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OIL AND GAS TAX PROVISIONS: 

A CONSIDERATION OF THE PRESIDENT’S 

FISCAL YEAR 2010 BUDGET PROPOSAL 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, 

AND INFRASTRUCTURE 

OF THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 10, 2009 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

SUBCOMMITTEE ON ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE

JEFF BINGAMAN, New Mexico, Chairman 

KENT CONRAD, North Dakota 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

THOMAS R. CARPER, Delaware 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN CORNYN, Texas 

ORRIN G. HATCH, Utah 

MICHAEL B. ENZI, Wyoming 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Bingaman, Hon. Jeff, a U.S. Senator from New Mexico, chairman, Subcommittee on Energy, Natural Resources, and Infrastructure, Committee 

on Finance ............................................................................................................ 1 

Bunning, Hon. Jim, a U.S. Senator from Kentucky ............................................. 2 

WITNESSES 

Krueger, Hon. Alan, Assistant Secretary for Economic Policy, Department 

of the Treasury, Washington, DC ....................................................................... 4 

Brown, Dr. Stephen P.A., non-resident fellow, Resources for the Future, Arlington, TX ............................................................................................................ 6 

Johnson, Calvin H., Andrews and Kurth centennial professor of law, University of Texas School of Law, Austin, TX ............................................................. 8 

Nichols, Larry, chairman, American Petroleum Institute, Oklahoma City, OK 10 

Book, Kevin, managing director, ClearView Energy Partners, LLC, Washington, DC ............................................................................................................. 12 

Kleemeier, Henry G., chairman, Independent Petroleum Association of America, Tulsa, OK ....................................................................................................... 15 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Bingaman, Hon. Jeff: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 31 

‘‘Oil and Gas Tax Provisions: A Consideration of the President’s Fiscal 

Year 2010 Budget Proposal,’’ Joint Commititee on Taxation staff report, 

September 9, 2009 ........................................................................................ 33 

Book, Kevin: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 71 

Brown, Dr. Stephen P.A.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 80 

Bunning, Hon. Jim: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 90 

Johnson, Calvin H.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 92 

Response to a question from Senator Hatch .................................................. 113 

Kleemeier, Henry G.: 

Testimony .......................................................................................................... 15 

Prepared statement .......................................................................................... 114 

Response to a question from Senator Cornyn ................................................ 130 

Krueger, Hon. Alan: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 133 

Responses to questions from Senator Hatch .................................................. 153 

Nichols, Larry: 

Testimony .......................................................................................................... 10 

Prepared statement with attachments ........................................................... 157 

Responses to questions from Senators Hatch and Cornyn ........................... 178 

Page

IV 

COMMUNICATIONS

Ad Hoc Deep Water Exploration and Production Coalition ................................. 187 

National Association of Royalty Owners (NARO) ................................................. 190 

National Petrochemical and Refiners Association ................................................ 193 

(1) 

OIL AND GAS TAX PROVISIONS: 

A CONSIDERATION OF THE PRESIDENT’S 

FISCAL YEAR 2010 BUDGET PROPOSAL 

THURSDAY, SEPTEMBER 10, 2009 

U.S. SENATE,

SUBCOMMITTEE ON ENERGY, NATURAL

RESOURCES, AND INFRASTRUCTURE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 2:15 p.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Jeff Bingaman 

(chairman of the subcommittee) presiding. 

Present: Senators Hatch, Bunning, and Cornyn. 

OPENING STATEMENT OF HON. JEFF BINGAMAN, A U.S. SENATOR FROM NEW MEXICO, CHAIRMAN, SUBCOMMITTEE ON 

ENERGY, NATURAL RESOURCES, AND INFRASTRUCTURE, 

COMMITTEE ON FINANCE 

Senator BINGAMAN. All right. Why don’t we go ahead and get 

started. Thank you all for being here. 

In the budget proposal that was sent to the Congress in February, the President called for significant changes beginning in 

2011 to the taxation of domestic oil and gas activities. Taken together, the proposed changes would raise an estimated $31.5 billion over 10 years. 

Some elements of the President’s proposal are already familiar to 

the members of the Finance Committee, as we considered them at 

length in the last Congress: first, imposing an excise tax on production in the outer continental shelf, and second, disallowing section 

199 domestic manufacturing deduction for the largest integrated 

producers. 

There was broad bipartisan support from the Finance Committee 

for those proposals in the last Congress. The proposals were included in the comprehensive energy tax legislation that the committee reported, but which failed by one vote to achieve cloture on 

the Senate floor. 

I continue to think those proposals have merit. But the President’s proposals would go further, in that they would disallow the 

section 199 deduction for all oil and gas producers, not just the 

largest integrated firms. I have concerns about that expansion and 

believe we need to give it careful study. I also understand the administration is refining its OCS excise tax proposal, and we look 

forward to seeing the final version of that. 

2 

In addition, the President’s budget proposal newly places on the 

table several tax preferences that have been imbedded in our tax 

code for decades and, in some cases, for nearly a century. In revenue terms, the most significant of those proposals are, first, to disallow expensing of intangible drilling costs, or IDCs, and instead 

require that those costs be capitalized; second, to prohibit percentage depletion for oil and natural gas firms and, instead, require the 

use of the cost depletion method; and, third, to increase the period 

over which independent producers amortize geological and geophysical, or G&G, costs and to increase that period from its current 

2 years to 7 years. 

IDCs and G&G costs are part of industry’s everyday vernacular. 

Frankly, I think few in Congress have great familiarity with these 

concepts. I believe it is important, therefore, that this subcommittee carefully study the tax provisions at issue and hear not 

only from the administration, but from industry and from independent analysts. And I am very pleased that we have a panel of 

six distinguished witnesses to speak to us on those subjects today. 

I appreciate very much the benefit of their views. 

Today’s panel will walk through elements of the President’s proposal. In addition, the non-partisan staff of the Joint Committee on 

Taxation has prepared a descriptive pamphlet for today’s hearing. 

I want to thank the JCT staff for their characteristically good and 

thorough work, and I direct that we include that pamphlet in the 

hearing record for this hearing. 

[The pamphlet appears in the appendix on p. 31.] 

Senator BINGAMAN. As we evaluate each proposal, I believe Congress needs to look at it through three critical lenses. First, we 

need to ask whether the proposal would cause more than a negligible increase in consumer prices. I think we are all well aware 

of the burden on consumers last year with gasoline prices getting 

over $4 per gallon. We need to focus on the impact of any changes 

in policy on consumers. 

Second, we need to ask whether the proposal would decrease domestic production. I know that is a serious issue as well. 

Third, we need to ask whether the proposal would impact local 

economies or cause job losses. To be really specific about that issue, 

the oil and gas industry employs something in the range of 23,000 

people in my home State, and the oil and natural gas production 

annually contributes about $1.2 billion to our economy. There are 

a lot of other States that also benefit from oil and gas production, 

and we need to be sensitive to the impact of policy on those issues. 

I look forward to exploring these issues more with the panel. And 

before I introduce the panel members, let me call on Senator 

Bunning to make any statement he has. 

OPENING STATEMENT OF HON. JIM BUNNING, 

A U.S. SENATOR FROM KENTUCKY 

Senator BUNNING. Thank you, Mr. Chairman. 

I am glad that we are holding this hearing today, because it 

raises some very important issues. 

This is not just about raising taxes on the oil and gas industry. 

The President’s proposal threatens our national security, energy security, economic security, and job security. 

3 

We are at a crossroads in our Nation’s energy policy. I have long 

said that we have the resources and innovation to develop our domestic energy industry in a way that is more efficient and environmentally sound. We must, however, develop all of our energy resources and not get into the dangerous political game of excluding 

two of our most reliable sources of our national energy strategy. 

We all want clean, renewable energy sources. But it will take 

decades before those sources come close to fueling our economy. In 

the meantime, we must have a rational national energy strategy, 

or American workers and consumers will pay the price. 

With America in the midst of a recession, now is not the time 

to impose new taxes on our oil and natural gas industry. These 

new taxes will mean less domestic energy production, fewer American jobs, and less revenue at a time when we desperately need all 

three. It will also jeopardize our Nation’s energy security by discouraging new investment in domestic oil and natural gas production and refining capabilities. These investments, and the jobs that 

go along with them, will be pushed abroad. 

It will weaken American competitiveness in the global oil market 

and increase our reliance—and I emphasize this again—increase 

our reliance on foreign oil and natural gas from unfriendly countries. And ironically, these tax hikes may actually damage the environment by shifting production to countries with less stringent environmental standards. 

For nearly a century, our tax code has recognized that oil and 

gas production is extremely capital-intensive, and it is in our national interest to ensure investments in domestic production go forward. This is not unique to oil and gas. The tax code is filled with 

incentives for domestic energy production from a variety of sources, 

and for good reason. Our economy grinds to a halt without abundant, affordable sources of energy. 

The American public will be stunned to learn that increasing domestic production is no longer our national goal. Instead, the 

Obama administration wants to discourage domestic over-production, as it has said 8 times in Treasury’s explanation of the President’s tax proposal. I was not aware that over-production of 

American-made energy is a problem. 

Some of today’s witnesses will argue that the President’s proposal will have a small impact on oil and gas production, prices, 

and jobs. But when the President’s tax increase on oil and gas are 

combined with other tax increases in the President’s budget, this 

amounts to an $80-billion tax hike on oil and natural gas. 

