Commentary

US Should Capitalize on Oil's Record Low, Fill the Strategic Petroleum Reserve

By Hans Bader | April 20, 2020 | 4:38pm EDT
The New York Stock Exchange (NYSE) is pictured on April 20, 2020 at Wall Street in New York City. - Wall Street opened lower on Monday as traders grappled with a drop in oil prices to historic lows as the coronavirus pandemic sapped demand for energy. (Photo credit: JOHANNES EISELE/AFP via Getty Images)
The New York Stock Exchange (NYSE) is pictured on April 20, 2020 at Wall Street in New York City. - Wall Street opened lower on Monday as traders grappled with a drop in oil prices to historic lows as the coronavirus pandemic sapped demand for energy. (Photo credit: JOHANNES EISELE/AFP via Getty Images)

Crude oil fell to a record low price today -- minus $37 per barrel at press time.

A basic rule of investing is to buy low and sell high. The U.S. has the chance to do that now. Years ago, the government sold off much of the oil in its Strategic Petroleum Reserve for $85 a barrel. But today, April 20, oil fell below zero per barrel to the lowest it has ever been in real terms. Back in February, oil went for more than $50 per barrel, and $40 to $50 was regarded as a relatively low price.

So the U.S. should be refilling its Strategic Petroleum Reserve. Doing so would also help hard-hit oil-producing states like Texas, Alaska, Oklahoma, New Mexico, and Louisiana. It would provide an additional place to store their oil -- oil storage is running out as coronavirus reduces demand for oil -- and increase a bit the price they receive for their oil.

President Trump wants to do this, and proposed buying up $3 billion worth of oil (or up to 77 million barrels) in the coronavirus relief legislation. That would result in a profit for taxpayers of several billion dollars if the oil were purchased today, and prices went back up to $40 per barrel. (Taxpayers could make over $100 billion in profit if the federal government's oil storage capacity were expanded to enable it to store more oil and sell it later at a higher price like $40. Currently, the government's facilities can only store an additional 77 million barrels. But expanding them would require new spending authorized by Congress.) The profit could be used to reduce America's national debt or provide additional relief for people harmed by COVID-19.

But Democrats, especially Senate Democratic leader Charles Schumer, wouldn't permit it. They forced Trump to remove an oil-purchase authorization from the coronavirus relief bill, and boasted about it in late March. Their obstruction will likely cost America billions of dollars in lost profits.

Trump can't spend money without Congressional authorization. To refill the strategic petroleum reserve, Trump would have to get both houses of Congress to pass a bill to authorize spending money to buy up the oil. The Democrats currently oppose any such bill, and they control the House of Representatives. They also have enough votes in the Senate to filibuster such legislation.

When Trump proposed buying up oil in March, the idea was vetoed by Schumer, who called it a "bailout for Big Oil." No, it's not a bailout. It's buying low and selling high -- a basic principle of investment.

As the Washington Examiner noted, Republicans in Congress sought "$3 billion to fulfill President Trump’s order to buy low-priced oil to restock the nation’s emergency Strategic Petroleum Reserve."

"Earlier versions of the relief bill proposed by Republicans contained the funding, an amount requested by the Energy Department, which was intended to help the oil industry, which has been reeling from low prices....

Administration officials say restocking the SPR won’t halt the price crash rocking the shale industry, but they say it makes sense on energy security grounds and would benefit taxpayers. Congress has been selling off oil from the reserve in recent years to fund unrelated priorities, but a sustained period of low prices represents a good opportunity to fill the SPR back up, the administration says."

It's also prudent to have reserve supplies of oil in the event of a crisis, to buffer against excessive prices that could harm industries and consumers that rely on reasonably-priced oil. Imagine that after the coronavirus crisis passes, Iran ends up shutting the Persian Gulf in a war, and the price of oil goes to $100 per barrel. In that event, the lost opportunity from our failure to buy up oil now could be absolutely enormous.

Schumer's bailout claim plays to deep popular ignorance, that falsely depicts oil companies as paying low taxes or receiving special tax breaks.

Many people erroneously believe that oil companies don't pay much in the way of taxes on their profits. But as Jerry Taylor, an advocate of green energy and carbon taxes, has noted, oil companies pay high tax rates on their profits:

"Oil companies are already paying a staggering tax bill. In 2006, for instance, big‐​bad ExxonMobil faced an effective tax rate of 44 percent on a profit margin of around 11 percent, a figure that actually understates things because corporate revenues sooner or later find their way to oil company employees, contractors, shareholders, and those who do business with the same, and that revenue is taxed again via the personal income tax."

Many people erroneously believe big oil companies get big "tax breaks" because they get to deduct the cost of their oil production (including reserve depletion) when they sell their oil.

But that is not special treatment, but simple fairness. When you sell something that you paid large sums of money to find and for which you then built the extraction apparatus, and you didn't get to deduct that full cost in the year you incurred the cost, it's normal and fair to deduct a proportionate share of that cost each year (proportional to the amount sold). That's Accounting 101.

Once you've sold all the oil, it's gone forever. If you spent $5 billion to produce oil and sell it for $7 billion, your profit is $2 billion, not $7 billion. You shouldn't be taxed on the $5 billion of your own money that you eventually got back after years of oil sales. But people who've never run a business, taken an accounting class, or generated a profit-and-loss statement find this oddly hard to understand.

Oil companies are taxed a lot more than other sectors that receive preferential tax treatment -- like commercial real estate, which is in what my family invests. As the New York Times and CNBC have noted, commercial real estate is favored by the tax code. Commercial real estate enterprises can avoid taxes on like-kind exchanges that would get an oil company socked with massive taxes. Commercial real estate, not the oil industry, is a favored stepchild of the federal tax code.

Other commercial interests are treated far better than the oil industry, or even its favored stepsister, commercial real state. At the state and local level, sports teams receive massive preferential treatment.

Taxpayers massively subsidize sports stadiums. Cities and states subsidize them, even though, as the St. Louis Journalism Review notes, "Research proves sports stadiums drain public resources, are of minimal or no economic benefit, and enrich primarily the owners of sports teams."

As researchers note, "Nearly all academic economists" in the area say "professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, DC and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area," according to a 2004 study.

"An economist for the Congressional Research Service concludes that federal, state, and local taxpayers don’t benefit economically from subsidizing professional sports stadiums," a 1996 study notes.

The left-leaning film-making industry often gets lucrative subsidies and tax credits from state governments. The Baton Rouge Advocate reported that Louisiana taxpayers "lose roughly two-thirds of the money" the state invests in film-makers.

"For every dollar spent on the tax credit programs for the entertainment industry in Louisiana — mainly the film tax credit — state and local governments get about 36 cents back in tax revenue."

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department.

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