[Senate Hearing 112-776]
[From the U.S. Government Publishing Office]
S. Hrg. 112-776
TAX REFORM: IMPACT ON U.S. ENERGY POLICY
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
JUNE 12, 2012
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico JON KYL, Arizona
JOHN F. KERRY, Massachusetts MIKE CRAPO, Idaho
RON WYDEN, Oregon PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan JOHN CORNYN, Texas
MARIA CANTWELL, Washington TOM COBURN, Oklahoma
BILL NELSON, Florida JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland
Russell Sullivan, Staff Director
Chris Campbell, Republican Staff Director
C O N T E N T S
Baucus, Hon. Max, a U.S. Senator from Montana, chairman,
Committee on Finance........................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 3
Nickles, Hon. Don, chairman and CEO, The Nickles Group, LLC,
Washington, DC................................................. 4
Sharp, Hon. Philip, president, Resources for the Future,
Washington, DC................................................. 6
Jorgenson, Dr. Dale, Samuel W. Morris university professor,
Harvard University, Cambridge, MA.............................. 9
Hamm, Harold, chief executive officer, Continental Resources,
Inc., Oklahoma City, OK........................................ 10
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baucus, Hon. Max:
Opening statement............................................ 1
Prepared statement........................................... 39
Prepared statement........................................... 41
Responses to questions from committee members................ 45
Hatch, Hon. Orrin G.:
Opening statement............................................ 3
Prepared statement........................................... 49
Jorgenson, Dr. Dale:
Prepared statement........................................... 50
Responses to questions from committee members................ 62
Nickles, Hon. Don:
Prepared statement........................................... 68
Responses to questions from committee members................ 72
Sharp, Hon. Philip:
Prepared statement........................................... 73
Responses to questions from committee members................ 80
ABM Energy....................................................... 85
American Council for an Energy-Efficient Economy................. 87
The American Institute of Architects............................. 91
American Public Power Association................................ 97
The Business Council for Sustainable Energy...................... 100
Center for Fiscal Equity......................................... 102
Efficiency First................................................. 107
IHS CERA Inc..................................................... 109
Independent Petroleum Association of America..................... 141
Large Public Power Council (LPPC)................................ 146
National Association of Royalty Owners (NARO).................... 154
National Biodiesel Board......................................... 162
National Rural Electric Cooperative Association.................. 167
Olson, Pamela F., et al.......................................... 173
Residential Energy Efficient Tax Credit Industry Coalition....... 220
Solar Energy Industries Association (SEIA)....................... 231
TAX REFORM: IMPACT ON
U.S. ENERGY POLICY
TUESDAY, JUNE 12, 2012
Committee on Finance,
The hearing was convened, pursuant to notice, at 10:06
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max
Baucus (chairman of the committee) presiding.
Present: Senators Conrad, Bingaman, Kerry, Wyden, Cantwell,
Nelson, Menendez, Carper, Hatch, Grassley, Snowe, Crapo,
Coburn, Thune, and Burr.
Also present: Democratic Staff: Russ Sullivan, Staff
Director; Ryan Abraham, Tax Counsel; Lily Batchelder, Chief Tax
Counsel; and Harun Dogo, Fellow. Republican Staff: Chris
Campbell, Staff Director; Curt Beaulieu, Tax Counsel; and Mark
Prater, Deputy Chief of Staff and Chief Tax Counsel.
OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
MONTANA, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The hearing will come to order.
The writer Hunter Thompson once wrote, ``Anything worth
doing is worth doing right.'' I could not agree more. Our
country is at a pivotal moment in energy policy. It is
important that we do it right. There have never been so many
worthy energy options. They are worth doing, and they are worth
Thankfully, we are already making progress diversifying our
energy portfolio. We have an opportunity through tax reform to
drive that progress further.
When I first ran for Congress, America was reeling from an
oil embargo. Gas prices had doubled. At one point in early
1974, 20 percent of American gas stations had no fuel at all.
It was clear that we could never again allow America to be so
dependent on a single source of energy.
Since then, we have boosted a more diverse, efficient, and
productive energy policy. Advances in technology mean more
domestic oil and natural gas are available than ever before. We
also have more renewable and clean energy sources. But we can
We are still, I think, too reliant on fossil-based energy
sources. Ninety-four percent of the energy used in the
transportation sector comes from oil. Only 10 percent of our
electricity consumption is generated from renewable or clean
Our country needs a diverse energy sector like we have in
my home State of Montana. So I will just brag a little bit. We
are an energy State. We are one of a dozen States that produces
more energy than it consumes.
In eastern Montana, at the edge of the Bakken formation,
next to North Dakota--my colleague to my right knows this all
too well, because the Bakken is even a greater formation in
North Dakota than it is in Montana--our oil and gas fields are
going through a renaissance. Technology has unleashed the oil
and gas potential and created thousands of jobs.
In central Montana, the wind turbine blades harness the
power of the Chinook winds. Wind farms in Montana now power
100,000 homes. Three new wind farms are being built. And in
western Montana, biomass powers sawmills and adds electricity
to the grid.
Montana also produces 45 million tons of low-sulfur coal
each year, and we are leading the way on carbon capture and
National energy policy, I think, should replicate a lot of
this mix. If we do not develop U.S. energy policy, we will
continue to be subject to the whims of foreign dictators and
sudden spikes in the price of oil. We will be one hurricane or
one regime change away from $6 gasoline. That would be
disastrous for our economy.
A $1 increase in the price of gasoline costs Americans $110
billion a year. We are all too aware of that in our State.
The tax code is an important driver of energy policy. Tax
incentives provide 85 percent of the energy sector's Federal
support. These provisions cover almost every conceivable form
of energy--nuclear, oil, gas, coal, wind, solar, and
geothermal. Tax provisions also cover a wide variety of energy
use, from powering common home appliances to running massive
But these incentives can be improved. Currently, the type
and level of tax incentives vary for different technologies.
Some incentives are temporary, others permanent. In some cases,
there are multiple incentives for the same technology. The
result is inefficiency.
Provisions that do not create jobs or improve our energy
policy should expire or be repealed. Right now we are providing
direct incentives to select technologies and industries.
Perhaps we should adopt a more technology-neutral approach and
stop playing favorites. That way, we could still help new
energy technology develop, but let the market decide which ones
Tax reform is an opportunity for the energy sector to make
real progress. It can move us further from foreign oil. It can
lead us down the road to diverse, clean, and secure energy
So let us seize the opportunity as we develop domestic
energy. Let us also focus on efficiency and try to make the
code less complex. Let us use tax reform to ensure our country
has a more secure and diverse energy supply. And, as Mr.
Thompson wrote, let us find the things worth doing, and let us
do them right.
[The prepared statement of Chairman Baucus appears in the
The Chairman. Senator Hatch?
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Thank you, Mr. Chairman. I want to thank the
chairman for once again holding a critical hearing on tax
reform. We have had a large number of these hearings, and they
have been very helpful, especially as we go into this next year
and the remaining part of this year.
It is essential that we continue these discussions in
pursuit of reforming a tax code which is complicated, unfair,
and difficult to administer. We cannot afford as a Nation a tax
code that prevents our full potential for economic growth.
Looking at the witnesses, it is clear that we have a good
representation of different viewpoints about the various energy
sources addressed throughout the tax code itself. My hope is
that this hearing will contribute to our goal of comprehensive
tax reform in the near future.
It is important to conduct our examination today with
President Reagan's three criteria for tax reform as our
guideposts. We will be looking at the fairness of the system;
we will be looking at the efficiency of the system, with a
particular emphasis on its anti-growth features; and we will be
looking at the complexity of the tax code. If we keep these
principles in mind, I am optimistic that this committee will be
in a position to reform our tax code in a way that is better
for families, businesses, and our economy.
I know many of my colleagues on both sides of the aisle
hope to achieve a tax reform that lowers rates while broadening
the tax base. However, from my perspective, there is another
feature that will be essential for any successful tax reform.
Tax reform should be about tax reform, not about deficit
reduction. We should be simplifying our tax code and lowering
rates to create a more fair system that generates the economic
growth necessary to generate jobs and revenue itself. It would
be a mistake to call tax increases tax reform and use that
increased revenue to achieve deficit reduction rather than pro-
growth rate reductions.
Today we are prospectively focusing on what role, if any,
energy policy should play in the tax code. Energy policy has
been creeping into the tax code at an exponential rate.
Yesterday, I heard the chairman compare the tax code to hydra,
the 100-headed creature of Greek mythology. Each time you cut
off one heard, two more grow back. I believe this analogy is
particularly apt with respect to energy tax provisions.