It is foolish to believe that these tax hikes will not have an impact on investments, on domestic supply, on consumer prices, and 

on the 9 million jobs that depend on the oil and gas industry. The 

witnesses who believe the impact will be small have probably never 

had to raise capital for an enterprise or make long-term business 

plans. I would hope that we do not damage our national energy 

strategy and our economy in order to score political points. 

Thank you, Mr. Chairman, and I look forward to hearing from 

our witnesses. 

Senator BINGAMAN. Thank you, very much. 

Senator Cornyn, did you wish to make a statement before we 

hear from the witnesses? 

4 

Senator CORNYN. Thank you, Mr. Chairman. I do not think that 

is necessary at this point. I do have some questions for the witnesses, so why don’t we just proceed to them? 

Senator BINGAMAN. Very good. Let me introduce everybody here, 

and then we will proceed in the order that I introduce them. 

First would be Alan Krueger, who is Assistant Secretary for Economic Policy at the Department of the Treasury. Thank you for 

being here. 

Next, Dr. Stephen Brown, who is a non-resident fellow at Resources for the Future, based in Arlington, TX. He recently retired 

from the Federal Reserve Bank of Dallas, where he retired as director of energy economics and micro-economic policy analysis. 

Third, Calvin Johnson is the Andrews and Kurth centennial professor of law at the University of Texas School of Law. 

Fourth, Larry Nichols, who is chairman of the American Petroleum Institute and the chief executive officer of Devon Energy in 

Oklahoma City. 

Next, Kevin Book is managing director of ClearView Energy 

Partners, LLC. 

And finally, Henry Kleemeier is the chairman of the Independent 

Petroleum Association of America and president and chief executive officer of Kaiser-Francis Oil Company in Tulsa. 

So, thank you all very much for being here. Why don’t each of 

you take about 5 to 6 minutes and summarize the main points you 

think we need to understand on these issues, and then we will 

have questions. 

Go right ahead. Mr. Krueger? 

STATEMENT OF HON. ALAN KRUEGER, ASSISTANT SECRETARY 

FOR ECONOMIC POLICY, DEPARTMENT OF THE TREASURY, 

WASHINGTON, DC 

Mr. KRUEGER. Thank you. Good afternoon, Chairman Bingaman, 

Ranking Member Bunning, and Senator Cornyn. 

Thank you for inviting me to testify this afternoon. I appreciate 

the opportunity to discuss the economic effects of the administration’s fiscal year 2010 budget proposals that focus on tax subsidies 

to the oil and gas industry. 

The administration believes that our Nation must build a new 

clean energy economy, reduce our dependence on oil, and limit the 

emissions of greenhouse gases. Congress has already taken important steps in that direction by providing funding for energy efficiency improvements and renewable energy investments in the Recovery Act. 

Consistent with the administration’s goal to build a clean energy 

economy, the budget also includes several proposals to eliminate 

tax subsidies that benefit oil and gas companies, such as percentage depletion and expensing of intangible drilling costs, beginning 

in 2011. 

In my testimony, I will describe why, from an economist’s perspective, these proposals are good economic policy. I will also describe why I believe eliminating these tax subsidies would have 

small effects on prices, production, and employment. 

An important principle of good tax policy is that a tax policy 

should be neutral across industries. By altering the pattern of 

5 

after-tax returns on investments, compared to the economic returns 

on investments, tax preferences distort resource allocation and reduce aggregate output. 

Maintaining neutrality in economic policy, absent a strong reason otherwise, is a longstanding principle that was emphasized by 

George Washington, who said in his farewell address, ‘‘even our 

commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences. . . .’’ 

The tax subsidies that are provided to the oil and gas industry 

lead to inefficiency by encouraging over-investment of resources in 

these industries. In 2005, the Congressional Budget Office estimated that the effective marginal tax rate on investments in petroleum and natural gas structures was 9.2 percent. This is well below 

the average effective marginal tax rate across all asset types, which 

is 26.3 percent. Removing this distortion would improve overall economic efficiency. 

A second principle of good tax policy concerns externalities defined as benefits or costs that accrue to parties not involved in a 

transaction. One reason to subsidize or tax a particular industry 

more highly is to align market prices with the full social cost of 

producing or consuming a good. 

Oil and natural gas prices may not reflect environmental harm 

caused by the release of greenhouse gases in the atmosphere associated with oil and gas production and consumption. Removing the 

current tax subsidies may move prices closer to appropriately reflecting the negative externalities associated with greenhouse gas 

emissions. Although, as I discuss shortly, our estimates are that 

the effect on prices of the proposed policies is likely to be very 

small. 

Next, I would like to turn to an analysis conducted by the Department of Treasury on the potential impacts removing these tax 

subsidies will have on prices, production, and employment. 

Tax preferences reduce a firm’s cost of doing business and, by 

lowering these costs, they can lead to an increase in the firm’s production and employment. Whether or not the market price of the 

good produced by a firm is affected by an increase in production depends on the size of the increase in production relative to the market as a whole and the availability of close substitutes. 

I will first discuss impacts on oil. The domestic price of oil is determined by global supply and demand, because oil is an internationally traded commodity. The U.S. share of global oil production is only 10 percent and its share of proven crude oil reserves 

is less than 2 percent, which means that any change in U.S. domestic oil production will have a limited impact on the world supply of oil. 

Because there will be little or no effect on the world supply of 

oil, removing the tax subsidies for oil production would have an insignificant impact on domestic prices and consumption. According 

to our estimates, removing subsidies for the oil industry would be 

equivalent to raising finding and lifting costs by less than 2 percent. 

The small change in domestic producer costs could cause some 

production to shift from domestic to foreign suppliers and among 

integrated and non-integrated suppliers within the U.S. However, 

6 

we estimate that the decrease in domestic production due to these 

proposals will be in the neighborhood of one half of 1 percent or 

less. This is based on standard production supply elasticities in the 

literature. 

A rough assumption would be that employment associated with 

oil production could fall in the same proportion as the decline in 

domestic production. The small increase in production costs would 

have no impact on employment in the refining of distribution sectors. 

Finally, as I noted earlier, reducing tax preferences will result in 

a more efficient allocation of capital and labor which will tend to 

increase national output and employment in the long run. 

I will next turn to the impacts on natural gas. Unlike oil, a large 

majority of the natural gas consumed in the U.S. is domestically 

produced. As a result, changes in domestic natural gas production 

costs have the potential to influence prices. However, the increase 

in production costs from eliminating the subsidies is small, and in 

the extreme situation, if all of the costs of cost increase are passed 

on to consumers, we estimate that the impact would be about 1 

percent higher natural gas prices. 

For context, consider that since 2000, prices for residential natural gas have fluctuated an average of plus or minus 6 percent per 

month. Thus, any price changes due to removing the tax subsidies 

will likely be small relative to normal price fluctuations and, as I 

mentioned, that is using an extreme assumption that all of the cost 

increase is passed on in the form of higher prices. 

Small increases in price may cause consumers to respond by decreasing their consumption of natural gas. However, again, the effect is likely to be small. Using estimates of the demand elasticity 

from the literature, our analysis suggests that a 1-percent increase 

in natural gas prices might result in a reduction in natural gas 

consumption and production of perhaps half a percentage point in 

the long term. 

Over the long term, of course, employment in the natural gas 

production and supply industry could change by a similar amount. 

As in the case of oil, eliminating the distortionary influence of the 

tax preferences for natural gas can improve efficiency and help to 

create jobs in other sectors over time. 

I see that I am out of time, so why don’t I stop there? You have 

my full statement in the record, and I will be happy to answer 

questions. 

Senator BINGAMAN. All right. Thank you very much. 

[The prepared statement of Mr. Krueger appears in the appendix.] 

Senator BINGAMAN. Dr. Brown? 

STATEMENT OF DR. STEPHEN P.A. BROWN, NON-RESIDENT 

FELLOW, RESOURCES FOR THE FUTURE, ARLINGTON, TX 

Dr. BROWN. Thank you, Chairman Bingaman, Ranking Member 

Bunning, and my Senator Cornyn. 

I am a non-resident fellow with Resources for the Future. Resources for the Future is a 57-year-old independent and nonpartisan research institution based here in Washington, D.C., and 

it focuses on energy, environmental, natural resource, and public 

7 

health issues. Non-resident in my title means that I primarily live 

and work somewhere else, in my case, Texas. 

As my written testimony states, any views I present today are 

strictly my own and should not be attributed to Resources for the 

Future. 

The President’s proposed budget changes would amount to $31.5 

billion in additional revenue. This contrasts with projections that 

the domestic oil and gas production over the same time period, for 

which this $31.5 billion would be raised, will be about $3.4 trillion, 

so the tax increase that is covered in this would be a little less 

than 1 percent of the overall revenue projected for the domestic industry over the 10-year time period. 

What I am going to address today is how these preferences fit 

into an overall U.S. tax system, how eliminating the oil and gas 

company tax preferences likely will affect U.S. oil and natural gas 

markets, and what impacts these will have on U.S. energy security, 

employment, and regional economic activity. 

Tax preferences, I think, are best viewed as instruments of policy. Their use should be limited to activities that need more encouragement than is provided by free market forces. Otherwise, tax 

preferences actually reduce overall economic well-being. Free markets should provide sufficient encouragement, as we are looking at 

projections of near-record high prices for oil and natural gas over 

the coming years. 

