Larry J. Richardson: Tax credits keep oil wells pumping

08/16/2013 5:56 PM

08/16/2013 5:56 PM

How about this for achieving energy security and lower consumer costs? America’s marginal oil wells – wells that yield on average only 2.2 barrels of oil per day – produce oil equivalent to 50 percent of the amount imported from Saudi Arabia.

Kansas has the third-largest number of marginal wells, also known as stripper wells, behind Texas and Oklahoma. But the Obama administration wants to repeal tax credits that would discourage the use of marginal wells, a source of one-fifth of the nation’s oil production. That would harm our energy security and, according to a Wood Mackenzie study, place at risk 165,000 U.S. jobs.

Almost all of the nation’s marginal wells are operated by small, independent oil companies or family businesses. Eliminating the same tax deductions that are available to every business in America would force companies and family businesses to pay more in federal taxes, which are already far higher than for most other industries.

Oil companies would feel the brunt of proposed tax changes. If they are approved, the oil industry would have to pay an additional $90 billion in tax increases. The industry already pays an average of $85 million a day, including royalty payments, bonus bids and other fees.

In order to be profitable, an oil or gas well, like any other business, must generate enough revenue through the sale of the product to a refiner or pipeline company to pay all of the costs associated with the production and maintenance of the well. Costs can run from a few hundred to several thousands of dollars per month. And the producer, like a farmer, does not set the price of the product that he produces. They are at the mercy of the commodities market.

As a result, the operator of a small oil or gas well does not have the ability to pass along costs resulting from increased taxes to consumers, as other “end product” businesses are able to do. This inability to pass on increased costs on already marginal wells can cause wells to reach or exceed their economic limit sooner than they otherwise would, reducing the amount of oil available to the consumer. This loss of production also costs states and counties to lose severance and ad valorem tax revenues, which would negatively affect our state.

Eliminating tax deductions would create new uncertainties even as energy investment needs continue to grow. But the outlook will be much brighter if such incentives for oil and gas drilling are kept. Projections show that with increased energy development, the oil industry could furnish $800 billion in new revenues for government by 2030.

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