico oil and natural gas industry operations could reach 430,000 jobs in 2013 if the permitting slowdown is reversed. As large as the jobs numbers are, however, they are just a fraction of all the jobs our industry could create with more forward-looking development policies in all federal onshore and offshore areas. And along with the increased jobs and energy production could come hundreds of billions of dollars of desperately needed additional revenue to the government. Policymakers now debating tax increases on the industry should understand that producing at home more of the oil and natural gas our nation will need is a far better way to help fix our economy and pay down our debt.
Clearly, there’s a bright future for American energy. But it’s up in the air if the current administration along with Congress can make this best-case scenario a reality.
For Daily Reckoning Australia