Because these tax preferences amount to less than 1 percent of 

the projected revenue for the industry, my estimates show that 

ending these preferential taxes will have a very small effect on 

U.S. oil and gas markets. The average U.S. consumer would pay 

about $1.40 more per year for petroleum products and natural gas 

over the 10-year time frame used in the President’s budget projections. At the same time, the U.S. Government revenue will be increased about $10.70 per consumer. 

My estimates suggest that there would be a small impact on 

world oil prices of about 6 cents per barrel of oil and, when you 

translate that into price increases for gasoline, diesel, and home 

heating oil, we are looking at a little less than two tenths of a cent 

per gallon. Consumer prices for natural gas will be pushed upward 

by about 2.4 cents per million Btu. This is less than 1 percent. Producer prices will be pushed down by about 2.7 cents per million 

Btus, so there would be an overall increase in taxation on natural 

gas of about 5 cents. When you put this into context of the projected price increases that we will see for natural gas, it would put 

natural gas in the $3.50 to $8.00 range over the next 10 years. You 

can see that these are relatively small increases. 

Of course, these are going to mean that these small changes will 

have some impact on domestic production and imports. And as a 

matter of context, the U.S. oil market is about a 20 million barrela-day market today and is projected to remain relatively constant 

over the next 10 years. 

My estimate showed that out of that market, we are looking at 

about a 9,000 barrel-a-day reduction in consumption and about a 

19,000 barrel-a-day increase in imports, for a total of a 26,000 

barrel-per-day decrease in domestic production. Of course, those 

8 

could be significant if you happen to be the producer of the last 10 

barrels in that 26,000 barrels. 

The small changes in oil market conditions would slightly increase the exposure of the economy to oil supply disruptions, but 

again, this is very slight and I estimate on the order of $7.9 million 

per year over the 10 years. So when you are looking at raising billions of dollars in a trillion-dollar industry, again, that is a small 

figure. 

One of the things that I was asked to do was assess the impact 

on regional economic activity, and I put these small changes into 

my model of regional economic activity and they were too small for 

the model to really give me any answers that I considered worth 

reporting. 

In summary, the elimination of oil and gas tax company preferences should have little impact on the industry, consumers, oil 

security, or on U.S. economic activity. And, like the previous speaker, I look forward to answering your questions. 

Senator BINGAMAN. Thank you, very much. 

[The prepared statement of Dr. Brown appears in the appendix.] 

Senator BINGAMAN. Professor Johnson, go right ahead. 

STATEMENT OF CALVIN H. JOHNSON, ANDREWS AND KURTH 

CENTENNIAL PROFESSOR OF LAW, UNIVERSITY OF TEXAS 

SCHOOL OF LAW, AUSTIN, TX 

Professor JOHNSON. I am Calvin Johnson. I thank the chairman 

and distinguished members for inviting me. I am truly honored. 

My testimony is on honest and accurate tax accounting for oil 

and gas. I have been a professor of law at the University of Texas 

Law School since 1981, 28 years. I help run the ‘‘Shelf Project,’’ 

which is a collaboration by tax professionals to develop and perfect 

proposals to raise revenue by defending the tax base. 

Our Uncle Sam is going to need significant revenue. The Congressional Budget Office estimates that the Federal budget deficit 

for 2009 will total $1.6 trillion, or 11 percent of gross domestic 

product. Once the need for short-term stimulus has passed, that 

deficit must be closed. In the impending revenue crisis, baseprotecting revenue provisions that were not possible under ordinary politics become political necessities. 

In raising revenue, it is better to go after the low-tax and 

negative-tax transactions before raising tax rates. A tax system 

does the least harm to the private economy if it is broad, unavoidable, and neutral between investment choices. A broad, healthy tax 

base allows us to raise the necessary revenue at the lowest feasible 

tax rates. Investment decisions should be governed, not by arbitrary tax accounting, but by the real non-tax merits of the investment. We need to get the tax accounting right to describe the real 

economic income, just as we need to keep our laboratory data honest and accurate, no matter how important the experiment is. 

Under the standards of a broad, unavoidable, and neutral tax 

base, we will need to have significant improvements in the tax accounting used for oil and gas. Tax accounting for oil and gas does 

not describe the economic income from the investment. Indeed, for 

a broad range under reasonable assumptions, oil and gas accountVerDate Nov 24 2008 20:17 Apr 27, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\65425.000 TIMD
9 

ing delivers a negative tax or subsidy to very profitable investments. 

For example, under reasonable assumptions, the combination of 

four tax preferences generates a subsidy that is a negative 42 percent of real income. The four preferences are expensing of intangible drilling costs, the pool of capital doctrine, the percentage depletion allowance, and domestic manufacturing deduction. 

The subsidy from the combination means that oil and gas investments can, in reality, lose over half of their cost of capital before 

tax and still make money after tax. Investments are not more virtuous because they lose money in absence of tax. Honest and accurate tax accounting for oil and gas would make taxable income describe the economic income and stop the tax subsidies. 

No one has yet made a plausible case that a subsidy is needed 

for oil and gas beyond the wisdom of the laws of supply and demand. The price of oil and gas is high enough to provide sufficient 

incentive, and, if more incentive is needed, the price will rise. Indeed, an increase in the price of oil and gas, if any, would help us 

conserve energy and adjust to alternative energy sources and the 

high energy prices in the future. The government should get out of 

the business of subsidizing oil and gas, especially via the tax system. 

None of the tax advantages accorded to oil and gas has ever been 

subjected even to the care that we give to government spending. 

The competitive Federal budget is the primary mechanism by 

which the government applies rationality to use of resources. 

Budgeted spending is subject to discipline because government 

spending is so widely hated. When items are off-budget, however, 

as when they are accomplished through the tax system, the subsidies avoid the budget competition for resources. When Congress 

allows tax advantages, they do not think of burdens as being real 

money and, therefore, they turn out to be quite irrational. Tax advantages are stealth subsidies, not understood to be real money by 

the people or by the Congress that adopted them. 

The following eight tax privileges now available to oil and gas 

should be repealed. 

One, repeal of the intangible drilling costs. These are real investments, and they should be treated as capital expenditures. 

Two, repeal of the pool of capital doctrine. If you are going to describe the economic income from an activity, you have to have the 

adjusted basis equal to the real bank account, you have to capitalize the costs, and you cannot allow people to get any of these 

costs tax-free. 

You need to have a repeal of the working interest exemption 

from the passive activity loss provisions. The Tax Reform Act of 

1986 was so marvelously effective because it lowered rates, and in 

order to lower rates it had to go after tax shelters. The siege gun, 

the most effective anti-tax shelter provision in the 1986 act was the 

passive activity loss provisions. Working interests have an exemption. That means that outsiders who want to buy a lot of shelter 

but do not have any oil mud on their hands, have never seen, set 

foot, or have anything to do with the industry, can buy their way 

into the artificial tax loss coughed up by the bad accounting, by the 

10 

artificial accounting, and we need those passive activity losses to 

come in. 

We need to limit the percentage depletion allowance to basis. 

Once somebody has recovered all their costs, that is it. There is no 

possible justification for percentage depletion, no engineering idea, 

no good accounting idea. 

We need to repeal the special exclusions for domestic production 

and repeal the tax credits. 

I thank you for your time. 

Senator BINGAMAN. Thank you, very much. 

[The prepared statement of Professor Johnson appears in the appendix.] 

Senator BINGAMAN. Mr. Nichols? Go right ahead. 

STATEMENT OF LARRY NICHOLS, CHAIRMAN, AMERICAN 

PETROLEUM INSTITUTE, OKLAHOMA CITY, OK 

Mr. NICHOLS. Thank you, Mr. Chairman. I am Larry Nichols, 

chairman and CEO of Devon Energy Corporation, an independent 

oil and gas company, and I am also chairman of the American Petroleum Institute. 

I appreciate the opportunity to present the industry’s views on 

the potential impact of the oil and natural gas proposals that are 

contained in the administration’s budget. 

I particularly want to thank Chairman Bingaman for your efforts 

in the past for greater access to our domestic oil and gas reserves. 

This budget calls for more than $80 billion over the next 10 years 

in new taxes on the oil and gas industry. These proposals are based 

on myth, rather than fact. They are based on academic studies that 

you have just heard, rather than real-world experiences or how real 

markets work. 

Here is an example of what I mean. Lower demand in the current economy, the current recession, has reduced natural gas prices 

by 75 percent. Crude oil prices are down by 50 percent. Now, the 

administration proposes to further weaken an industry that is already suffering, along with the other vital sectors of this economy. 

Incredibly, the administration states that its proposals are aimed 

at reducing domestic development of oil and gas. It does so as if 

this is a good thing, at a time when we need all sources of domestic 

energy to help our economy grow, to keep jobs in this economy. 

The administration also states that the current tax treatment of 

our industry’s normal business expenses somehow distorts investments, while not recognizing that other taxpayers in other industries get very similar treatment for their business expenses. 

The proposals are aimed at crippling our industry, a fact that is 

borne out in the administration’s own words. The Green Book, really the best argument produced by the Treasury, is the best argument against the proposals. It says on page 63, and elsewhere in 

the document, that the current tax system ‘‘encourages the overproduction of oil and natural gas,’’ which, it says, is ‘‘detrimental 

to the long-term energy security of this country.’’ 

