It is not easy these days to be the CEO of a major American company. You are wracked with uncertainty about future tax rates and pushed one way and another by different sets of regulators and anticipating even more regulations coming down the pike that may well affect your business in significant ways. The debt ceiling negotiations at the moment only exacerbate thosIte anxieties. The big oil and gas companies are a good example of being caught in this financial and regulatory vortex.
The Administration proposes taxing increases on the “big” oil companies. The exact structure has not be outlined but their profits are clearly in the cross-hairs. Those companies are identified in the political rhetoric of the Left as the fat cats. Well, exactly who are those fat cats. You can look up easily enough the stock ownership of Exxon Mobile for example. There are plenty of stock and trading websites out there. They give a great deal of detail. That detail includes data on the ownership of their stock. Like most of the larger companies a relatively small percentage is owned by the man on the street–you and me. The largest percentage by far is owned by funds, hedge funds, and professional investment banking houses.
But when you look a bit behind that hedge fund ownership you will see that it really does get back to the man on the street. Where do you think those hedge funds get their money? There are actually very few of the mega rich in this country. Those hedge funds get their billions of dollars for investment from pension funds, investment funds, 401k’s, endowment funds from colleges and other pools of money. That is where the really big bucks are. The University of Texas alone has 20 billion in its endowment fund. The other major universities have similar amounts or even more. The California state pension fund has billions under its control. Those are the institutions that invest in the Dow companies through the various hedge funds. Of course the real money behind those funds are the little people–you and me. Those pension funds don’t want to simply put the money in CD’s or Treasury bills. There are millions of ordinary folks who have a stake and indirect ownership in Exxon through their pension plan and many wouldn’t even know it.
Those profits of Exxon go to those funds which in turn are for the benefit of a real cross-section of America. Those are the fat cats under attack. It is not a handful of rich investors living on the Upper East Side. Believe me those funds want all the profits they can get from Exxon for their investors, large and small.
Under particular attack is the depletion allowance deduction for these large companies. Those have been allowed since the ’20s. An oil well only has a finite amount of oil and has it is produced then amount is depleted and that reduction in oil reserves under the ground is recognized as a loss of value. That is logical and factual. Coal mines get the same treatment and have for decades. The companies are required to have third parties evaluate their reserves on a regular basis by the SEC and state regulatory authorities. This is because they want accurate information given to shareholders and potential shareholders about the asset value of these oil companies. There are a number of large concerns that are devoted to this evaluation work. They are just like Moodys or Fitch in grading and evaluating companies worth.
That worth is important because many states tax these companies under Franchise tax laws or usage laws based on total net worth or asset value. As the oil is depleted and removed from the ground the worth of that well is reduced yet the cost of operating the well continues as much as on day one of pr0duction.
The loss of the depletion allowance will be a double whammy on the companies. First they will obviously lose the revenue that they turn over to the Feds. Of course we all know how wisely and prudently the Feds will spend that money. They will lose profits and thus have lower dividend payments to shareholders which when followed gets down to the man on the street. Additionally, that legitimate tax deduction will result in a lower asset valuation which in turn means smaller payments to the various states under the Franchise or usage taxes based on valuation. The states won’t like that. Of course the SEC will continue to insist that the companies reduce values based on real depletion which is a physical fact and this in turn will lower the net market capitalization value of the company.
Lastly, the loss of the depletion allowance will be a cost to the production companies and they will pass along as much of the cost as they can. They won’t be able to pass along the cost dollar for dollar but the price will increase to the consumer. It will make exploring for and producing oil even more expensive. Do we really want more expensive oil? Well, we know some do like Chu that runs the Administration’s Energy department. Umm, maybe that is the reason for the push to up prices. You would think our government would do everything possible to expand oil and gas exploration for all the obvious reasons to promote more production and lower prices and greater security.
“A wise man proportions his belief to the evidence”. David Hume, Scottish philosopher. www.oldcrank.wordpress.comr