Wisdom and Ignorance

July/26/2012 16:51PM
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First,  the wisdom. John Kasich, Republican governor of Ohio has established a severance tax for the oil companies drilling in Ohio. Here’s how it works.

From the Wall Street Journal.

The U.S. fracking boom is leading an economic transformation, at least in the states with the wisdom to manage it well—c.f., gas-rich North Dakota’s unemployment rate of 2.9% versus gas-rich New York’s 8.9%. Less noticed is that it can also improve the tax climate, as evidenced by Governor John Kasich’s plan to convert Ohio’s energy wealth into a tax cut.

The Buckeye State currently imposes a relatively low 20-cent severance tax on oil and three cents for gas. For a barrel of oil, this double dime levy amounts to two-tenths of 1%, an artifact of the era when its resources weren’t economically or technologically recoverable. But hydraulic fracturing for natural gas and especially crude is now surging in the Appalachian foothills on the eastern side of the state. Think Youngstown.

Severance taxes are routine in energy states like Texas and Alaska, and they also commonly apply to other nonreplaceable resources like timber and coal. Mr. Kasich wants to modernize the tax structure now that Ohio is becoming an energy producer, but without enlarging government. Annual proceeds would go into a fund devoted to lowering all personal income tax rates dollar for dollar.




Associated PressOhio Gov. John Kasich

The proposal would raise the severance tax to about 2.7% of the market value of oil or gas, depending on the type of well. As the industry matures and production peaks, the tax would on present price trends raise between $459 million and $547 million each year, equivalent to a 5% across-the-board tax cut for each of Ohio’s nine brackets.

Yes, nine brackets. Mr. Kasich’s plan is welcome relief for a state with some 3,300 taxing jurisdictions, including some library boards and parks departments. This system led to a combined state-local tax burden that for most of the 2000s was among the country’s highest, according to the Tax Foundation. Ohio has dropped into the top third after Mr. Kasich’s first-year tax reforms, and his tax swap would reduce it further.

The energy levy shouldn’t stifle development. A study by Ernst & Young for the Ohio Business Roundtable compared the proposed severance levy to those in seven competing states, including North Dakota, Pennsylvania, Texas and West Virginia. It found Ohio’s tax would be 16% lower than the average for wells producing dry gas, 40% for oil. Including all energy taxes, Ohio would be 40% and 48% lower than the average, respectively.

The plan is controversial in Ohio’s Republican-controlled legislature and among some Tea Partiers, and as with any tax increase the danger is that some future government will renege, pocket the revenue and return to raising income taxes. But the energy levy is sure to increase if production booms, and the Kasich formula ensures the money isn’t spent on new programs. Meantime, lower rates on income and capital investment are a net plus for economic growth.

Another virtue of the Kasich plan is to increase public confidence in energy exploration by giving voters a stake in, and a direct share of, its economic benefits. Political opposition to fracking has led some states to squander this incredible natural gift. Attn: Andrew Cuomo. Mr. Kasich may have hit on a strategy to help prevent the New York Governor’s model of nonexploration from going national.

Let me condense the article. Kasich will collect a modest tax from the drillers in Ohio. He will not spend the money, he will give it back to the taxpayers. When taxpayers get something out of a venture, they tend to support the venture. One can expect the majority of voters in Ohio will be supporting more drilling in Ohio. It creates jobs, it creates wealth for landowners, and now it creates dividend checks for everyone in Ohio.

Now for the ignorance. This from the LA Times.


China moved Monday toward its biggest overseas energy acquisition, with Chinese offshore oil and gas giant CNOOC saying it has agreed to buy Canadian company Nexen Inc. for $15.1 billion.

The deal faces scrutiny from the Canadian government, which has rejected foreign interest in the past over worries about the country’s natural resources industry.

CNOOC and other big state-owned Chinese energy companies have increased purchases of oil and gas assets in the Americas as part of a strategy to gain access to resources needed to fuel China’s economy.

Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, with its biggest reserves in Canadian oil sands. It produced an average of 213,000 barrels of oil equivalent a day in the second quarter this year.

The acquisition vastly expands CNOOC’s holdings in Canada, where the company has already invested about $2.8 billion.

The last time Canada faced a similar issue — when Australia-based BHP Billiton launched a hostile takeover bid for Potash Corp. of Saskatchewan — the government rejected the deal under pressure from Saskatchewan Premier Brad Wall and corporate players.

CNOOC said it plans to set up its regional headquarters in Calgary and increase spending to develop the Canadian company’s energy reserves.

“This transaction will allow for significant investment in our business and opens the door to new opportunities for our employees,” Kevin Reinhart, interim chief executive of Nexen, said in a statement.

The companies already had a strategic alliance that involved CNOOC investments in Nexen offshore wells in the Gulf of Mexico.

End of article. Yes, you read that correctly, Chinese in the Gulf of Mexico.

The Chinese are trying to buy one of the oil companies that produce much of the oil that would have traveled down the Keystone Pipeline to the US Gulf Coast refineries. But, no, the leader of this once great country decided the Keystone Pipeline was a bad idea. Canadians are drilling their brains out up north. Creating jobs and a good economic climate for Canada. The Chinese are buying every drop of oil they can buy all over the world. The Americans are turning friends into enemies by telling the Prime Minister of Canada to keep his dirty oil and investing billions in companies like Solyndra.

Maybe Kasich should be running this country. Bozo isn’t doing so well.

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