That is absurd. The over-production of oil and natural gas—I had 

never heard anyone, until reading this document, think that we 

had a problem with producing too much oil and gas. Every President since President Nixon has talked about increasing—including 

11 

the current President—domestic energy and reducing our reliance 

on foreign oil. This proposal would have exactly the opposite effect. 

At a time when everyone suggests we need all sources of domestic energy, it makes absolutely no sense to discourage production 

from our leading sources, oil and natural gas. This counterproductive approach is also at odds with the administration’s own 

carbon reduction policy because it would discourage the production 

of natural gas—our cleanest fossil fuel. 

When these proposals are combined with the House-passed 

Waxman-Markey climate legislation, they will lead to less U.S. refining capacity and more reliance on imported gasoline, without 

any reduction in worldwide carbon emissions. 

Yet, the President’s tax proposals appear to be based on a myth 

that tax increases of this magnitude would have no adverse effect, 

that somehow companies would just absorb them without any impact. That assumption is naive and misleading. Increased taxes 

represent real increases in the cost of doing business, real cash out 

of the pockets of oil and gas companies. That will mean fewer jobs, 

less exploration, fewer wells and higher costs for the consumer. 

API companies have a record of reinvesting their profits to get 

the oil and natural gas our economy needs. In fact, from 1996 to 

2007 our companies invested more in new projects than we made 

in net income. This has been a driving force contributing to domestic supply growth for both crude oil and natural gas. The growth 

has largely come from the development of new shale programs, 

where each well can cost $3 to $9 million and deep-water Gulf of 

Mexico projects, where individual wells cost well over $100 million. 

Basing tax policies on myths leads to the wrong choices for the 

long term. For example, the new excise tax on Gulf of Mexico production would raise money for the government in the short term, 

but cost money in the long term. The increased cost to find and develop U.S. offshore resources would reduce production of domestic 

offshore oil and gas, which generates royalties, bonuses, and tax income to the government. 

The current ability to expense intangible drilling costs—and 

these are the real costs of drilling wells—recognizes that they are 

business expenses that serve as the foundation for our ongoing exploration and production operations. That is why this deduction 

has been a part of the tax code since its inception. 

Repealing it would significantly raise the cost of drilling and development in the United States. For a company like mine, it would 

reduce our capital budget by nearly 20 percent. That is not de 

minimis. It would result in less drilling, less revenue to the government, higher energy cost, and fewer U.S. jobs. 

Another example: section 199 was used to encourage U.S. manufacturers to maintain and create well-paying U.S. jobs. Our industry employs 9 million workers and their families. The proposed repeal of this deduction would specifically impose a higher tax rate 

on this industry, when our effective tax rates are already higher 

than the rest of manufacturing, and indicate that those hard workers are not as valued by Washington as the workforce in other industries. 

I also want to mention two of the broad-based business tax proposals that would have a negative impact on our industry. The proVerDate Nov 24 2008 20:17 Apr 27, 2011 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 R:\DOCS\65425.000 TIMD
12 

posal to modify rules governing the creditability of foreign taxes 

paid by dual-capacity taxpayers would lead to double taxation and 

compromise our ability to operate abroad. 

The other proposal hits refineries by repealing the LIFO accounting method, a well-established method for determining book and 

taxable income which has been around for decades and decades. 

The stark reality is that these proposals are anti-jobs, they are 

anti-consumer, and they are anti-energy. They will depress investment in domestic oil and natural gas projects, they will weaken our 

Nation’s energy security, and make it more difficult to achieve economic recovery. 

Instead of these proposals, we need policies that reflect the realities of America’s energy challenges. We need a multiple approach 

that includes renewable energy, increased energy efficiency, and increasing our ability to produce oil and natural gas and other resources. 

Thank you very much. 

Senator BINGAMAN. Thank you, very much. 

[The prepared statement of Mr. Nichols appears in the appendix.] 

Senator BINGAMAN. Mr. Book? 

STATEMENT OF KEVIN BOOK, MANAGING DIRECTOR, 

CLEARVIEW ENERGY PARTNERS, LLC, WASHINGTON, DC 

Mr. BOOK. Thank you, Chairman Bingaman, Ranking Member 

Bunning, and Senator Cornyn, for the privilege of contributing to 

today’s discussion. 

My name is Kevin Book, and I lead the research practice at 

ClearView Energy Partners, LLC, an independent research and 

consulting firm that serves institutional and corporate energy investors. 

I think I can summarize my lengthy testimony in three points. 

First, I am going to address our view that global oil demand is in 

an unusual and potentially deceptive lull that does not invalidate 

the long-term trends we saw going on in prices last summer. 

Second, I will identify some general challenges that energy policy 

changes can create for certain classes of private companies, and, 

last, I will address several specific unintended consequences that 

could arise from the proposed oil and gas tax policy changes. 

We are, indeed, in a historic demand lull, but the way we got 

here is nothing to celebrate. Moreover, it is unlikely to be sustainable. Thirteen months ago, the global oil system was running at 

about 99 percent of capacity. Prices reflected real and anticipated 

scarcity. Today, economic collapse and rare OPEC cooperation have 

left the world at less than 94-percent capacity. What changed? Demand, and it changed fast. U.S. automobiles got more efficient this 

year and will get more so as consumers recover, simply because 

drivers will replace old cars with new. 

Policies will make a difference, too. Our model suggests that, if 

proposed vehicle greenhouse gas standards are met by fuel economy gains, U.S. motor gasoline demand could peak in 2012 or 2013 

and slowly decline. American drivers literally drive global oil demand. 

13 

And this is a point I think I did not hear in any of the other testimonies: oil and oil products tend to price at the margin, so the 

marginal increase in demand when you are at 94 percent may have 

very little price increase. But when you are at 99 percent in the 

global system, and you have a significant change in demand to the 

upside, price can go up a lot, and fast. 

American drivers are not going to be the only thing in the future, 

because it will not be just about us and our cars. The recession 

slowed purchasing in the West, stalling manufacturing in the East 

and lowering shipping demand. Oil use compressed at every link of 

the global value chain. 

Yesterday’s consumers, though, are not like an old clunker cast 

onto the scrap heap. They are still around to purchase tomorrow’s 

goods, and they are likely to be growing in number. 

On the supply side, we have abundant supply, which means we 

are less vulnerable to acute geo-political events. But as cash grows 

tighter, governments that control and influence industry investments may have fiscal motivations to dig deeper into natural resource profits. The resulting underinvestment could create a slow 

supply bleed, even as demand momentum grows, which is not to 

blame governments. 

It is not easy to sync up energy policy with energy investment 

cycles. Governments mostly have relatively short cycles, and energy 

projects have long lead times and longer lifetimes. But unanticipated policy volatility can inject risk and impair investment. 

Cautious companies plan to survive volatility in prices by earning sufficient returns in later years to pay back losses that they 

earn in earlier years. The time scale of this payback can be a decade or longer. As a result, corporate responses to policy changes 

can be long-lasting; petroleum is a global business, companies 

move. 

Firms pursue projects that deliver the best returns for shareholders. Big resources can be worth big risks and tough terms. 

Conversely, contract rescission or policy changes could undermine 

the attractiveness even of low royalties, especially for smaller 

projects. 

In addition, private firms with finite cash resources must compete with State-owned, State-funded companies. They may be 

among the most vulnerable to unanticipated government actions. 

For this reason, policy volatility within market democracies can be 

more damaging to private companies than to their State-owned 

competitors. 

Before I comment on the proposed changes, one quick note. My 

firm analyzes energy economics and the policies that shape it. We 

do not take sides. We do not consider it our place to judge policy 

changes. More to the point, I am honored to sit alongside distinguished witnesses who have strong and credible arguments for 

both sides. 

Accordingly, I want to focus only on potential unintended consequences. Most of the oil and gas tax incentives on the books 

today have been in force for decades. Some, as mentioned, date 

back to the last century, rather the 19th century. Some are newer, 

section 199, and the accelerated G&G amortization, but they all 

have basically two things in common. First, they encourage U.S. 

14 

petroleum supply security, and, second, they recognize that oil and 

gas investments are enormous. The oil business requires vast 

amounts of cash as a primary factor of production. 

LIFO-to-FIFO, paired with rising prices, could motivate refiners 

to reduce inventories before it happens. This could flood the market 

with crude, artificially depressing prices in the short term and 

hurting the economics of higher-cost alternatives. Refiners might 

also hold leaner inventories thereafter, creating greater price volatility. 

Deduction deferrals, dual capacity tax rule changes, and unraveling inversions could create cash-flow challenges or competitive disadvantages for international companies, but they also create incentives to re-domicile, rather than re-patriate businesses and taxable 

profits. A deep-water drilling surtax could deter higher-cost 

projects. If nothing else changed, pushing back production into the 

future would diminish the present value of royalties received to the 

Federal Government. 

Far more vexingly, changes to lease life or royalty rates could diminish bid bonuses in future auctions, because leases that cost 

more per barrel to produce could be worth less to private companies. 

I think a lot has been said about IDC deductions, and I do not 

want to belabor it, but anything you do to deprive re-investible capital in new production is likely to diminish new production. 

And, perhaps, finally, the 199. One point worth making here also 

pertains to the refining sector, which has survived for years on 

razor-thin margins. You have some companies that are currently 

well-insulated against small tax increases by virtue of their debt 

structures and cash positions in cost structures, but some of the 

smallest companies undertaking some of the highest cost, most innovative and most environmentally-friendly projects, could be the 

most severely impacted. 

