Oil's Pogo Problem

Yesterday I participated in another in a series of blogger conference calls hosted by the American Petroleum Institute (API.) This one covered a study commissioned by API and conducted by Dr. Robert J. Shapiro, a former Undersecretary of Commerce for Economic Affairs, examining the ownership of US oil and gas companies. The study's findings dispel the notion that the oil industry is owned by a few insiders, rather than by a broad cross-section of the public via our mutual funds, pension funds, and direct equity investment. In fact, the owners of these companies look a lot like those in other industries. While that might not surprise many of my readers, it highlights a significant disconnect in some pending energy legislation. Anyone familiar with the late Walt Kelly's cartoon possum, referred to in this posting's title, knows where this is headed.

The study looked at the ownership of oil & gas company shares, among management, individuals, and various institutional investors. Although these owners don't make the day-to-day decisions that guide these companies, they are entitled to all of the firm's earnings, whether paid out as dividends or reinvested. Out of every dollar of oil company pre-tax profit, roughly 35 cents cents goes to Uncle Sam and another 7 or 8 cents to the appropriate state tax authority. Of the remainder, Dr. Shapiro's study suggests that approximately 57 cents ends up in someone's IRA, 401-K, life insurance policy, or pension fund, leaving under a penny for "corporate insiders." That seems very much at odds with public perceptions about oil companies.

In the podcast interview that accompanied API's press release on the study, John Felmy, API's chief economist, made an astute observation. Referring to recent legislation increasing taxes on the industry, he said, "They seem to be predicated on the notion that people believe that no one owns the oil companies, and somehow if you take money from an oil company, no one gets hurt." The data paint a very different picture; the people who own those large profits we want our representatives to tax away are mainly the same ones who elected them: us. When I asked him about this, Dr. Shapiro was careful to make a distinction between the composition of the electorate and of the owners of financial assets. The latter group is skewed toward the upper half of income, compared to the whole population, though the electorate probably is to some extent, as well. However you slice it, though, raising taxes on oil companies means taxing the nest eggs of America's middle class.

In that light, the only practical difference between raising federal revenue by taxing the oil & gas industry, in preference to some other broad or narrow target of corporate income taxes, lies in reducing the amount available to invest in producing more energy, rather than materially shifting the pockets from which the funds will ultimately come. Surely that is counterproductive to the cause of reducing our reliance on imported energy, even if some of those profits would otherwise be spent on share repurchases or mergers. When we argue that we want to tax oil companies, because we have more confidence in the government to invest in alternative energy, we are really saying we want to tax our own savings and those of our parents, friends and neighbors to fund energy R&D. When you look at it that way, that's just not a very enlightened policy, compared to a tax on energy consumption or carbon, either of which would do far more to reduce demand, improve efficiency, and reduce greenhouse gas emissions.