I hope today that we can have an open debate about whether,
going forward, there is a role for energy policy in the tax
code and, if so, what that role should be. I could keep
talking, but there is no tax incentive for producing a lot of
hot air yet. So I will just let the witnesses get to it.
I want to thank you, again, Mr. Chairman. And I look
forward to hearing from our panel here today.
The Chairman. Thank you, Senator.
[The prepared statement of Senator Hatch appears in the
The Chairman. It is now my honor to introduce our panel. I
am especially honored to introduce our first witness. Don
Nickles, currently chairman and CEO of the Nickles Group, for
24 years represented the great State of Oklahoma and was a
valuable member of this committee. And I just welcome you back,
Don. It is great seeing you. I particularly remember your
incisive and persistent and perceptive points of view. I deeply
appreciate your return.
Next is the Honorable Phil Sharp. Phil is currently the
president of Resources for the Future, and for 20 years
represented Indiana's 2nd district in the U.S. House of
Representatives. As a matter of fact, Phil and I were freshmen
in the House, the Watergate class, 1974. I have very fond
memories of that, and especially of you, Phil. You were one of
the sharpest--no pun intended--members of the group.
Our third witness is Dale Jorgenson. Dr. Jorgenson is the
Samuel W. Morris university professor, Department of Economics,
at Harvard. As it turns out, Dr. Jorgenson and I are fellow
alumni of the same high school in Helena, MT.
I might add, a former chairman of this committee, Bill
Roth, is an alumnus from that same high school. There are three
of us--Helena High. It is a good school. Two years in a row, we
did not make the State championship in football, but we were
runners-up 2 years in a row.
Dr. Jorgenson. They had a great basketball team, though.
The Chairman. Great basketball; back in your era, they won.
They won the championships, that is true. Thank you.
Finally, we have Mr. Harold Hamm. Mr. Hamm is chairman and
CEO of Continental Resources, a position he has served in since
its inception in 1967.
Thank you all for coming very much. You all know our
practice, at least we assume you do. Certainly, you do, Don. So
speak for about 5 or 6 minutes, everyone, and all your
statements will be inserted in the record.
Go ahead, Don. We are glad to have you here. I tell all our
witnesses, pull no punches, tell it like it is. Life is short,
you cannot take it with you. Go for it.
STATEMENT OF HON. DON NICKLES, CHAIRMAN AND CEO, THE NICKLES
GROUP, LLC, WASHINGTON, DC
Mr. Nickles. Mr. Chairman, thank you. And it is a pleasure
for me to be on the panel and join my colleagues on the panel,
especially Harold Hamm, who has built just one heck of a
company in Oklahoma, Continental Resources, and is doing so
much in North Dakota and Montana, but also in Oklahoma. And
they have added hundreds and hundreds of jobs and a lot of
valuable resources to this country. So it is a pleasure to join
him as well.
Mr. Chairman, you mentioned talking about tax reform and
doing it right. I remember being in this body and particularly
this committee. And in my 24 years in the Senate, I loved this
committee, this committee and those who got on it. And it takes
a long time to get on the committee. But it is a great
committee, and you are doing really great work, and especially
if the Senate works.
And so I am a big advocate for regular order and marking
up, and that is the tradition of this committee, marking up
bills and having lots of amendments and lots of debate. And we
did that on countless bills.
I remember that some of the best time in my service in the
Senate was when we had tax bills and we considered hundreds and
hundreds of amendments in the committee and/or on the floor.
And so I urge you, in the process portion of this, whether
you are talking about extenders or whether you are talking
about trying to avoid the calamity of the end of this year,
beginning of next year, or restructuring the tax code, regular
order is the process. And that way, the Senate works, and it
makes the Senate such a special place to be.
You also mentioned doing it right, and you talked about
energy taxation. I ran for Senate because of windfall profits
tax. Absolutely, if Congress had not passed that in 1979, I
would not have been here. But it motivated me.
I was a State Senator at the time, but I disagreed with
that so strongly. So when I say, do it right, I think we are
talking about good tax policy, and good tax policy is good
economics, it makes sense.
You do not have to pick winners and losers. Windfall
profits tax discouraged domestic production and encouraged
imports. How absurd. We finally got rid of it. But it was a
There are some other bad ideas that are out there. The
administration talked about, well, let us do away with
intangible drilling costs. They had a comment in their
statement. They said, ``The expensing of IDCs, like other oil
and gas preferences the administration proposes to repeal,
distorts markets by encouraging more investment in the oil and
gas industry than would occur under a neutral system. To the
extent expensing encourages overproduction of oil and gas, it
is detrimental to long-term energy security and is also
inconsistent with the administration's policy of reducing
carbon emissions.'' What a crazy statement.
Good tax policy allows expensing--it is not only of wages.
Mostly, intangible drilling costs are wages. The tax code--you
should allow any industry to expense their wages that are
incurred in the year that they are paid. Not necessarily a
credit. This is not a credit. This is not a credit against
taxes. It is expensing. So it is expensing of non-recoverable
business expenses. You ought to be able to expense that. So I
They also call 199 a subsidy to big oil. Hogwash. Now, I
was on the committee when we created section 199, a lower
corporate rate for manufacturers. And some of you may remember,
I was a manufacturer before coming to the Senate.
But I argued against it, and I still think it is bad
policy. I think you ought to have it uniform. So, when you are
reforming the tax code, have it be a uniform corporate tax
rate, not a lower rate for manufacturers versus service
companies or other companies. It is very confusing, very
And then in past law we said, well, all manufacturers get
it except for oil. Oh, we are not going to give them the full
benefit of section 199, which is basically a 3-point reduction
in the corporate rate. Big oil only gets a couple of points of
But it is bad policy. So I urge you to have a uniform
corporate rate. And I might mention too, there are some
companies that have both. They are manufacturers, they are
financial companies, they are one and the same. They have both.
And so, then they have all this accounting challenge trying to
figure out what is what.
Anyway, where you are trying to come up with a more
uniform, lower, more competitive rate--and I think everybody,
Democrats and Republicans, is talking about that, God bless
you, keep it up--a lower rate, a more competitive rate, a
competitive international rate, which probably means going to a
territorial system, makes good common sense. And to eliminate
exemptions and credits along the way, I think, makes sense.
Tax all income once. We have a lot of income that is not
taxed. So you can help lower the rate by doing so.
There is also a proposal for eliminating dual capacity. And
I would just say, if you want to have U.S.-headquartered oil
companies, if you eliminate that, you are going to double-tax
their foreign earnings and, as a result of that, the net result
is Total, British Petroleum, other foreign companies are going
to want all their international deals, and that would just
really be a dumb thing for us to do, very short-sighted.
And I could go on, Mr. Chairman. I just think making good
tax policy is not good energy policy, it is good tax policy.
Good tax policy would apply to all industries, and I would
encourage the committee to advance its work.
I encourage the committee to do that, and I encourage you,
for as much as can be done this year, to avoid the end-year
challenges. And for totally reforming the system, I encourage
you along that way. I think is very exciting, and, hopefully,
you will be successful.
For it to be successful, this committee has to lead, and I
hope and pray that you do.
The Chairman. Thank you, Don. We would like to have you
[The prepared statement of Mr. Nickles appears in the
Mr. Nickles. Thank you. Good to be back.
The Chairman. You would be a great addition to this
STATEMENT OF HON. PHILIP SHARP, PRESIDENT,
RESOURCES FOR THE FUTURE, WASHINGTON, DC
Mr. Sharp. Thank you very much, Mr. Chairman. I am
delighted to be here. And I must quickly say that, as the head
of Resources for the Future, it is an independent think tank, a
nonpartisan, non-lobbying organization, and the people in it
are a lot smarter than I am. And so these are strictly my
comments from my experience on a variety of commissions, as
well as here in the House of Representatives.
Let me quickly say my plan is just to provide a few
contextual things about where we are in public policy on
energy, as well as where the markets are. This committee--many
of you are way ahead on these issues, and this is probably not
particularly relevant, but I think it is very important in the
public discussion that we try to get a better perspective on
what really goes on with energy policy and with our markets.
Now let me say, obviously, as everyone here knows, energy
is absolutely essential to our modern economy and to any
economic growth that we want to have. It also has implications
for our national security, and it also has consequences for
health, safety, and the environment.