Mr. Chairman, current policies embody the energy strategies and 

value judgments of past generations of lawmakers and regulators. 

I believe they can, and should, change with changing economic circumstances. I remain optimistic that this committee and this Congress will continue to craft energy policy that reflects practical and 

well-considered tradeoffs. 

At this point in our Nation’s economic history, it seems equally 

irrational to demonize the taxes that will fund government operations as it does to demonize the fossil energy that will power our 

economic recovery. 

This concludes my prepared statement. I look forward to any 

questions at the appropriate time. 

Senator BINGAMAN. Thank you, very much. 

[The prepared statement of Mr. Book appears in the appendix.] 

Senator BINGAMAN. Mr. Kleemeier? You are the clean-up witness 

here. 

15 

STATEMENT OF HENRY G. KLEEMEIER, CHAIRMAN, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, TULSA, 

OK 

Mr. KLEEMEIER. Thank you. I like being last. 

My name is Buddy Kleemeier. I am the president and CEO of 

Kaiser-Francis Oil Company in Tulsa, OK, and I am the current 

chairman of the Independent Petroleum Association of America. It 

is my pleasure to be here, Mr. Chairman. And thank you, Senator 

Bunning and Senator Cornyn, for allowing me to testify. 

America’s independent producers drill 90 percent of all the oil 

and gas wells that are drilled in the United States. We produce 

over 65 percent of the crude oil produced in the United States 

daily, and over 80 percent of the natural gas produced in the U.S. 

daily. 

Notwithstanding some of today’s testimony, the tax code has 

been written to encourage the development of American resources, 

and it has succeeded. America should not turn its back on public 

policy actions that are designed to attract capital to the high risk 

of developing natural gas and oil to keep those resources producing. 

The outcome of the administration’s proposals to producers, rather than the economists and tax accountants, is clear: investment 

will fall, production will fall, and, for America’s marginal wells, 

production will cease altogether. 

In the limited time available, I want to discuss a few of the items 

addressed in my written testimony: the intangible drilling costs, 

percentage depletion and the passive loss exception, the flawed 

logic behind the administration’s proposal, and the likelihood that 

the Nation will spend more on imported oil than it will gain from 

the revenue increases projected by the administration. 

Intangible drilling and development cost treatment is designed to 

attract capital to the high risk of the natural gas and oil business. 

The expensing IDC has been part of the tax code since 1913. Only 

independent producers can fully expense IDC on American production. Loss of IDC for independent producers will have significant effects on their capital development budgets. 

A Raymond James analysis reported that the loss of IDC would 

result in capital budgets being reduced by 25 to 30 percent. This 

compares with anecdotal information provided to IPAA by its membership indicating that drilling budgets will be cut by 25 to 40 percent. 

Clearly, the consequences would be significant and soon evident. 

Roughly half of the natural gas we burn each day in this country 

comes from wells that have been drilled in the last 4 years. American producers are already facing significant reductions in their 

capital budget due to current low product prices. Layering loss of 

IDC on top of these limitations will only worsen the consequences 

for American production. 

All natural resource minerals are eligible for a percentage depletion income tax deduction. Percentage depletion for natural gas and 

oil has been in the tax code since 1926. Unlike percentage depletion 

for all other resources, natural gas and oil percentage depletion is 

highly limited. It is available only for American production, only 

available to independent producers and royalty owners, only available for the first 1,000 barrels-a-day of production, limited to the 

16 

net income of a property, and limited to 65 percent of the producer’s net income. 

Percentage depletion provides capital primarily for smaller independents and is particularly important for marginal well operations. Those wells that account for 20 percent of America’s oil production and 12 percent of America’s natural gas production are the 

most vulnerable economically. 

Input to IPAA from its operators who take percentage depletion 

indicates that the combined effect of the Obama administration’s 

proposal on IDC and percentage depletion would reduce drilling 

budgets in half. At this lower rate, new production will not offset 

the natural decline in production from existing wells. 

For example, one of our producers reports that he drills 10 wells 

per year. Without IDC and percentage depletion, he will only drill 

5 wells a year. A 5-well program will not replace declining production in existing wells, and over time his operation will just shut 

down. 

Congress’s choice is straightforward: reduce American oil production by 20 percent and its natural gas production by 12 percent or 

retain the current historic tax policies that have encouraged American production. 

When the Tax Reform Act of 1986 divided investment income expense into two baskets—active and passive—it exempted working 

interests in natural gas and oil from being part of the passive income basket. If a loss occurred, it was deemed to be an active loss 

that could be used to offset active income so long as an investor’s 

liabilities were not limited. 

Natural gas and oil development require large sums of capital, 

and producers frequently join together to diversify risk. Additionally, natural gas and oil operators have sought individual investors 

to contribute capital to share the risk of drilling wells. 

There is no sound reason for Congress to enact tax rules that 

would discourage individual investors from continuing to participate in this system. Moreover, Congress applied the passive loss 

rules only to individuals and not to corporations. The repeal of the 

working interest rule, therefore, would senselessly drive natural 

gas and oil investments away from individuals and toward corporations. 

There is no apparent reason why Congress should or would favor 

corporate ownership over individual ownership of working interests. Further, since AMT restrictions apply to IDC of individual 

working interest investors, the application of the passive loss rules 

to these investments is unnecessary and excessive. 

Taken together, these administration-proposed tax changes are 

projected to strip about $36 billion from the U.S. natural gas and 

oil production investment over a 9-year period. The administration 

justifies its proposal based on two flawed rationales. First, it argues that each provision distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. And, second, to the extent that the provision encourages over-production of oil, it is detrimental to long-term energy security and is also inconsistent with the administration’s policy of 

reducing carbon emissions and encouraging the use of renewable 

energy sources through a cap-and-trade program. 

17 

The first issue is neither unique to natural gas and oil tax provisions, nor to the tax code generally. For natural gas and oil production, these provisions are intended to encourage the development of 

American resources—they were never intended to be neutral. More 

broadly, these provisions reflect business tax policy that is consistent with comparable treatment from other energy sources. 

A 2007 Energy Information Administration report assessed the 

Federal Government’s support for energy sources. The analysis 

demonstrates that natural gas and oil Federal treatment is comparable to other major energy sources on a total basis and is well 

below other sources on a unit basis. The Obama administration’s 

first justification is simply an inaccurate characterization of the nature of Federal energy tax policies that have been crafted over decades by this Congress. 

The administration’s second rationale is simply irrational. Production of American oil and natural gas serves the Nation’s goal of 

improving energy security. Production has been regulated since the 

mid-1930s by State regulatory commissions to assure that wells are 

limited to volumes that conserve long-term production and ultimate 

recovery for reservoirs. Current market conditions reflect the need 

for American production to be maximized, and nothing suggests 

that it should not be. 

In summary, the administration’s climate goals for reducing carbon emission and encouraging the use of renewable energy sources 

are enhanced by American natural gas and oil production. Natural 

gas is clean, American, abundant, and affordable, and must be a 

part of any climate initiative. Oil will continue to be a key component for America’s energy supply for the foreseeable future, and 

any policies should rely on American oil first and foreign sources 

last. 

The administration’s revenue estimates raise significant and unanswered questions. Over the 9-year period of this proposal, the 

revenues from all of these provisions would average about $4 billion annually. 

In August 2009, the Energy Policy Research Foundation released 

an analysis that addressed issues related to the Obama administration tax proposal. This analysis said the incremental benefit of 

reducing oil imports by one barrel is worth $14.70 to this economy. 

Thus, if American oil production is reduced by 745,000 barrels-perday as a result of these tax provisions, the cost to the Nation of 

increased imports would be offset entirely by the increased revenues. 

EIA estimates that marginal oil wells produced 844,000 barrelsper-day in 2006. This production would be lost because of the 

changes to IDC and percentage depletion. Clearly, the economic 

consequences of the administration’s tax proposals forcing the closure of America’s marginal oil and gas wells, even without addressing the impact of losing marginal natural gas wells for reduction 

in drilling affecting new production, would exceed the revenue expectations of the total tax changes. 

Those are my comments. Thank you. 

[The prepared statement of Mr. Kleemeier appears in the appendix.] 

Senator BINGAMAN. Thank you all very much. 

18 

Let me start. We will just do 5-minute rounds of questions here. 

If I could start off. 

One issue which seems to be in disagreement is this whole issue 

of the effective marginal tax rate that is being applied, or is imposed, on the oil and gas industry. 

Mr. Krueger, I understand your testimony. You cited GAO reports saying that it is 9 percent as compared to 20 some-odd percent for most sectors of U.S. industry. Am I right about that? 

Mr. KRUEGER. That was a CBO report, but the numbers are accurate. 

Senator BINGAMAN. It was a CBO report, not a GAO report. 

Mr. Nichols, I think your testimony was that the effective rate 

in the oil and gas industry is already higher than on other manufacturers. I guess I am just trying to figure out what the truth is 

here. What is the effective rate? 

Mr. NICHOLS. You can listen to the second quarter conference call 

that we had in August with our investors. We do this every quarter. We update our estimate for what our effective tax rate will be. 

This is what we say. It is in our SEC filings. Our estimate for this 

year will be 32 percent. That is—— 

Senator BINGAMAN. Are you typical of the industry, or is Mr. 

Krueger right when he talks more generally about the industry? 

