Friday, May 13, 2011

When Oil Men Go to Capitol Hill: the reluctant neighbor?

Keywords or Terms: Oil Industry; Huge Quarterly Profits; Subsidies; Federal Budget and Deficits; Uncle Sam; Chevron; Shell; British Petroleum; Max Baucus; Mary Landrieu; Mark Begich; Joe Barton; Capitol Hill; and, Gulf Coast

Might oil companies arise to help fill the gap in the Federal Budget? Will the oil industry lend a hand in time of austerity? Most Americans will dismiss this as utterly improbable or nonsense. Oil Companies with their mega million dollar profits are hardly a brother’s keeper when it comes to sharing their largesse. No surprise therefore when the oil companies’ executives were asked to justify the tax breaks to their industry in light of the reported huge profits in the industry and the nation’s pressing need to fill the huge hole in the federal budget and expanding nation’s deficits, they replied: for our industry to sustain viability of its enterprise for many years to come, we need to make investments; and, denying us tax incentives and deductions will be misinformed and tantamount to discrimination.

Senate Democrats are giddy about eliminating the subsidies to the oil industry; however, the oil executives are not ready for that and they do have friends in high places, in both chambers of Congress. How about Democratic Senators Mary Landrieu (D-Alaska), Mark Begich (D-Alaska) and Representative Joe Barton (R- Texas)? There are other lawmakers on Capitol Hill from both aisle of congress, who are not so extroverted regarding their avowed support for the oil industry; but will most likely vote against the idea of eliminating subsidies to the industry. From statements in support of the continued exploitation of the nation’s carbon-based resource to the possibility of expansion of off-shore and on-shore drilling on federal leases, some of the oil industry’s better friends on Capitol Hill, are not yet ready to support any proposal to cut the subsidies to the industry. Now the blog tonight wants to contemplate whether oil companies are willing to share in the nation’s burden of austerity, just as they have shared in its wealth in the past decades.

Democratic Senator Max Baucus (D-Montana) was probably attempting to get into the hearts of the oil executives or was romanticizing the possibility of a change of heart from oil executives regarding subsidies’ withdrawal from the industry when he uttered the comment, "Just seems frankly like you're making a lot of money. That's fine. That's the American way. But, it also seems maybe the subsidies are not really that necessary anymore." The response he got from the oil executives after all, told him clearly that the oil companies are not ready to part with their booty or loot; one that continues to grow every quarter, or allow them to quadruple profits. Frankly, they are hardly obligated to do so; however, considering the fact that schools are being closed, lunch programs in elementary schools being scaled down and health programs for infants, women and the elderly being sidetracked, can these companies continue to be perceived as good neighbors? Can the oil industry continue to ignore the reality of troubling times for American homes and government?

Yet some in Congress are hoping for more, they are asking questions that the average American would like to ask executives in the industry: Can you share your lunch with us, since it seems Uncle Sam is growing broke as he continues to gift some to your industry! I have once argued against the continuance of any subsidy to the oil industry and asked in blunt language, why is the nation giving away its money to a wealthy industry that hardly needs it. Forget about Chevron’s Chairman Watson’s response that the cost of crude oil is the prime ingredient in the price of gasoline and raising oil industry taxes will not reduce price of gasoline at the pump. The reality is the unnecessary increases in the cost of a barrel of crude oil are partly due to speculation, greed and wanting more, an act that oil industry futures’ traders are convoluted in. The oil executives understand that the withdrawal of federal subsidies will only reduce a fraction of their huge profit; it will not do them in. Unfortunately, they will not publicly agree to that!

To their credit, Oil industry invests huge sums of money in exploration and adoption of modern technologies to facilitate extraction of oil in remote regions and desperate depth off-shore. Oil Companies’ investments in research are hardly contingent on federal tax credit write-offs; however, they help and give the oil companies the edge or the time to recuperate huge upfront investments in exploration. Once again, when an oil reserve is found and extraction begins over the life of a well, the oil companies stand to gain billions and some of those again, are always withheld through accounting gimmickry that makes it impossible to ascertain the net returns from initial investments and associated government subsidies. In the absence of a spirit of sharing or forbearance, a wide gap will remain between the expectations of Democrats who want to pull the federal subsidies to the industry and what the oil companies are willing to forgo or defer.

The question is whether oil companies are willing to forgo some of the subsidies that are currently given to the industry. Senate Democrats will like to go after $21 billion in tax incentives and deductions over the next ten years. However, this looks like a tall order, with the President of Shell Oil Company, a corporation that that made $8.8 billion profit last quarter, holding brief on its behalf and for the beleaguered British Petroleum with the following comment: "last year in the Gulf of Mexico, government policies caused Shell to defer some $700 million in capital expenditures and take more than $180 million in special charges. We expect to lose an estimated 50,000 barrels of oil equivalent per day in 2011 alone. Thinking about the impact-to-date, that represents lost gasoline production - just to Shell - that could have powered, on average, 633,000 cars and light trucks every day since January 1."

The first obstacle to oil companies playing ball or acknowledging that they can actually do away with the subsidies to the industry is grounded in the fear of the unknown. True, exploration for oil and gas is an expensive, difficult and potentially dangerous venture. In early 1990’s the Gulf Coast was considered a “Dead Sea” after fifty years of tapped exploitation; then came advancements in Deep-water drilling Technology, which has helped increase production by more than 50%. It was estimated that before the Deep-water Horizon disaster, 52% of the oil and 20% of the gas extracted in the Gulf Coast came from wells drilled in depths of 1,000ft and over. This was a significant development; however, with the BP disaster, obviously, there is going to be a pull back and somewhat of a trepidation regarding how much understanding the industry has of deep-water off-shore drilling. The uncertainty of exploration investments is one that oil and gas companies are too afraid to absolve upfront. However, if lucky in their explorations, the reward could be very handsome.

The second obstacle is facing federal regulatory requirements, including safety guidelines, refinery operations and other regulatory agencies’ requirements on exploring for oil and gas. The challenge and risk of accidental spill often beleaguer the oil industry. The lackadaisical operations on oil platforms and unconscious safety management practices get oil companies into problems just as we had over the past year. British Petroleum could rightly argue that other oil companies in the industry could have suffered their faith at the Macondo well; and, only the fact that there are available government subsidies that encouraged the company to venture into the depths that led to the accidental explosion. However, this argument will hardly hold ground, if the Federal Government pulls subsidies that allowed oil companies to take extra-ordinary risks that lead to explosions and deaths in the process of searching for oil. The continued Federal subsidy to the oil industry conflicts with its goal of maintaining safety in the process of exploration. If oil companies are not being responsible enough with the issue of safety management and if oil companies want to hang the risk-taking choices on the fact that they are being subsidize to take huge risk, perhaps, it is time to let go the subsidies or yank the subsidies in order to save lives.

The best hope is to grapple with the fact that some of the subsidies would have to go away. However, the problem is, would the leadership in both chambers of congress live up to the expectation of the nation, in terms of bringing down the deficit; and, or making up for the shortfall in federal budget, by suspending the subsidies to the oil industry. Fortunately, one does not have to look far to see how this could be accomplished or play out. However, the question is, and has always been: will our lawmakers do their job, or will they continue to catty-up to the oil industry that lines the pockets of some of them or their campaign chests? The huge quarterly profits and mixed records of oil companies, with respect to safety management in exploration and marketing oil, make it imperative that our lawmakers take away some of the industry subsidies, if not for the sake of making up for the huge hole in our budget, but also to encourage some discipline in the way safety issues are managed in the oil industry.

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