And our practical problem is, there is no policy, there is
no set of policies, that will serve all of these goals. So we
are always in conflict over it, and it comes right here into
this committee and everywhere else. And, frankly, the American
people and others should reduce some of their expectations
about what can be accomplished and how it can all fit together
logically. This is a vast country, this is a vast problem, and
we are going to come at it over time in many different ways.
Let me quickly indicate, however, that while there are many
things that we have done and tried--and some failed and some
worked--it is very important to remember that one of the
fundamentals about our energy policy, which is true through
Democratic and Republican administrations and Congresses, is
that we rely overwhelmingly on private capital to build,
produce, and distribute our energy in this country, and nobody
that I am aware of wants to stop doing that.
And what that means is, it is a major challenge to what the
government can actually efficiently do, because you are always
trying to change, incentivize, or restrict behavior by
investors or by consumers. And many of the initiatives that are
taken do not pay off because they involve millions of decisions
by consumers and thousands of decisions by investors under
pressures and with other values at stake.
With this limitation in mind, nonetheless, there are many
things that do work and do help. But let me quickly give you a
piece of the picture that the chairman already outlined, which
is: our picture on energy continually changes, and we have a
new picture today compared to where we were 10 years ago. And
it is very important that we recognize this change, partly to
recognize that it is going to continue to change and that
policy has to accept and work through those changes.
First, we have a vast array of new technologies that have
come into the marketplace in this decade. I do not care whether
it is in oil production, gas production, solar, nuclear, or
efficiencies in technologies and vehicles, it is amazing. And
most of it was not predicted to happen by academics, by
industry, or by government when the turn of the century came
about. Many of these things were quite well-known, but nobody
expected them to take hold the way they did.
Second of all, we have a radical change in our supply of
natural gas, and the projected supply of natural gas, again,
was unanticipated at the beginning of the decade.
Third, we have a decline, again unpredicted, in oil
imports, which is viewed as very positive from a security
standpoint, with a projection that it will continue, if we do
not mess it up.
Fourth, we have, actually, a decline in our carbon dioxide
emissions in this system, with a projected minimum growth over
the next decade. This is a positive development. Some of it, of
course, is just the consequences of the unfortunate slowdown in
the economy, but it also represents, actually, improvements in
efficiencies and fuel-switching and other things that have gone
on. There is more to be done, in the view of many people, on
this front, but this is progress.
Now, why did this happen? Let us remember the power of
price at the outset, because we almost always want to deny it
in public conversations in this country. First, we had a very
high rise in natural gas prices at the turn of the century,
less than a decade ago. It was followed within a few years by a
very high rise in oil prices, and, by the way, again, neither
academics, the government, nor the industry predicted this--a
few individuals probably did, but they ended up writing their
books and getting rich after the fact. Whether they actually
knew it ahead of time is not clear.
The truth is, that had a powerful impact on the behavior of
consumers, investors, and government policy.
Second of all, obviously, the entrepreneurial risks that
people are willing to take, like Mr. Hamm and others, have been
powerful, whether it is in oil, in the new natural gas supply,
in the new nuclear plant that is about to be built in this
country, in solar, in a whole bunch of resources. We require
that entrepreneurism across the board if we are going to be
effective. Nobody in this group, I am sure, would deny the
importance of that.
The third reason for this change is because many of these
technologies that came in the marketplace for production or for
demand reduction were actually the result of decades of
research, some of it by the private sector, much of it
supported at some level by the public sector, some in the
public sector, like our national laboratories. It is very hard
to unsort that mix of which is which, but nobody should
misunderstand that both are important, and government policy
and government expenditure help advance these technologies that
now we have sucked into the marketplace.
And the fourth, finally, there of course have been policies
at the State and Federal levels that have helped incentivize
innovation, and this committee itself has been very active in
that, helped both the efficient technologies and promoted
adoption in the marketplace.
Many of these policies, I would suggest to you, actually
followed on the price increases that drove the incentives for
the marketplace, as well as the political incentive for
Congress and others to make decisions.
Now, let me suggest to you that, while this picture is, in
my view, a very positive development compared to where we were
10 years ago, obviously, it was marred in the past couple of
years by that massive blowout in the Gulf of Mexico and marred
by the events at Fukushima. These are high-risk operations. We
are in a position around the world where we do things big. We
are going to be taking big risks, and we have to be smart about
how to mitigate those, to the extent we can. I am not one who
thinks we can just walk away from all these risks, but I do
think we have a serious responsibility, governments and
industry, to minimize their impact.
Now, this new natural gas supply is the overwhelming
development in our energy picture that was certainly
unanticipated, and many people believe, and I certainly
believe, this is a powerful economic benefit to this country.
But we cannot mistake that there are major challenges in this
development that have to be taken seriously, whether they are
impacts on air, on methane leakage, on water--and some in the
industry are being extremely responsible about this and,
frankly, some are not.
We have many players in this new and dynamic field, and
government has to be smart and careful in the way it regulates.
But we have to take it seriously, as the National Petroleum
Council study of last summer makes very clear--this is very
much of an industry, along with other NGOs and others involved
in this. It is a Federal advisory committee, as you folks well
know--which said, you have to have responsible development, and
you have to take these issues seriously for us to be able to
capitalize and maintain a good thing.
There are other challenges--excuse me, Mr. Chairman. I will
stop with one more challenge, and that is, this is not just
changing the natural gas picture. This is changing the picture
of all other major energy sources in this country. And, as you
make policy, you need to think through what is going to be
undermined and what is not by this enormous development.
Sorry, Mr. Chairman.
The Chairman. No problem. Thanks very much, Congressman.
[The prepared statement of Mr. Sharp appears in the
The Chairman. Dr. Jorgenson, you are next.
STATEMENT OF DR. DALE JORGENSON, SAMUEL W. MORRIS UNIVERSITY
PROFESSOR, HARVARD UNIVERSITY, CAMBRIDGE, MA
Dr. Jorgenson. As the chairman stated, I am a professor at
Harvard University. I have taught in the Department of
Economics there since 1969. I have devoted a good part of my
relatively lengthy career as an economist to the topics that we
are here to debate today, and it is a very great privilege for
me to participate in this panel and to join you in your
I would like to discuss three issues. To fix ideas, I am
going to associate a number with each one of them. And the
first number that I would like you to remember is 1.5 percent
of the GDP. What is this? A system of environmental taxes on
fossil fuel combustion would generate revenues equal to 1.5
percent of the GDP. This would be mainly a very substantial tax
on coal, a much more limited tax on oil, and a minimal tax on
natural gas. There would be no taxes on renewable forms of
energy like wind or solar. The 1.5 percent of the GDP does
not--I want to emphasize--does not include any additional
revenues from limiting or eliminating tax expenditures, like
the ones that you are going to hear about today.
Let me proceed to the second issue that I would like to
discuss. That is the Federal Government budget.
You have been told by dozens of economists inside and
outside the government that we will be going over a fiscal
cliff at the end of this calendar year. The Bush tax cuts of
2001 and 2003 are finally scheduled to sunset as we welcome in
the new year. There is also the threat of sequestration, which
was legislated by the Congress in August of last year. And
beyond that looms another fight over the debt limit.
Douglas Elmendorf, the highly respected Director of the
Congressional Budget Office, has told you that all of this will
produce another recession. So the number I would like you to
remember here is 2 percent of the GDP. This is the difference
between the Federal revenue of 17 percent of the GDP in 2011,
which is the last year for which we have real numbers, and 19
percent, which is a long-term average of Federal revenue of the
GDP for the last 30 years. This is the minimum that I think we
can expect that revenue will contribute to closing the budget
gap that looms ahead of us.
The third issue is comprehensive tax reform. Ranking Member
Hatch has reminded us that that is the subject of these
hearings. The number there I would like you to remember is 7
trillion. To paraphrase that great U.S. Senator after whom this
building is named, a trillion here and a trillion there, and
pretty soon you are talking about real money.
So what is the 7 trillion? This is the cumulative impact of
a carefully designed system for comprehensive tax reform. Seven
trillion is more than sufficient when added to our national
wealth of $60 trillion to put our labor force back to work and
to resolve our fiscal crisis. In short, it would enable us to
achieve a fiscal policy that is sustainable.
Let me summarize. We are not here to debate energy policy
alone. We are not here to debate comprehensive tax reform
alone. We are not here to debate the Federal Government's
budget alone. We are here to see how all three can be fitted
together to solve our budget problem, to clean up our
environment, and to give a positive thrust to the growth of our
Thank you very much.
The Chairman. Thank you, Doctor. Within time, too.
[The prepared statement of Dr. Jorgenson appears in the
The Chairman. Mr. Hamm?