Mr. NICHOLS. We are certainly typical of all the other large independents that I follow. In fact, if you look at the facts, the last 5 

years our own effective tax rate has ranged between 28 percent and 

33 percent. 

Senator BINGAMAN. All right. 

Mr. Krueger, did you have any comment on that issue? 

Mr. KRUEGER. Well, I am not entirely sure how those figures 

were calculated. I think it is important to match the timing correctly, so it might be related to timing. It is not only the CBO who 

finds low effective marginal tax rates for the oil and gas industry. 

That has also been found by other independent analysts. For example, a study by Gilbert Metcalf at Tufts University finds—particularly for the non-integrated producers—lower marginal tax rates 

than for the integrated ones than compared to other industries. 

Senator BINGAMAN. Let me ask. In the past, Congress, at least 

in certain circumstances, has made distinctions between the oil 

production and natural gas production. Again, I think in your testimony, Mr. Nichols, you were saying that natural gas prices are 

down 75 percent, oil prices are down 50 percent. I guess an obvious 

question is whether, in any change in tax law, if Congress were to 

enact a change in tax law, should we make a distinction between 

what we do with natural gas production versus what we do with 

oil production as far as the level of taxation? I do not believe the 

administration made that distinction in their recommendations. 

Maybe, Mr. Krueger, you could comment on that and whether or 

not you think it would make sense for us to look independently or 

separately at those two sectors of the energy industry. 

Mr. KRUEGER. Very quickly, we use the principle of neutrality, 

and the reason why a distinction was not made was to keep the 

rates neutral, to not distort production decisions, investment decisions, between the two industries. 

19 

Senator BINGAMAN. Let us just ask any of the other witnesses if 

you think that it would make sense for us to separately look at the 

appropriateness of any of these changes with regard to natural gas 

rather than just with regard to oil, or should we just keep them 

in one basket? 

Mr. BOOK. Mr. Chairman, I could offer, as an outsider, 

maybe—— 

Senator BINGAMAN. Yes, please. 

Mr. BOOK [continuing]. To the industry who does not have this 

at stake. You drill a hole in the ground to get petroleum out, and 

it can come out in gaseous or liquid form. I am not very familiar 

with any circumstances in American history where we have reinjected the associated crude into the ground from a natural gas 

well. They are both valuable, and companies have a hard time 

sometimes just getting one. So, I mean, it is tough to do in practice 

what the law might try to do tax-wise. 

Senator BINGAMAN. All right. 

Anyone else have a comment? 

Mr. NICHOLS. Yes, reflecting on your earlier comments about the 

three goals that you wanted to address. If the goal is to protect 

jobs, or indeed enhance jobs in the United States, I do not think 

it matters to our workers whether they are producing oil or natural 

gas. The geologists are working for both commodities, and a job is 

a job. If the goal is to protect our national security and not reduce 

production, then we need oil production, we need natural gas production, and we need all we can get until we can achieve alternate 

forms of energy that can fuel our economy. 

Senator BINGAMAN. Let me ask, just particularly, Mr. Nichols or 

Mr. Kleemeier, since both of you are industry representatives here 

on this panel, what is your reaction to Professor Johnson’s proposal, which I understand on the depletion allowances, one of his 

suggestions is that we should limit the amount of depletion deduction to the amount of the investment, as I understand it, and not 

allow the circumstance which he indicates currently exists where 

you have more of a tax benefit realized than is in fact invested. 

Mr. KLEEMEIER. Of course, percentage depletion has been eliminated for all of the integrated companies, and it is only available 

to independent producers and royalty owners. In fact, it is the only 

deduction that royalty owners receive. The small producer—the 

way a person gets to be a small producer usually is a result of 

properties being sold as they become less economic. It starts off 

with the most economic, the most high-risk, the most high-reward 

projects being developed by the integrated companies, the very 

large independents. 

The bottom 80 percent of their property becomes 20 percent of 

their value, and to become efficient they sell off those properties to 

a mid-size producer. The mid-size producer then sells off his bottom 

80 percent to a mom-and-pop small producer. The operating costs 

on those properties are very, very high, and the reason the momand-pop producer buys them is because they can operate more efficiently by producing the properties themselves. 

Without IDC, and without percentage depletion, their very thin 

margins disappear, and that is why I comment on this. Twenty percent of American oil production and 12 percent of American natural 

20 

gas production is stripper wells, and the depletion allowances that 

now exist are focused on people who produce no more than 1,000 

barrels a day. They have to be an independent producer, or they 

have to be royalty owners. So I think this Congress should be focused on the depletion allowance being used only by the people who 

need to have it to stay in business. 

Senator BINGAMAN. Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. Secretary Krueger, 

the first economic principle for tax policy that you listed in your 

testimony is that tax policies should be neutral across industries. 

Is that correct? 

Mr. KRUEGER. Absolutely, it is a good reason otherwise. That is 

correct. 

Senator BUNNING. Currently, oil and gas face strict limits on percentage depletion, while extractors of other mineral deposits do not 

have those limits. Is this policy neutral across industries? 

Mr. KRUEGER. Thank you. That is an excellent question. I think 

the proposal that we made is a first step in trying to improve neutrality across all industries. As you know, the President has asked 

PERAB (the President’s Economic Recovery Advisory Board), Paul 

Volcker’s commission, to look at taxes with an eye toward making 

recommendations. 

Senator BUNNING. Please answer the question. Do not give me all 

the—just answer the question. 

Mr. KRUEGER. The answer that I was giving is that we are in the 

process, through the Volcker Commission chaired by Martin Feldstein, of looking at other subsidies across other industries and, 

hopefully, they will come back with some—— 

Senator BUNNING. In other words, it is not neutral right now. 

Mr. KRUEGER. As I said, it is a first step to try to move toward 

neutrality. 

Senator BUNNING. Is the administration proposing to eliminate 

percentage depreciation for all mineral deposits, or just for oil and 

gas industries? 

Mr. KRUEGER. We are in the process, through the Volcker Commission, of reviewing—— 

Senator BUNNING. Presently, they are only doing it for just oil 

and gas. Is that correct? 

Mr. KRUEGER. That is correct. 

Senator BUNNING. All right. 

Let us turn to the deduction for domestic manufacturing. The oil 

and gas industry is capped at a 6-percent deduction, while other 

U.S. producers will have a 9-percent deduction next year. Is this 

policy neutral across industries? 

Mr. KRUEGER. That policy is not neutral across industry because—— 

Senator BUNNING. That is all. Thank you. 

Mr. KRUEGER [continuing]. If you compare manufacturing, nonmanufacturing, and so on. 

Senator BUNNING. Is the administration proposing to eliminate 

the manufacturing deduction for all U.S. industries, or just for oil 

and gas? 

21 

Mr. KRUEGER. The administration has asked the commission, 

chaired by former Federal Reserve Chairman Volcker, to look into 

these issues to make recommendations. 

Senator BUNNING. In other words, it is not. 

You described the President’s proposal as removing favored treatment, when in fact two of the largest tax increases, percentage depletion and the manufacturing deduction, involve situations where 

the oil and gas industry is already at a disadvantage compared to 

similar industries and will be placed at a further disadvantage. 

Mr. KRUEGER. I think, if you look at the various estimates of the 

effective marginal tax rate, that is not so clear. I am not necessarily disputing, I am saying that there are different estimates, 

and it is not clear that the rates are consistent with them being 

at a disadvantage. 

Senator BUNNING. Mr. Book, some of our witnesses have suggested that the President’s proposals will have minimal impact on 

our supply of energy. You elaborated in some of your testimony on 

why you think there will be some immediate impact on supply, particularly if LIFO is repealed. If LIFO repeal causes a big tax hit, 

could the need to raise cash to pay the tax create other problems 

like less hiring, less capital investment, and even bankruptcy? 

Mr. BOOK. Yes. Thank you, Senator. 

The question is a very good one, because I think it addresses how 

companies try to minimize their bleeding in down times. They ultimately have to try to keep producing to pay their debt obligations, 

so one of the first things they stop doing is investing for the future. 

The next thing they try to do is minimize their variable costs, 

and last, but not least, they shut down if they cannot make it. So 

the implication is that you actually will probably bring about immediate cessation of reinvestment in future capital projects, then 

current projects, and then finally in staff and development. 

Senator BUNNING. Mr. Nichols, is there a parallel between the oil 

and gas industry treatment of intangible drilling costs and other 

extraction industries, such as the mining industry’s ability to expense research and development? 

Mr. NICHOLS. Yes, not only the mining industry, but all industries’ ability to expense research and development. Our exploration 

wells are all research and development, so there is a perfect analogy there between those. 

Senator BUNNING. Secretary Krueger, is the administration’s 

present position that because an industry is not always profitable, 

it should pay higher taxes? 

Mr. KREUGER. Certainly not. The administration’s position, as I 

mentioned, is that they seek a neutral impact of taxes across industries. One thing I would also add, the question you raised about 

flooding the market with LIFO and FIFO. I would just emphasize 

that the transition would take place over 8 years. 

Senator BUNNING. I understand that. But in the first year you 

get whacked. 

Mr. KREUGER. My projection would be that there be more gradual transition among companies. 

Senator BUNNING. My last question is for you also. When did it 

become the United States’ policy to produce less oil and gas domestically? 

22 

Mr. KREUGER. Let me clarify, also, what is said in the Green 

Book, because it was only partially—— 

Senator BUNNING. No, when did it become policy—— 

Mr. KREUGER [continuing]. To the extent that expensing encourages over-production of oil and gas. 

