The truth about America’s oil & gas companies — Part I

Brian Johnson Contributor
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In a recent interview, Sen. Bernard Sanders (I-VT) alleged that while America’s oil and natural gas companies make “huge profits,” they “pay nothing in taxes.” Nothing could be further from the truth.

A recent 60 Minutes segment and other commentary have examined how U.S. industries use the tax code to export jobs and hold profits overseas. They point to the low effective income tax rates incurred by these companies as proof. While some industries may engage in this behavior, America’s oil and natural gas industry is not one of them.

Make no mistake, U.S. oil and gas companies are large, complex organizations — they have to be in order to succeed in global energy markets, where their competition can be state-controlled energy companies. Their earnings are matched by their significant investments.

Their earnings, however, are in line with those of other major U.S. manufacturing industries, as measured against their sales. The latest available data for 2010 earnings shows the oil and natural gas industry earned 5.7 cents for every dollar of sales. This is below the earnings of all U.S. manufacturing, which earned an average of 8.5 cents for every dollar of sales. Many would not expect an industry as large as the U.S. oil and natural gas industry, which supports 9.2 million U.S. jobs and contributes to 7.5 percent of gross domestic product (GDP), to have lower earnings per dollar of sales than the average manufacturing industry, but that’s the reality.

Further, U.S. oil and natural gas companies pay considerably more in taxes than the average manufacturing company. According to data found in the Standard & Poor’s Compustat North American Database, the industry’s 2009 net income tax expenses — essentially their effective marginal income tax rate — averaged 41 percent, compared to 26 percent for the S&P Industrial companies. The Energy Information Administration (EIA) concludes that, as an additional part of their tax obligation, the major energy-producing companies paid or incurred over $280 billion of income tax expenses between 2006 and 2008.

The U.S. oil and natural gas industry also pays the federal government significant rents, royalties and lease payments for production access — totaling more than $100 billion since 2000. In fact, U.S. oil and natural gas companies pay more than $86 million to the federal government in both income taxes and production fees every single day. In addition, since 2000, the industry has invested almost $1.7 trillion in U.S. capital projects to advance all forms of energy, including alternatives, while reducing the industry’s environmental footprint.

Oil and natural gas companies must constantly find new opportunities to produce more oil and natural gas. Given administration policies limiting new domestic opportunities, these resource-driven companies are forced to explore abroad. However, unlike other industries that may look to open factories in low-tax countries, oil and natural gas companies must invest where the resources are. For example, while it would be great to produce in Ireland and enjoy a 12 percent corporate income tax rate, Ireland holds very small oil or gas reserves. Resource-rich countries understand this and often impose higher income taxes on oil and gas operations.

Despite their international presence, U.S. oil and natural gas companies still directly employ millions of U.S. workers, invest heavily in the United States and pay valuable dividends. Therefore, substantial foreign earnings are constantly returned to this country and put back into the economy. This revenue flow is dependent upon the United States recognizing that, because the income has already been taxed abroad, it should not be taxed again upon repatriation. However, the administration and some in Congress have proposed raising taxes on U.S. companies’ foreign earnings, further undermining U.S. competitiveness abroad and potentially limiting the availability of future reserves.

U.S. oil and natural gas operations are intricate and complex, but the facts are simple: America’s oil and natural gas industry supports 9.2 million jobs throughout the economy and 7.5 percent of our GDP. Its companies provide higher-than-average wages — approximately $98,000 a year for an upstream job — and help ensure our nation’s energy security. In the process, they generate tax revenues from operations and sales of products that contribute billions every year to federal, state and local governments.

Contrary to what some political pundits may say, major energy producers are paying their fair share.

Brian Johnson is the senior tax advisor for the American Petroleum Institute — a trade association representing over 470 oil and natural gas companies. Visit www.api.org for more information. This is the first of a two-part series.

Brian Johnson