STATEMENT OF HAROLD HAMM, CHIEF EXECUTIVE OFFICER, CONTINENTAL
RESOURCES, INC., OKLAHOMA CITY, OK
Mr. Hamm. Thank you. Thank you, Chairman Baucus, Ranking
Member Hatch, and members of the committee. It is an honor and
a privilege for me to be here today. I will be speaking on my
own behalf, not as a representative of Continental Resources. I
am not here on behalf of the Romney campaign, for which I serve
as an energy advisor.
It has been 20 years since I was here speaking before this
committee. Senator David Boren, at that time, was co-chairing
the committee, I believe, and I spoke to him about a couple
things that were mostly unknown and totally unconventional at
the time. One of them was horizontal drilling, and the other
was the aspect of drilling into the source rocks themselves,
the shales, that might produce a vast amount of natural gas. We
were talking about a temporary trigger, a tax trigger, to
advance that theory.
Well, that was not given. We did not get a tax trigger. But
over the last 20 years, we have seen those technologies
developed, and, thank God, we have come a long way since then.
Continental is a top 10 petroleum liquids producer. We are
75 percent oil with last year's production. We focus on oil.
The Bakken Play, Senator, started in Montana, and that is
where we started with Elm Coulee Field, and, of course, the
deep end of the pool is over in Senator Conrad's State, over in
North Dakota, and we were one of the original players over
I might say that only here in America can a 13th child of a
sharecropper turn a 1-man 1-truck operation into one of the
Nation's largest oil companies. But having discovered that
field at Continental, we have been able to do that.
Today, I am going to talk to you from the perspective of
the seasoned petroleum geologist, explorationist, who has been
in this business buying oil, from my own account, for about 45
I first started speaking on oil about 2 years ago. At that
time, it was being severely disparaged, and people were trying
to get market share. So I thought someone needed to stand up
for oil, and I started talking about that. It is a very
important segment of our energy picture. Nearly all
transportation runs on it. There is hardly a jet plane anywhere
that burns anything besides oil products.
I am also here to talk about these Federal tax provisions
that will allow us to continue the job of the viable American
dream of energy independence that we have begun. These are very
important for America.
There are 18,000 independent producers today that drill 95
percent of the wells in America. We produce 67 percent of the
oil, 86 percent of the natural gas that is produced today. We
typically invest all that we make, borrow about 30 percent
more, and I am afraid our company falls in that same lot as
We are in the exploration and production business, that is
what we do; we have no refining operations. And I will not get
into the tax consequences. Senator Nickles covered that very
well. Section 199 foreign tax credits could then affect us a
whole lot. But certainly the IDCs do, and, if we do away with
those, we will stop this march to energy independence that we
These same tax provisions not only allowed us to survive
the terrible times, the disastrous years of the 1980s and 1990s
that eliminated about 50 percent of the independents within our
ranks, but also allowed one other really important thing, and
that was to allow us to try and fail and try again, and,
certainly, that is what it took with the Bakken.
We drilled about 18 commercial wells up there before
breaking the code on producing this mighty oil field that is
somewhere over 24 billion barrels. Without that ability, we
would not have been able to do that.
And also, let me talk about some other players. You know
that Barnett shale field, George Mitchell's quest down there,
George worked 16 years breaking the code on the Barnett. This
is the largest natural gas field today in Texas. It took 16
years to break the code to get that done. So try and try again,
he was able to do it.
I might just talk about a new era that we have entered into
in American oil. It is fair to say we are transitioning from an
era that was mobile. That oil moved. What we are entering into
today is an immobile portion of the oil in America, and this is
estimated to be at least a third larger than the mobile portion
was that we have been producing in this world for 160 years.
We are now able to do that through one thing, and that is
precision horizontal drilling, where we will go down 2 miles,
turn right, go 2 miles, and hit that lapel pin with a drill
bit. It is that precision that we have developed. The
independents are largely responsible for that development,
myself and others. And so we are able to do that precision
drilling, and that is what unlocked this new era that we are
into. And it is certainly a great era.
We have had tremendous success in these new resource plays
across the country. Somebody aptly described the new natural
gas supplies that we have unlocked. Some say 100 years' worth--
I think it could be even greater than that. It is tremendous.
And we have seen the imports go down as new productions come on
here in America. They have gone down to about 42 percent right
now from 60 percent, a high of 60 percent. We are down to 42
And it is estimated--Marshall Adkins, who is a renowned
analyst with Raymond James, he has estimated that it will fall
to 26 percent by 2015--that is just around the corner--and also
will cut our trade deficit by 82 percent by 2020. So it is
tremendous where we are headed and what it has done.
Most importantly, we are into a cheaper price regime, that
is, a discounted price regime for both oil and gas for the
consumer; so, lower cost to the consumers here in America. That
$15-a-barrel difference right now between us and bench price--
we are talking $2 natural gas here, and we are talking $12
natural gas in China today. So it is a tremendous difference.
But what the impact of this new production to America is,
is better national security, drastically reduced deficits and
budget deficits, jobs creation, good-paying middle-class jobs.
We have seen that in Oklahoma, Texas, North Dakota, Kansas,
Montana, wherever oil and gas is. So what we are doing is--it
is estimated by API we could add 1.2 million jobs to the 9.3
million jobs that are currently in our industry today by 2030.
And then the American wealth creation, and we are talking
wealth creation to our own Federal Government--$18 trillion of
value in oil and gas on Federal lands. That is the estimate
that is out there. We are not talking about creating other rich
Arab sheiks. We are talking about at home. We are talking about
10 million royalty owners right here in the States. North
Dakota does not have a deficit; Montana does not have a
deficit. These States where this is going on do not have a
But I think primarily----
The Chairman. I am going to have to ask you to sum up, if
you could, Mr. Hamm.
Mr. Hamm. The big thing is the psychological impact in
America, the self-sufficiency in America, of producing what we
need right here at home and saving American lives.
So the unintended consequences, if we are not careful, of
changing these rules could be devastating. We could stop this
energy renaissance. We certainly do not want to do that.
Thank you very much.
The Chairman. Thank you, gentlemen, very much. I have a
couple of questions.
[The prepared statement of Mr. Hamm appears in the
The Chairman. First, as prompted a bit by Congressman
Sharp's point, all the new technology is unpredicted--natural
gas unpredicted, prices unpredicted--and the basic question is
the degree to which tax policies really matter.
The fracking technology was developed. Nuclear technology
is being developed. Lots of other energy technologies are being
developed, partly because of the entrepreneurial spirit in
America. People see how they can make a buck. And the basic
question is, how much do these tax incentives really matter,
A side question there is, what do other countries do and
does it matter, or are we just responding to political
pressure, when really a lot of the results are the result of
people figuring out how to do a better job?
And I have, actually, a third question, if you could wrap
them together. As this committee works to pursue tax reform,
the argument is, why don't we have a more technology-neutral
technology-neutral deduction, some incentive to help boost
energy production, domestic energy production, but in a way so
we are not picking winners and losers?
I know it is a complicated question, but if anybody wants
to take a crack at it, those are some of the things on my mind.
Dr. Jorgenson. The leading point that I would like to make,
Mr. Chairman, is that the opportunities are not so much on
reducing the tax expenditures that you just enumerated. That is
an important issue, but this committee over the years has
worked to limit these tax expenditures.
The things that we are talking about here in terms of
expensing development and the percentage depletion and so on, I
certainly agree with you, those should be reconsidered.
The big issue, though, is on the side of the utilization of
energy, in other words, a use of energy, and that is where
energy taxes really have to play a role. We have an opportunity
to raise revenues equal to 1.5 percent of our GDP, and those
are entirely on the side of using. They have nothing to do with
technology-neutrality. That is another range of issues that I
think is secondary relative to energy utilization.
The Chairman. Could you focus some more on--what do you
mean by energy utilization?
Dr. Jorgenson. I mean burning fossil fuels, Senator. So I
am referring to combustion of coal in the generation of
electricity. I am referring to the combustion of oil products,
as Mr. Hamm reminded us, in transportation, and the use of
The tax for energy would be primarily--you are a Senator
from Montana, so you are well-aware of this--on coal. It would
be a modest tax on oil and a very modest tax on natural gas.
That would lead to the substitution that is underway right
now away from coal, which is the most polluting energy source,
toward natural gas in the generation of electricity. That is
the great environmental opportunity of our time. It just turns
out that it produces a lot of revenue.
The Chairman. So it is a cousin to a carbon tax.
Dr. Jorgenson. This is not a carbon tax.
The Chairman. A cousin, I said a cousin.
