Our critical mission is to educate policymakers, media and the general public on the importance of capital formation for the overall U.S. economy. Capital Corner brings a unique perspective on topics of interest from the broad spectrum of industries that we represent. These valuable insights from our members reinforce the importance of sound tax, energy, environmental, regulatory and trade policies that facilitate saving and investment, economic growth and job creation.
After several years of relative price stability, the oil markets sailed into a perfect storm in the second half of 2014. High growth in supplies met with low growth in demand. Global oil supply was supported by production from U.S. tight oil plays, which exceeded 4 million barrels per day in 2014 — barrels that were not being produced in any large volumes just five years ago. In addition, Libyan supplies returned to the market more quickly than anticipated, despite continued unrest within the country, adding yet more barrels to OPEC’s 30+ million barrels per day of output. And then negative data on economic growth from China, Europe and Japan triggered downward revisions to oil demand outlooks. The surplus of supply relative to demand on the world market then triggered a sharp drop in prices. The global benchmark Brent crude oil fell from an average price of $112 per barrel in June to less than $50 at the time of this writing. This 60 percent drop is approaching the severity of 2008’s 70 percent drop. The jolt to the markets is real. And past experience reveals that lower price levels tend to be accompanied by greater price volatility.
The combination of volatile yet low prices presents a challenge for business decision makers. Crude oil producers are examining their portfolios to ensure capital is deployed efficiently and sustainably. Companies are reducing plans for capital spending so as to manage the downturn. The magnitude of each cut is specific to each company’s circumstances, influenced by numerous factors ranging from balance sheet strength to diversity of the production portfolio. Producers will “high-grade” their portfolios to ensure maximum returns. Rigs in the most productive, highest return areas are expected to continue drilling new wells. The industry is seeing a drop in rig activity with a recent Baker Hughes’ survey (Jan. 9) reporting 1,421 oil rigs active in the U.S., down 188 from the October 2014 peak of 1,609. Vertical rigs declined first, followed more recently by horizontal rigs.
U.S. oil production is rising now and is projected to continue growing in 2015 over today’s level. In its latest Short Term Energy Outlook, the U.S. Energy Information Administration projects production rising to 9.3 million barrels per day at West Texas Intermediate (the U.S. benchmark) prices of $62.75 per barrel in 2015 versus 8.6 million barrels per day and $93.82 in 2014. U.S. oil production can continue to increase, albeit at a slower pace, because the best wells deliver good returns on investment even at low price levels.
However, a lower, more volatile price environment poses a threat to the economic success story that tight oil created across the U.S. The jobs and income growth resulting from oil production are critical components of the U.S. recovery from the Great Recession. U.S. Bureau of Labor Statistics data show approximately two hundred thousand new jobs were created in oil and natural gas extraction and support services since the third quarter of 2009. These jobs indirectly create many additional jobs throughout the economy. According to recent research by the Manhattan Institute, a total of ten million jobs are associated with the oil and gas industry in fields as wide-ranging as transportation, construction, education, health care and food services. Consequently, if producers and service companies were to repeat past cutbacks of ten to twenty percent of their workforce, negative spillover effects to other sectors should be expected.
In a more challenging global market environment, it is vital that U.S. businesses do not face an uneven playing field, with regulatory hurdles that put them at a disadvantage to non-U.S. firms. As the only country that bans crude oil exports, U.S. policies hold oil producers captive to a limited domestic market, unable to tap the wider global market of buyers. This puts U.S. producers at a clear disadvantage to non-U.S. producers. It also disadvantages U.S. producers relative to refiners whose products are freely exported worldwide. Consequently, the negative effect of low prices, which hurt oil producers as well as steel and other industries, are magnified by restrictive, outdated trade policies. The nation’s best interest is served by removing barriers to trade, thereby allowing U.S. oil producers access to the world market, as this supports domestic jobs and income growth.
March 28, 2014 | by Lynn Dudley
Retirement security requires planning, commitment and investment over many years. Employer-sponsored retirement plans provide a framework for those efforts, thanks to many features and protections that make them attractive to employees and employers. But quite apart from the essential role that retirement plans play ensuring income security, is an indisputable fact: they constitute a large pool of investment capital in our country, which is indispensable to economic growth.
October 11, 2013 | by Donna Harman
With comprehensive tax reform on the Congressional front-burner, paper and wood products manufacturers are educating lawmakers on the tax profile of the industry and the possible effects of wholesale reform of the tax code. Our priority is to ensure that any changes result in improved economic growth, job opportunities and the competitiveness of U.S.-based forest products businesses.
September 01, 2013 | by Thomas Kuhn
As Congress continues to examine comprehensive tax reform, the nation’s investor-owned electric companies are working to educate lawmakers and the Administration about the impact that certain changes to the tax code—particularly changes affecting dividend tax rates and the deductibility of interest expense—could have on our industry’s ability to raise capital. Today, the electric power industry […]
Difference in Effective Corporate Tax Rates and Tax Reform: What Does it Mean for Different Industries?
July 01, 2013 | by Randy Mullett
At a recent event sponsored by the American Council for Capital Formation, I had the opportunity to brief those present about the effective corporate tax rate for my employer, Con-way Inc., a Fortune 500 Trucking and Logistics Company. Our effective rate approaches 40% (which includes federal, state and foreign income taxes) and is similar to […]
June 01, 2013 | by Charles T. Drevna
Who would have dreamed a decade ago that oil and natural gas would become the impetus for American energy security and a revitalized manufacturing sector? Who would have imagined that OPEC members would be meeting to discuss the U.S. shale revolution and its impact on their economies Yet, without question, the worldwide energy picture has […]
March 19, 2013 | by Kelly Johnston
When actor-director Ben Affleck held aloft his Oscar “Best Motion Picture” award for the movie, “Argo” and thanked Canada, most Americans applauded. But how are we really thanking Canada, by far our largest trading partner, with $1.8 billion in goods and services crosses our northern border every day? Is our economic relationship being weighted down […]