Oil prices collapsed on Monday, trading below $0.00 for the first time in history as the coronavirus pandemic continues causing consumer demand to plummet.
Stay at home orders and restrictions on travel have kept demand for oil at rock-bottom levels. The crisis was only exacerbated by a Russia-Saudi Arabia oil price war that sought to leverage the pandemic to kill off competition. Consequently, thousands of energy workers are now in danger of losing their jobs as energy producers prepare to halt production and hundreds of companies are in danger of going bankrupt.
The Trump administration is reportedly weighing policy options to provide relief to the energy sector, proposals that range from a $3 billion oil purchase for the nation’s Strategic Petroleum Reserve, to potentially paying oil producers to keep the oil they produce in the ground. Some in Congress have even begun pushing for new tariffs on oil sourced from foreign markets.
As the Trump administration weighs options for relief to the energy sector, limited government intervention in the market should be the default position of all parties involved. Meddling in questions about supply and demand of oil could do irreparable harm to the ability of the industry to recover long-term. Among the tools at the administration’s disposal, however, include tax relief for developers in America.
Specifically, the Trump administration could suspend or reduce royalty taxes paid by companies extracting and developing energy on federal lands. Doing so would reduce the cost of energy development, helping slow down the rate of companies shutting down production as a result of historic-low prices. By delaying decisions about current development projects, companies might be able to keep thousands of workers on payroll in these tough economic times.
The key issue policymakers should aim to address is not overproduction on the supply side but rather a severe demand crunch brought on by the suppression of market forces required to fight a public health crisis. Consumers are not currently seeing the benefits of low energy prices because they are under instruction from public officials to stay in their homes and avoid travel. That will change in the coming months.
At current prices, American energy development is largely a money-losing proposition. Extracting federal tax collections from developers further fuels losses and exacerbates the pressure to close down operations across the country. According to the Government Accountability Office, royalty relief could reduce the cost of resource development immediately by 12.5 to 18.75 percent. This would temporarily provide some of the much-needed relief businesses are searching for as they plot their 3, 6, and 12 month futures in the market.
This is not a solution being sought by major energy executives, who at a recent White House meeting expressed opposition to both a spending bailout and temporary royalty rate tax cuts. Targeted and temporary tax relief is not a “bailout” and should not be viewed as such.
While federal action to provide relief for American businesses has largely relied upon massive government spending – a tough pill for conservatives to swallow – providing royalty relief is a proposal that cuts taxes and reduces government involvement in energy markets.
The added benefit of cutting taxes while prices are so low is that the temporary loss in revenue to states and the federal government is minimal. It also may ensure that there is a competitive domestic resource production market once demand re-stabilizes over the coming year by keeping more small businesses active within the industry. Without tax relief, many smaller businesses may find themselves bankrupt and America may find itself more reliant on oil sourced from foreign markets. If this occurs, ramping up domestic production won’t simply occur overnight and the Energy Dominance agenda of this administration could falter.
Under present law, the Secretary of the Interior has existing authority to provide royalty relief and requires no new action from Congress to enact a policy change. The administration can provide this across-the-board relief on a temporary basis while Congress re-examines and compares our own royalty rates against those of our foreign competitors in the years to come.
Americans for Tax Reform urges the Trump administration and the Secretary of Interior to consider this policy tool as an alternative to heavy-handed intervention in the market that interferes with the natural laws of supply and demand.