Dr. Jorgenson. It is a kissing cousin to the carbon tax,
let us put it that way. This is a tax on the six criteria
environmental pollutants which have been identified for years
by the Environmental Protection Agency, going back to the Clean
Air Act of 1970 and enhanced by the Clean Air Act amendments of
1990, and so it would focus specifically on the pollution that
is associated with these criteria pollutants.
So what are those? Well, there are coarse particulates,
smoke. There are fine particulates, also in smoke, but less
visible. And the list goes on. You can fill out the rest of the
We have to have taxes that limit this pollution. This is
conventional pollution. We are not talking about climate change
here. We are not talking about saving the planet. We are
talking about saving lives, reducing illness.
That is what environmental protection is about, and we have
a job that is still undone that turns out to be a potential
source of revenue equal to 1.5 percent of the GDP on the side
The Chairman. Congressman Sharp, do you have any thoughts?
Mr. Sharp. Very quickly, to put out one sliver. When you
were talking about new technologies, and I talked about them,
while entrepreneurs are very important in imaginative work all
around this country--very important--the truth is the
government has been very important here too.
And the tax credit on research and development, which you,
I am sure, are more familiar with than I am, is intended to
keep our private sector entities working, to keep our great
research institutions like MIT, to keep our national
laboratories figuring ahead, because we do not know which ones
of these will work.
Now, let us understand this extraordinary work by Mr. Hamm
and others was facilitated by the Federal Government. I mean,
seismic 3D, which allowed much greater visualization into the
ground to advance us, was a major industry achievement, but it
had Federal backing to help figure out how you do that, as well
as some of these other technologies.
And I think we have to be a little careful about just
ripping all this out and thinking that it is all going to be
done out there without somebody who will see this through
because it was not worth it to anybody. There was no immediate
return for a lot of these technologies. The return only
happened after several decades.
The second thing I would say is, it is the same with the
production of new kinds of energy sources like wind. I doubt we
would have anything like the wind industry we have today if the
Federal Government had not engaged in research to bring down
the costs and upgrade the efficiencies--not to take anything
away from private sector activities--or if you had not adopted
the 1992 or whenever it was, I think, in the Energy Policy Act,
the production tax credit.
Now, the issue is whether that is really still necessary to
The Chairman. My time has expired. It expired some time
Senator Hatch. Thank you. I have really enjoyed this panel.
And this particular question is for the entire panel.
A number of tax policy experts believe that the tax system
should simply be used to raise the revenue necessary to fund a
constitutionally limited Federal Government and not get
involved in social engineering through the code. These experts
suggest that the energy policy should not be run through the
Now, as part of the tax reform exercise of lowering tax
rates by broadening the tax base in a revenue-neutral manner,
this is one approach to dealing with energy tax provisions.
I would just like to have your thoughts on such an approach
with regard to energy tax reform. We will start with you, Don.
We are grateful to have you back, and grateful to have all of
you here today.
Mr. Nickles. Senator Hatch, just a couple of comments. One,
tax policy does make a difference. In partial response to your
question and Senator Baucus's question, if you no longer
allowed intangible drilling costs to be expensed, you would
shut down the shale revolution, the oil revolution that is
happening in the Bakken and in every major play.
I am on the board of a couple of companies. That is a big
deal. If you do not allow people to expense, and they have had
expensing--the independents have had it, frankly, since, I
think, 1913 or something.
Senator Hatch. Like 18 dry holes in Bakken before you hit
Mr. Nickles. Absolutely. Senator Hatch, in response to your
question on overall tax policy: absolutely, getting a lower
rate, a more competitive rate, competitive internationally, is
important. This committee has not done a lot on the
international tax front. We have always talked about it, but it
is really about time. And I think a greater consensus is
building towards a territorial system. It makes sense.
We are becoming a smaller world in international
competition, and, frankly, we should not be giving advantages
to our international competitors over our U.S.-based companies.
We want more U.S.-based companies to be successful
And then finally, Senator Hatch, kind of in relation to
your comment and overall, the tax rates you want to have and,
to some extent, to be as efficient and maybe raise as much
money as they can without doing harm, when we reduce capital
gains and corporate dividends to 15 percent, we actually raise
more money for the Federal Government. I am very concerned
about the cliff that is coming on cap gains. The rate at
January 1st, if the committee does not do something, if
Congress does not do something, it is going to go from 15 to 25
Senator Hatch. Or higher.
Mr. Nickles. And on corporate dividends, it goes from 15 to
44 percent--15 to 44--the ordinary rate, 39.6, 3.8 on top of
that for the President's Obamacare, and then maybe another 1.2
on elimination of PEP and Pease. So you go from 15 to 44.6.
That is tripling the rate on corporate dividends for
individuals. The corporation has already paid 35 percent.
So this committee really needs to do some work. And from
your vantage points and from trying to raise money, if a lower
capital gains rate actually raised money--if you would take
capital gains from 15 to 25 or corporate rates and triple them,
I am afraid the government is not going to raise money. I am
afraid you are going to lose money, and it is going to hurt
real estate, and it is going to hurt banks that loan for real
Senator Hatch. You are preaching to the choir here. It was
the Hatch-Lieberman bill that brought the rates down to begin
Mr. Sharp. Senator?
Senator Hatch. Mr. Sharp?
Mr. Sharp. Just a comment. I was around, but not on the
relevant committee, in 1986 when this theory was very popular
about just not using the code for any social engineering. I
think it is a good one, if we could all subscribe to it. I just
do not know any faction in America that really believes it
enough to act on it.
I cannot imagine this committee will be able to not be
inundated with everybody--we already heard one appeal to why
some critical provision is necessary in the code. We are
certainly a lot better off economically if we can get this
simpler, if we can get the rates down, if we can get rid of
some of the tax preferences.
But I think it is a pipe dream of some outsiders who think
that, in this complex economy, that any business organization,
let alone the U.S. Congress, can follow that philosophy.
Senator Hatch. Professor?
Dr. Jorgenson. Senator, nobody is talking about eliminating
things like percentage depletion or the deductibility of
exploration and development. What we are talking about is
bringing those tax provisions into line with fundamental
That is what the concept of tax expenditures is all about.
So we are not talking about getting rid of incentives. We are
talking about making them neutral, which is your point, as I
understand, Mr. Ranking Member.
Secondly, as I emphasized in my written testimony and in my
oral remarks, 19 percent of the GDP as the revenue contribution
to the Federal budget seems to me to be a reasonable target. We
are below that level now. We are at 17 percent or below.
As I said, 17 percent is the number for the last real data
we have. The Congressional Budget Office has projected that for
this year, this calendar year, that is, the number is going to
So we need to have some kind of consensus. I am talking
about unanimity. I would like to see everybody subscribe to
this around a number like 19 percent as a starting point for
But I agree with you entirely that we should have a neutral
tax code. That is the purpose of comprehensive reform, as I see
Senator Hatch. Thank you.
Mr. Hamm, we will make you the last one.
Mr. Hamm. I mentioned unintended consequences in the
government's quest to raise more money and equalize things. I
just want to caution that this tax could be one that vaporizes
if the IDCs are taken away, if we stop the renaissance. And we
are still going to raise a lot of money.
There is $4 billion lost if drilling ceases or slows down
considerably. We have examined our company and, absolutely, a
third less drilling would take place without the IDCs.
Senator Hatch. Thank you all.
The Chairman. Thank you.
Senator Conrad. Thank you, Mr. Chairman. Thank you for
holding this hearing. Thanks for the excellence of this panel.
I remember very fondly serving with Senator Nickles. We led
the Budget Committee together for a number of years. One thing
I learned about Senator Nickles is his word is absolutely gold.
Even when it was hard to keep his word, he did, which I always
Congressman Sharp, it was always good to serve with you.
You were a thoughtful member.
Dr. Jorgenson, a wise man, we are fortunate to have
somebody of your quality and character before the committee.
Mr. Hamm, thank you for what you have done for the country.
Thank you for what you have done for our State.
I just want to point out what has happened to dependence on
foreign energy. Since 2005, we have gone down from 60-percent
dependent to 45-percent dependent last year. We believe we will
be 42-percent dependent this year.
So we have seen dramatic reduction in our dependence on
foreign energy. Still, we are spending $1 billion a day on
foreign sources. And it is incredibly important to the
economics of the country that we make further progress.