Senator BUNNING. In particularly, the United States of America, 

you are talking about? 

Mr. KREUGER. To improve energy security, the administration’s 

position is that we should reduce our dependence on oil. 

Senator BUNNING. We are 62-percent imported from not very 

friendly countries right now on oil. 

Mr. KREUGER. That is correct. 

Senator BUNNING. Petroleum. 

Mr. KREUGER. It is a global market for oil, and the best way for 

us to reduce—— 

Senator BUNNING. Is to become less independent. 

Mr. KREUGER. Or to use less energy. 

Senator BUNNING. Is that what you are saying? To use less energy? 

Mr. KREUGER. Given our production is a small part of the world 

supply—— 

Senator BUNNING. The Chinese would love you. [Laughter.] 

I mean, that is—all right. Next? 

Senator BINGAMAN. Senator Cornyn? 

Senator CORNYN. Thank you, Mr. Chairman. Thanks to all the 

witnesses for participating in this very, very important hearing. 

I want to go first to make the point that the chairman made 

about its impact in terms of jobs. The oil and gas industry in my 

State, like New Mexico, although we are a bigger State—we have 

312,000 Texans, 3.1 percent of the workforce, who are employed in 

the oil and gas industry, with total industry wages of $30.6 billion 

a year, or 6.9 percent of all wages in Texas. 

And, fortunately, for a variety of reasons, we have been more fortunate than the rest of the country when it comes to unemployment. The Texas unemployment rate is almost 2 percentage points 

below the national rate. But I worry about the impact of raising 

the tax burden on domestic oil and gas production in terms of jobs, 

which I thought was sort of our main focus in this recessionary 

economy. And, of course, while many people may have the impression that oil companies are big, multi-national corporations, the 

fact of the matter is that middle-class American households with 

mutual fund investments, pension accounts and other personal retirement accounts, and small personal portfolios, are the ones who 

own the stock in oil and gas companies. 

I would like to return, Mr. Secretary, to something that Senator 

Bunning alluded to, and that was the Green Book’s statement. He 

talked to you about the statement that these subsidies, these tax 

policies, encourage over-production, but it also says that it is detrimental to long-term energy security. Can you explain why it is not 

detrimental to our long-term energy security to decrease domestic 

production and rely more heavily on imported oil? 

Mr. KREUGER. Yes. Let me make a couple of observations, first 

related to the comment you made about jobs. 

23 

Senator CORNYN. If you would answer my question first, and 

then I would be glad to hear your comment. 

Mr. KREUGER. Sure. 

Senator CORNYN. Thank you. 

Mr. KREUGER. Sure. 

The administration’s goal is to have resources invested in the 

way which yields the highest social return. In ordinary circumstances, unless there are large externalities from a particular 

industry, that would imply that the tax code should be neutral. 

The administration has proposed the cap-and-trade policy to reduce our energy consumption, which we think is our best way of 

reducing our reliance on oil and improving our energy security. So, 

I continue to look at the proposals as a whole, trying to move the 

country towards a clean energy economy. 

Senator CORNYN. Well, these tax provisions would have a negative impact on production of domestic natural gas, would they not, 

by increasing the financial burden on producing it here in America? 

Mr. KREUGER. That is correct. As I mentioned before, our calculations are that the subsidies could increase the cost of production by 

probably less than 2 percent overall, which could lead to a small 

reduction in the production of natural gas and oil. 

Senator CORNYN. I think Mr. Kleemeier and Mr. Nichols, maybe 

Mr. Book, might disagree with you, but let us get to that in a 

minute. 

So, what the administration is concerned about is achieving the 

largest social return? 

Mr. KRUEGER. That is correct. What economists call the social return, which takes into account any of the external benefits, and social return does not mean—— 

Senator CORNYN. So we are not talking about the impact on average Texans, for example, when they go pump gas at their local 

gas station, or, let us just say, for example, to Senator Bunning’s 

point, our reliance on imported energy comes from some potentially 

unfriendly nation’s, like Iran, for example. 

Has your calculation taken into account the possibility that at 

some future date there might be a conflict in the Middle East that 

would disrupt imports from countries like Iran, or perhaps Hugo 

Cha ́vez in Venezuela decides to cut off exports to the United 

States? Have you calculated that in terms of calculating the largest 

social return? 

Mr. KRUEGER. The answer is yes, we have. First of all, the social 

return obviously includes Texans and Kentuckians and so on, but 

right now we are not importing oil from Iran. Iran still influences 

the world price of oil so, to improve our energy security, the goal 

is to become less reliant on oil. 

Now, if I can just get back to the jobs question. 

Senator CORNYN. Let me ask you about Iran. Of course, we are 

not directly importing oil from Iran, but you indicate oil is a fungible commodity. And so, if you take Iran’s oil off the market, will 

that not have a negative impact on prices for all consumers? 

Mr. KREUGER. Absolutely, and that is why we want to reduce energy reliance on oil. That is absolutely right. 

Senator CORNYN. I would like to ask just a couple more questions 

in the time remaining, quickly. 

24 

This has to do with the impact on refineries. And, Mr. Book, 

maybe I will ask you to take a shot at this. The President’s proposed repeal of section 199 manufacturing deduction tax credits for 

income derived from American oil and gas operations, this policy, 

I believe, disadvantages the domestic refining industry, particularly independent refiners, to their worldwide competitors. 

Could you explain your view of the impact this would have on 

refineries, particularly independent refineries? Do we know whether repealing the section 199 domestic manufacturing deduction will 

lead to an increase in imported fuel and less domestic investment 

in refining capacity? 

Mr. BOOK. Yes, Senator. I think anything that increases the cost 

of producing oil products for domestic producers will lead to greater 

imports, and there are two reasons why. BP publishes data every 

quarter about what they think that the amount of money you make 

on a barrel of oil products is above the cost of that barrel of oil. 

That margin is below $5 for the last quarter on the books. At a carbon tax of $10 per metric ton, a carbon surcharge of $10 per metric 

ton would eat about half of that money, so half of your margin 

would go away right there. That would put just about everybody 

out of business, but the people it would hurt the most are the people with the highest debt obligations to make, and a lot of them 

are small refiners. Because what they did was strategically smart 

about 4 years ago. They went and built a lot of high-complexity refining capacity that can break down heavy sour oils they could buy 

cheap, and now they can sell gasoline that they made from cheaper 

stuff for the same price as everyone else. 

The problem is that, if you turn it around and it is the same 

price that everyone else is paying for gasoline, so, if your costs now 

go up, you are still not able to sell it for more money, and where 

margins are right now and where demand is right now, those are 

the companies that will go out of business, and then that part of 

the industry will probably go overseas. 

Senator CORNYN. Just so I have this right, if there is less refined 

product, less supply, same demand, prices are going to go up for 

our consumer? 

Mr. BOOK. Globally, yes, and in all likelihood, the proportion of 

products that come from imports will also go up. 

Senator CORNYN. Thank you, Mr. Chairman. 

Senator BINGAMAN. Thank you. Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Welcome to the committee. I appreciate you folks all testifying. 

Mr. Krueger, you referred to the Intergovernmental Panel on Climate Change 2007 synthesis report to claim that the ‘‘best estimate 

is that temperature may increase by more than 7° Fahrenheit in 

this century.’’ Actually, the report gives six different scenarios, as 

I view it, and a range of temperature changes for each scenario. 

Now, most scientists associated with the IPCC consider the A1B 

scenario to be the most accurate, and the synthesis report lists the 

best estimate to be 2.8° Centigrade or just over 5° Fahrenheit. 

That is a very significant reduction from your 7° Fahrenheit. The 

table is on page 8 of the synthesis report if anyone wants to actually read it. 

25 

So, in other words, by simply taking a better look at the data, 

I was able to reduce the air’s average temperature by 2° over the 

next century. Now that was easy. I think Americans deserve to 

know how much the temperature is expected to decline as a result 

of all the pain we are asking them to bear under a cap-and-trade 

scenario. The best estimates I have found, which use the assumptions and data from the United Nations scientists, is that WaxmanMarkey would reduce the global temperature by somewhere between 0.2° and 0.07°C after 100 years. 

Now let me restate that to make sure everybody hears that: the 

entire U.S. contribution to reducing the global temperature after 

100 years, under Waxman-Markey would be between 0.2° and 

0.07°. For the moment, let us assume that these benefit projections 

are accurate. As an economist, do you believe that such an immeasurable benefit is worth the tremendous burden cap-and-trade 

would place on American consumers? 

Mr. KRUEGER. I am glad you threw in ‘‘as an economist’’ at the 

end, because I was going to start by saying I am not a scientist and 

I was relying on the IPCC, and I will certainly take another look 

before I call something the best estimate. 

But let me get to your question. 

Senator HATCH. All right. 

Mr. KREUGER. And I think I made a similar response to a question Senator Bunning asked me at an earlier hearing. I believe it 

is critical for the rest of the world to follow similar policy or to follow policies of reducing their reliance on energy that produces 

greenhouse gases—— 

Senator HATCH. The rest of the world is not doing this. 

Mr. KREUGER [continuing]. And, in particular, China and India. 

And I think it is very important that we work through diplomatic 

channels to bring that along, and I think us passing the cap-andtrade policy is an important step in bringing the rest of the world 

along, but it is actually critical, I think, that the rest of the world 

comes along, and that the U.S. take leadership on this issue. 