Let us go to the next slide and show what has happened to
domestic production. And, again, I thank Mr. Hamm. Thank you
for making the investment. Thank you for taking the risk. Thank
you for having faith that what you and your people saw as an
opportunity was worth pursuing, because you have helped turn
around our domestic production in a very dramatic way, and I
believe it is entirely in our Nation's interest, in the
national security interest, in the national economic interest,
and we have to pursue it.
That takes us to the question of incentives. Mr. Hamm, you
have focused on intangible drilling costs. Can you just tell us
again why, in your view, that is so critical?
You have testified here that if that were taken away, in
your company alone, you believe there would be a one-third
reduction in drilling. Is that what your people have concluded?
Mr. Hamm. It is. I am not a tax accountant. I am an oil
finder. But we do have a lot of tax accountants who work for
us, who are on staff, and we have done a study on it, and that
has been our consensus that, in our company, it eliminates
about 34 or 35 percent of our drilling activity right off the
It takes about 7 years for us to get back to normal, some
normal type operations.
Senator Conrad. If that were taken away.
Mr. Hamm. Yes.
Senator Conrad. Let me just say that I have served on the
Bowles-Simpson Commission, the Group of Six, tried to be part
of efforts to get us back on track, because when you are
borrowing $0.40 of every $1, that cannot continue much longer,
and we have to get a hold of it.
Part of our issue clearly--almost every bipartisan group
that has looked at this has said that tax expenditures have to
be part of the solution, because they are now $1.2 trillion a
year. That is more being spent through the tax code than all of
the appropriated accounts.
So I personally believe we are going to have to reduce tax
expenditures, broaden the base. I personally believe we should
lower rates in conjunction with that to help America be more
competitive. We need to lower the corporate rate to be more
But we also need to generate some more revenue to help with
the deficit, on top of reforming entitlements, on top of
cutting spending in the discretionary accounts, all of which is
going to have to be done, and none of which is really popular.
But we have to be careful we do not throw the baby out with the
And what I hear you saying, Mr. Hamm, is that, as you move
toward these reform steps, first of all, do not throw out
intangible drilling costs, because that would have unintended
Mr. Hamm. Yes.
Senator Conrad. Is that what you are trying to tell us
Mr. Hamm. That is correct. Again, I am not a tax
accountant, but that is--we have done the study. We have
provisions right now that encourage us to invest, and we need
to invest heavily in the Bakken.
For instance, up there right now, there is about, we
estimate, 900 billion barrels of oil in place in this whole
Senator Conrad. Nine hundred billion barrels.
Mr. Hamm. Nine hundred billion. We right now can get, we
think, about 2 to 3 percent of that, 2.5 maybe, 2.5 percent or
something like that. If we could move that needle up to 5
percent, everybody here can do the math, I mean, we are talking
about doubling our crude reserves in America. So it is that
So we have a job to do and a very significant one, and we
need the ability to do it. This gives us--this encourages us to
Senator Conrad. Just a last statement, if I could, Mr.
Chairman. I have just been up talking with Secretary Salazar
about some of the wells being drilled in North Dakota, and I
will tell you, it is extremely impressive. It is being
carefully done. It is being professionally done. It is being
done in an environmentally sensitive way. It is being done with
extraordinary technology. And so we thank you for that, as
I tell you, I do not think any one of us would go there and
not come away impressed with the professionalism of how it is
The Chairman. Thank you, Senator. I agree. In fact, a guy
took me out to one of the rigs in Montana. It was the same
person who took you and Secretary Salazar up to Riggin, ND.
If you could answer, if I might, in just 1-sentence. What
does it take to move that needle up to 5 percent? What is a 1-
sentence answer of what it would take to move the needle to 5
Mr. Hamm. Well, I think it can be done over time. There are
a lot of things we have to--we have to figure out the next step
of enhanced oil recovery. That is going to play a big factor,
whether that is C02, just normal secondary water
flooding, or whatever it is. We have to do that. That is going
to move the needle on up.
The Chairman. Thanks a lot.
Senator Grassley. As we begin to consider what
comprehensive tax reform would look like, it is important to
discuss goals and objectives other than revenue collection and
what the tax code should accomplish.
We had testimony before our committee in December 2011 on
incentives for alternative energy. Ms. Sherlock of CRS notes,
``The income tax code has long been used as a policy tool for
promoting U.S. energy priorities.''
So it makes sense to consider whether or not our tax code
of the future should further energy priorities. Those who want
to isolate Federal tax incentives for alternative energy and
put them on a chopping block need to remember that the oil and
gas industries have received massive permanent tax breaks for
In contrast, tax incentives for alternative energy have
existed only a few decades and have always been temporary.
These incentives first appeared in the 1970s in direct response
to the oil crisis, and they helped to level the playing field
for renewable resources. These incentives reduced the cost of
capital investment for those fledgling industries that were not
yet able to raise capital.
Any argument made for eliminating renewable energy tax
incentives is intellectually dishonest if it does not include a
review of all energy tax incentives. Those opposed to
incentives for alternative energy often fail to consider that a
key reason to support renewable energy resources should be
energy independence. The United States spends more than $400
billion each year importing oil.
Now more than ever, the United States needs to ramp up
domestic production of traditional energy, including oil,
natural gas, coal, and expand alternative fuels and renewable
energies, including all of them, and I will not name them
because you know them.
America imports almost 50 percent--I think it is a little
bit less than 50 percent now--of our oil. The U.S. Treasury
pays out an average of $84 billion a year to defend shipping
lanes to bring that oil here. These costs are never included in
the discussion of cost-effectiveness of tax incentives for oil
and gas as compared to alternative energy.
For sure, we need a tax system that is less complicated,
fairer, and will make us more competitive in the global
economy. However, there is a long history of using the tax code
to promote energy policy, starting with intangible drilling
costs and percentage depletion provisions that are almost 100
Experts in favor of these provisions argue that these
provisions are not tax expenditures because they just represent
ordinary business expenses and are similar to research and
development. Yet, the expensing of research and development
costs and the intangible drilling costs are exceptions to the
rule that such expenses should be capitalized and deducted over
It seems a primary benefit of intangible drilling cost
provisions is that they provide more cash for additional
drilling operations, which results in more jobs. Retaining this
provision then would seem to indicate that the tax code should
play a role in our energy.
So, to Senator Nickles and to Mr. Hamm, does this conflict
with the key objectives of tax reform to lower the rates and
broaden the base? Would not lower tax rates also provide more
cash for additional exploring and drilling? And also, if the
R&D and accelerated depreciation provisions are reviewed in the
context of tax reform, do you agree that intangible drilling
costs and percentage depletion provisions should also be
Mr. Nickles. Senator Grassley, you have not changed a bit.
I remember having this debate for about the last 30 years.
A couple of comments. One, intangible drilling cost is
expensing out-of-pocket business expense; that is, wages. You
compared it to R&D. R&D is a credit. There is a big difference.
R&D credit is dollar-for-dollar off your income tax, and
the other one is a deduction for an out-of-pocket expense--
wages. And I mentioned earlier, before you arrived, I think for
tax simplicity, you should allow every business to be able to
expense certainly its wages.
So I do not compare the two. I am in favor of putting
basically everything on the table. It is exciting to think what
you all are getting ready to do in very significant tax reform,
and you should put everything on the table.
But, if you do not allow industries to expense their out-
of-pocket expenses, as Harold Hamm said, you are going to have
some real negative consequences. You will not have $2 gas.
So I do not think this committee or Congress wants to do
something that is going to have adverse economic impact. This
happens to be--the shale gas revolution, as well as the oil
revolution, is one of the best things that has happened in this
country economically in years. Congress does not want to mess
But I think you ought to look at every credit, because that
is--any credit is--by nature, it is Congress saying, we think
this is even more valuable than the $1 you spend. You spend $1,
and we are going to reduce your taxes by $1.
So I am all in favor of putting a lot of credits and
deductions and tax-exempts on the table. You have a lot of tax-
exempts that are not taxed. Tax them. Tax everything once. You
broaden the scope a bunch by doing so.
Senator Grassley. Mr. Hamm?
Mr. Hamm. I agree. We capitalize all of the tubers, all the
hardware out there, we capitalize all of that. We do write off
the wages in regard to drilling, and the debt was in that
regard. And it is a provision that encourages new exploration.
And we need to look at what is going to happen down the
road. Right now we are using 91 million barrels of oil per day.
Here in the U.S., we are producing about 10 percent.
If you add to the chart the petroleum liquids, to that
chart, we are about 9 million barrels a day. So we are
producing about 10 percent of our petroleum needs today, and
that is estimated to go up by 2035 30 percent more to 112
If we are going to produce our part of that in the future,
we are going to have to have incentives like we have in place
to do that.
The Chairman. Thank you, Senator.
Senator Bingaman. Thank you all for being here. And first,
I congratulate Mr. Hamm and all those in the industry who have
been so successful at increasing production. I think it is a
good thing for our economy. Obviously, it is strengthening our
I have always thought that there are three primary goals
that we have as a country with regard to energy. One is, we
want to have an ample supply at reasonable cost; second, we
want to have diverse sources of energy so that we are not
dependent upon any one source; and third, we want to have an
energy policy that does the least damage to the environment,
does the least damage to the health of the citizenry. And so
those are the three goals that we have out there.
Now, on tax expenditures, I know there is a lot of talk
about reducing tax expenditures, and strong arguments have been
made as to why those that relate to the oil and gas industry,
at least intangible drilling costs, ought to be maintained.
I gather Senator Nickles's view is we ought to repeal
section 199 for everybody, not just for the oil and gas
Mr. Nickles. I would think you--when you are doing
corporate reform, having a uniform corporate rate, not a lower
rate for manufacturers, would make sense. That is what I argued
when I was on the committee, and I have not changed my
Senator Bingaman. One of the things that has complicated
our discussion of energy tax expenditures is that we have some
that were adopted prior to the Budget Act of 1974, and we have
others that have been adopted since the Budget Act. And by and
large, those that were adopted prior to the Budget Act which
relate to the oil and gas industry are permanent parts of the
Those that have been adopted since the Budget Act are very
limited in time in most cases, and they keep expiring. And
those that relate to renewable energy have expired and come
back, and we put them in place again and then we let them
I would just be interested in the panel's view as to
whether--whatever we do with these expenditures, would it make
good sense--it seems to me it would make good sense to put them
all on an equal playing field in terms of their permanence.
And, whatever we decide makes sense for the wind energy sector,
if the production tax credit or some lesser version of the
production tax credit ought to be a part of our tax code, then
we ought to put it in place and leave it there for a while,
just as the intangible drilling cost provisions that relate to
oil and gas production are a permanent part of the tax code.
I do not know. Dr. Jorgenson, did you have a thought on any
Dr. Jorgenson. Well, as I said in response to Chairman
Baucus, I think we need to focus on the environmental issues
that really count, Senator, and those issues have to do with
the utilization of energy. They do not have to do with energy
There is something that has not been mentioned that I think
we need to focus on. Senator Baucus, I think, alluded to this,
but let us put it front and center.
In December 1998--I am reading from a publication of the
Energy Information Administration--the cost of a barrel of oil
in Cushing, OK--this is West Texas Intermediate--the spot price
FOB was $11.35. In April of this year, which is the last year
for which we have data, April of 2012, that number was $103.32,
7 times greater. We have had an energy price crisis. You are
all familiar with that. Everybody here has lived through this.
That peaked with the price in June 2008--again, Cushing,
OK, West Texas Intermediate--of $133.88.
Now, what is the difference between this experience and our
previous experience? These prices have not declined. In 1973,
it was followed by a price collapse. In 1979, it was followed
by a price collapse. In 1981, it was followed by a price
This has not happened. Something has changed in the world
petroleum markets. These prices are permanently higher. This is
the basis for the incentives that are driving the Bakken. You
can talk all you like about tax incentives, and I am not
against treating these symmetrically with every other form of
production. I am talking about oil and natural gas.
But the point is that, once you do treat them
symmetrically, you have to reckon with the fact that we have
seen a sea change in the world petroleum market. We have prices
that are 7 times as high as they were as recently as 1998. That
is the most relevant fact about incentives that we are here to
Senator Bingaman. My time has----
Mr. Hamm. Could I respond?
Senator Bingaman. Go right ahead. Sure.
The Chairman. Sure.
Mr. Hamm. Dr. Jorgenson picked the lowest year in history
almost. In 1998, if anybody here remembers, that is when our
friends from Venezuela were dumping oil into America, trying to
put all the stripper producers, particularly, and high-cost
producers of America, out of business.
Prices before that had been in the $20 range, twice that.
After that, they responded and came back to that after that
point. The procedure was changed and the administration was
changed in Venezuela. So that is how that happened.
When the Bakken began in early 2000, the price of oil was
about $25 a barrel. So, yes, we have seen prices spike at $147
for 1 day and then they came back.
So right now, we are at about an $80 price range, close to
that. We are about $15 under the Brent price, which is
considered a world price here in the Midwest.
So prices go up and they go down.
The Chairman. Thank you, Mr. Hamm.
Senator Coburn. Thank you, Mr. Chairman. And thank the
I am having trouble getting this. Senator Enzi and I are
the only two accountants on this committee. And the thing I
cannot figure out is what we--the obvious is not being seen.
If you eliminate intangible drilling costs, actually, you
decrease revenue to the Federal Government, and here is why.
You take away the capital for exploration, and you thereby
decrease the amount of revenues and the exploration in this
If you had no change in exploration and no change in
discoveries, the tax revenue to the Federal Government would be
the same over 10 years as it is with intangible drilling costs.
There is no difference to what the government takes in. One is
a delayed tax versus a fully captured tax at the time of the
So I do not get what the debate is. What I do not
understand is why, when we are sending $400 billion a year out
of this country and we have the potential to have a stimulus in
this country of $400 billion a year by having the money that we
would have sent out spent here, tax-free, not borrowed to
create a stimulus, totally tax-free, and energy independence
for our country, why would we not do everything we can to do
that--still within the parameters that Dr. Jorgenson set out in
terms of the clean environment? I do not get it.
We have the opportunity of a lifetime in this country to
reinvigorate this country in terms of natural gas and propane
and ethane. We are building new cracking plants. Conoco is
going to do another one. They are employing 10,000 people in
Texas right now to build a big cracking plant. It is going to
put us at a major advantage over everybody in the world in
terms of raw materials for almost everything that is made in
this country, from plastics to chemicals to you name it.
We have an opportunity to expand our dominance in the world
as manufacturers on the basis of what has happened in oil and
gas exploration. And when we talk so foolishly about short,
little bitty things, not looking at the big picture, I have
trouble understanding that.
There is no question there will be no increase in revenue
to the Federal Government by eliminating intangible drilling
costs, no net revenue increase to the Federal Government,
because you are going to shut down a third of the exploration.
And by the way, they pay out $100 billion a year. The oil
and gas industry is the largest payer to the Federal Government
in terms of taxes that there is today. They pay, on average, 9
percent more against earnings than any other industry in the
country, and now we are talking about lessening that. But more
importantly, we are talking about stealing the one thing that
can renew America's dominance in terms of productivity and in
terms of manufacturing edge. What has happened in the oil and
gas industry is giving us an opportunity to regain our mojo. We
must be very careful in how we approach this.
Amortization is something that my colleagues need to learn
about, what it means in terms of the accounting rule. Under
Generally Accepted Accounting Principles, we amortize expenses.
What we have done with intangible drilling costs is said, we
are not going to amortize those, we are going to allow those to
be written off, just like we did with the 100-percent write-off
that we gave in terms of new investments this last year.
And what has come about from that? What has come about from
that is a tremendous increase in jobs, but, more importantly, a
dynamite opportunity for this country to get back to where it
was 20 years ago in terms of leading the world in terms of
production, innovation, and efficiency. We should be careful.
I have one question for Dr. Jorgenson. If we had $400
billion in stimulus every year coming into this country that
was not borrowed money and not directed by the Federal
Government, but was in the market, what would be the net effect
to our economy?
Dr. Jorgenson. Senator Coburn, you are going to be very
surprised to hear this answer, because I am going to agree with
everything you said. This is not a debate about tax
expenditures. That is second-order. Let us get the big picture
We are not talking about big revenue here. These
expenditures have been limited for years to the independents.
That is what Mr. Hamm discussed with us in his written
testimony. So I think we are all on the same page here.
What we are not apparently on the same page about is
essentially what the price system is doing for the energy
sector. You are an accountant, or were, Senator Coburn, and you
know that when you evaluate a project for a client like Mr.
Hamm, if you ever had such an outstanding person as your
client, I would simply say, if you ignore the price of energy,
if you ignore the dynamism of our economy and the energy
independence that is going to result from the new structure of
oil prices in the world economy, you are fired. You are no
longer Mr. Hamm's accountant, if you have done project analysis
ignoring energy prices. And that is what we need to absorb.
Our market-based economy is working. It is working toward
energy independence, and it is working toward a more effective
allocation of energy resources toward the domestic sector,
which you have emphasized in your question, Senator Coburn.