Senator HATCH. You believe that is a risk worth taking, that we 

will actually be able to bring India and China along, and that we 

should do this even though it is going to make us uncompetitive 

with the rest of the world, environmentally? 

Mr. KREUGER. Well, first of all I think we should try to minimize 

the cost on the U.S. economy, and there are ways of designing a 

cap-and-trade system which poses less risk for the U.S. economy. 

Senator HATCH. We are talking about the one that we are going 

to have to vote on here in perhaps the next month or so. 

Mr. KREUGER. I understand, and I appreciate the good work that 

the committee and the Congress are doing on this issue. But I 

think, if one considers the risk on the other side, you know, there 

are very severe, consequential risks of inaction. 

Senator HATCH. Well, it does not appear to me they are that consequential over a 100-year period, compared to the tremendous economic difficulties that we are going to go through as a volunteer 

Nation, when these other nations are not coming along. 

Now, admittedly, your argument is that, if we do it, maybe they 

will. I do not have nearly the confidence that they will do it that 

26 

you do, but even if they do, will the reductions be that significant 

that we can take the risk? 

Mr. KREUGER. Well, I think that is a very important area for us 

to devote, for the administration and the Congress to devote, effort. 

I would say on the economic cost, Senator, that, as you know, the 

CBO estimates are about $170 per household. So, I think it is important to keep the economic costs in perspective as well. 

Senator HATCH. But even so, if we should go forward and do this, 

should we pass this particular bill when you say that we have a 

lot of studying to do and a lot of work to do to make sure that there 

are not unfortunate results here. 

Mr. KREUGER. I think, Senator, it is very important that the U.S. 

take leadership on this issue and that the administration remain 

committed to bringing the rest of the world along—— 

Senator HATCH. But you just got through admitting that it would 

be good if we could do some more studies on this to make sure that 

there is not that big of an impact. 

Mr. KREUGER. I am not sure I said more studies; I think I said 

it is important to design the policy, for the policy to be designed 

in a way that minimizes economic cost. 

Senator HATCH. Well, my question then is, is the policy wellenough designed so that we can actually pass this bill without any 

worries that it is going to make us uncompetitive with the rest of 

the world? 

Mr. KREUGER. I would be happy to talk to you at length about 

the climate change proposal the administration has made, the capand-trade proposals, and ways of achieving the goal at minimum 

economic cost. I would be delighted to work with you and your staff 

and the committee on that. 

Senator HATCH. In your testimony, you stated that, in the interest of advancing important policy objectives, including that of ‘‘encouraging sustainable domestic oil and gas production,’’ the administration is working with Congress to develop a proposal to impose 

an excise tax on certain oil and gas extracted offshore in the future. 

I want to make sure that this is not a typographical error. Did 

you actually mean that the administration believes that imposing 

an excise tax would encourage more domestic oil and gas production? And, if this is the case, why are you not making the argument 

that all of these tax increases will encourage sustainable domestic 

oil and gas production? And I wonder if any of our other experts 

believe that increasing taxes leads to more domestic production? 

Mr. KREUGER. The point I was trying to make is that by not favoring oil and gas production, we would be pursuing an energy policy which is less dependent on oil and gas, and that would lead to 

a more sustainable production of renewable energies. 

In the context—I am not exactly sure which part of the testimony you are reciting from, but the administration’s approach is 

a comprehensive energy policy to lead us to a more sustainable 

path for energy consumption and production. 

Senator HATCH. Can I ask one more question, Mr. Chairman? 

Senator BINGAMAN. Go right ahead. 

Senator HATCH. Well, it seems to me that anybody who looks at 

the energy situation will realize that all of these other alternatives, 

compared to oil and gas and coal, are alternatives that we should 

27 

be pursuing. I think almost everybody would agree then that, if 

over the next 10, 15, 20, 30 years, without oil and gas and coal, 

we are really hurting our future and the futures of our children 

and our grandchildren because we are not competitive and we cannot keep up the work that we are doing if we do not have the energy to do it. And even for trillions of dollars for developing the alternative forms of energy, but without oil and gas and coal over the 

next number of years—decades really—we are going to be at a tremendous disadvantage if we make the disincentives to finding and 

increasing and utilizing those forms of energy. 

Mr. KREUGER. I do not think we are proposing a future without 

oil and gas and coal. I think we are pursing policies to try to have 

the appropriate investment in those industries and to have a neutral hand with respect to investment and capital across all sectors 

of the economy. 

But, it is certainly the case in the energy industry. Take natural 

gas, where we have made breakthroughs, and I am sure that other 

gentlemen on the panel can comment on this with much more expertise than I can. Take logical breakthroughs, which have greatly 

increased our capacity in our reserves, and also which led to lower 

prices. 

Senator BINGAMAN. Let me just ask one other question here to 

the witnesses, and that relates to this section 199. The proposal 

from the administration is to repeal the domestic manufacturing 

deduction as it relates to oil and gas production, as I understand 

it. 

Let me ask you just to clarify, Mr. Kreuger. Would you also repeal it as it relates to refining of oil and gas products, or just as 

it relates to production? 

Mr. KREUGER. I believe that is the administration proposal. 

Senator BINGAMAN. Is to repeal it as it relates to both? 

Mr. KREUGER. Yes. 

Senator BINGAMAN. Both production and refining? 

Mr. KREUGER. Yes. 

Senator BINGAMAN. We did have a hearing, I think it was a joint 

hearing between the Commerce Committee and this committee—no 

it was the Commerce Committee and the Energy Committee, excuse me, back in 2005. This provision, this section 199, just became 

part of our law in 2004, as I understand it. And prior to that, there 

was no deduction of this type for the industry. 

In 2005, we had a hearing of the two committees, and we had 

there the CEOs of the large integrated companies: Exxon, Mobil, 

BP, Shell, Chevron, Texaco, and ConocoPhillips. They all stated, I 

think, in answer to a question about whether they agreed with 

President Bush that tax incentives like this were not needed in 

order to encourage production, and they said that in their view 

they were not, at least that is my recollection of what they said. 

At that time, the price of oil was about $55 a barrel. 

How do we square that? If my recollection is correct about that 

testimony, how do we square that testimony with what we are 

hearing today from industry witnesses about the importance of 

maintaining this manufacturing deduction? 

Mr. NICHOLS. Well, Senator, I cannot comment on their testimony, because I was not there and do not know what it was. But 

28 

if you look at the overall intent that the Congress had in section 

199, it was to effectively reduce the tax rate on U.S. companies 

that are in competitive positions with regard to foreign competition. 

Senator BINGAMAN. But it was to promote export, right? I think 

that was the general idea. 

Mr. NICHOLS. That was originally the intent, but it has been expanded dramatically for a lot of industries—the advertising industry, construction industry, even a sports franchise, things that have 

nothing to do with export. 

Senator BINGAMAN. Yes, and I think there is a real question as 

to whether it should have been expanded that broadly, and whether we should either pare it back or reconsider it. What is your 

thought, particularly as it relates to oil and gas? 

Mr. NICHOLS. Well, if you forget the history and just look at 

where we are from a competitive standpoint, oil and natural gas 

that are produced domestically in a more secure and a more environmentally sensitive way are in competition with foreign oil, 

whether we are importing or exporting. We import a lot of our oil. 

If it costs more to produce oil or refined gasoline in this country, 

then those jobs and that wealth will just get transferred outside 

this country. We will not be competitive, and the effective tax rate 

is, of course, a part of the cost that goes into that. 

The same thing is true with natural gas. Increasingly natural 

gas is just not a domestic or North American market, it is a worldwide market. And the price is not as worldwide as with oil, but 

nevertheless, we are competitive. If it is more cost-effective for a 

utility to import foreign-produced natural gas, it will do so. And the 

tax rate that we have to bear is one of the burdens that our country has with higher effective tax rates than are in most of the rest 

of the world. 

Senator BINGAMAN. Do you have any comment on that, Mr. 

Kreuger? 

Mr. KREUGER. Just return to what I said earlier about seeking 

to make the tax code more neutral with respect to investment 

across different sectors and try to remove this distortion. I think 

the point that you raised is a very good one about the evolution of 

this credit. I mentioned earlier that the Volcker Commission subcommittee, chaired by Martin Feldstein, is looking into other sectors, and we are looking forward to their recommendations on simplifying and reducing other subsidies in the tax code. 

Senator BINGAMAN. Well, I think, just as a matter of common 

sense, it is easier to explain and understand why a manufacturing 

deduction would apply to the refining of petroleum products than 

it is to why it would apply to the production, and I understand we 

have stuck a lot of other things in that benefit from this section 

199 tax deduction as well that do not, under any normal understanding of the English language, qualify as manufacturing. But, 

I do think it makes sense to at least consider whether we ought 

to be having a manufacturing deduction that applies to so much 

that is so unrelated to manufacturing. 

We have a vote that has started on the Senate floor. Unless Senator Bunning or Senator Hatch has another burning question, let 

me thank all of the witnesses very much. It has been useful testiVerDate Nov 24 2008 20:17 Apr 27, 2011 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 R:\DOCS\65425.000 TIMD
29 

mony. We appreciate your being here, and we will take your good 

advice to heart. 

Thank you. We stand adjourned. 

[Whereupon, at 3:47 p.m., the hearing was concluded.] 

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