Senator Coburn. I would just say that as we--if the
chairman would allow me. We have the opportunity to see oil
prices go down if we become totally independent of outside
resources, which gives us another boost in terms of our
The Chairman. Thank you, Senator.
Senator Menendez. Thank you, Mr. Chairman. Thank you,
gentlemen, for your testimony.
Senator Nickles, as we look at all of these different
provisions and think about what is the right tax policy, I look
at the big five oil companies and, from my perspective, they
are avoiding U.S. taxes by disguising what we would do here in
the United States, which is a royalty payment, and instead of
having a foreign royalty payment, having those countries charge
them a tax and, in doing so, allowing themselves to write off
these foreign taxes as a tax credit in the United States, and
in turn, in my view, shortchanging the American Treasury and
the American taxpayer.
Why should the American taxpayer be in the business of
subsidizing foreign oil exploration? Why should we not close
this enormous loophole as we have seen the Senate vote, a
majority of the Senate vote, to force these giant oil companies
to pay what they owe?
Senator Nickles. Senator Menendez, I could not disagree
with you more.
Senator Menendez. I am not surprised, but I still want to
hear your rationale.
Senator Nickles. Well, I do. You are talking about dual
capacity. You are talking about the ability to be able to
deduct overseas taxes against the tax amount paid.
I think if your proposal was successful, we would not have
international oil companies based in the United States. You
would give such a tax advantage to Total, BP, Lukoil, other
international oil companies that would not be facing this tax
penalty. Double tax would be the result of your proposal, in my
opinion, so that they would not want to be headquartered here.
I am speaking for myself, not for anybody I work with, but
tax policy has consequences. The windfall profits tax had
consequences. This would have tax consequences. You would put
us at such a competitive disadvantage internationally that the
growth in international exploration would not be done by U.S.
Senator Menendez. But you would not deny that, in essence,
what is happening here is that the same company in the United
States drilling on Federal lands or water would pay a royalty,
and, in essence, they are paying a royalty. The only thing is,
they are disguising that royalty as a tax.
Mr. Nickles. Well, I would not agree with that
characterization one iota. Treasury has worked--IRS has worked
for years with companies to figure out the complicated--and
they are complicated, I will grant you that--I am going to say
allocations. You are talking about royalties, you are talking
about taxes, you are talking about all kinds of fees--we have
all kinds of fees, as well--and trying to come up with a system
that works. I think they have done that over years and years
But I think if you are not careful, you could have a lot of
Senator Menendez. Well, I would be happy to get involved in
talking about how we tax all U.S. companies' foreign income. I
think that would be great. But what you criticized in your
testimony, as I read it, is the administration's attempts to
force the big five oil companies to play by the current rules
that all other U.S. companies play by.
Now, it seems to me that no matter how wealthy or powerful
the company, they should pay their fair share. The reality is
that the big five will make $1 trillion in profits over the
I think the marketplace--I think Mr. Hamm said in his
testimony that--I think he rightfully points out that oil
subsidies going to the big five oil companies are ``not
providing the capital that is fueling America's march to energy
independence.'' I agree on that view.
The reality is the marketplace has dictated that they will
make more than enough money to continue to pursue their
exploration, whether here or abroad. It does not seem to me
that they need $24 billion of our collective money as taxpayers
when they will make $1 trillion in profits, not proceeds, over
the next decade. I do not think they are going to deter their
march towards oil exploration if they lose those $24 billion
over the next decade.
Mr. Nickles. One, I do not think it is a subsidy. Two, I
think they should be treated fairly. And three, if you tax
U.S.-domiciled international companies punitively compared to
other international companies, those other international
companies will win in the leasing, the bidding.
The competition is fierce all around the world, and you
have less jobs, less jobs in the United States, and the U.S.-
headquartered companies will become smaller, and the other non-
U.S. companies will become much bigger, and I think that would
be a terrible result.
Senator Menendez. It is hard to believe $1 trillion in
profit is not enough for a company to pursue their own
One final question. You seem to be, from all the testimony
I read, and someone can correct me if I am mistaken on that--
the one witness who is willing to defend the fact that the big
five oil companies receive the domestic manufacturing tax
deduction--I can see how some might consider oil refining to be
manufacturing--but other than a hole in the ground, do oil
drillers actually manufacture?
Mr. Nickles. Well, one, I do not defend 199, period. I
think Congress--when you are rewriting the tax code, you should
have a uniform corporate rate, not a lower rate for
manufacturing. Some companies do both. Some are manufacturers,
some are service.
But to single out five companies and say, ``We are going to
have a lower manufacturing rate except for you,'' I think, is
absurd. Congress should not be picking winners or punitively
picking losers and saying, ``We are going to give a lower rate
for everybody but you. You are too big.'' That is just bad tax
Senator Menendez. Well, I agree. I will close, Mr.
Look, other than--sometimes we do want to incentivize an
effort. Manufacturing may be one of them. I just do not
understand how extracting oil from the ground is manufacturing,
because that would make everybody who owns a well with water a
water company that should be subject to getting the same
I do not think it makes the type of tax policy we would
like. But I thank you for your answers.
The Chairman. Thank you, Senator.
Before I turn to Senator Wyden, there is just one
observation I would like us all to consider. Section 199 was
enacted, as we all know, to replace something called the
Foreign Sales Corporation and Extraterritorial Income
exclusion, or FSC/ETI. FSC/ETI was in the law to counter the
advantage that VAT countries had because the VAT that, say, a
European country had was rebated back to the company. They gave
them a subsidy for exports. So VAT countries had an export
We took our regime, FSC/ETI, to--it was taken to WTO. It
was ruled, at WTO, illegal. So we then came up with our 199
manufacturing incentive. It was very crude, but it was a very
rough offset to deal with the ability of VAT countries to get a
subsidy on exports.
That is the origin of 199, which obviously raised the
question of the degree to which we should try to enact
something that deals with that VAT advantage.
Senator Wyden. Thank you, Mr. Chairman. I think it has been
a good hearing, Mr. Chairman, and I think we have sort of had a
wakeup call for just how tough this is going to be to actually
write a bill.
And let me start, if I might. For the last 5 years, I have
worked with two very thoughtful conservatives here in the
Senate, Senator Gregg and now Senator Coats, and another
Democrat, Senator Begich, and we produced an actual tax reform
It is modeled after the 1986 legislation, where you clean
out a lot of the clutter, hold down the rates, keep
progressivity, and it has been scored by the Joint Committee on
Taxation as essentially generating revenue.
One of the toughest parts of actually sitting down--and
Senator Gregg and I spent week after week after week for almost
2 years--was dealing with these issues we are talking about
here today, the energy question. And I came to those
discussions saying--highlighting a point we have heard this
morning: that natural gas is a huge strategic American
advantage. People ought to understand that right at the get-go.
And we ought to be talking about renewables, and some
renewables that hardly ever get mentioned around here like
hydropower and geothermal and other promising renewable
sources. And yet, at the same time, we were actually able to
write a bipartisan bill.
And two of the principles that we have touched on today I
think are going to be key, as Chairman Baucus and Senator Hatch
lead us now into tax reform, and one of them is that we cannot
have a double standard on tax breaks. We cannot have a double
standard on energy breaks. And today the oil and gas production
side gets a permanent tax break, while renewable energy gets a
temporary tax break, and often those expire. So we are going to
have to get rid of the double standard.
The second issue that we have sort of touched on a little
bit this morning is the idea that we ought to ``get rid of
everything.'' But when you say get rid of everything, it sort
of has an asterisk after it, because then we say intangible
drilling costs ought to be able to go forward as well.
So let me ask you four, because you have given us
thoughtful and valuable testimony: what would a level playing
field on the energy side look like so we can advance the cause
of energy independence, but also move us away from the double
standard and this question of let us get rid of everything,
without putting an asterisk by it?
Just go down the row. Level playing field. And, Senator
Nickles, you have been at a number of the discussions that took
place on tax reform, and you and I have talked particularly
about the effort I started with Senator Gregg.
So let us hear your thoughts--level playing field.
Mr. Nickles. A couple of comments. One, I think you kind of
threw in tax breaks, and then you said, well, renewables. There
is a difference between deductibility and subsidies. Most of
the renewables get subsidies. Wind, you are talking about,
what, $0.02 per kilowatt hour multiply.
So there is a difference between a subsidy and a deduction.
And I think allowing deductions makes sense. Tax credits do
not. Tax credits are basically a deduction off your taxes. So I
would make that kind of assessment. One is much more of a
subsidy than the other, which is basically normal operating
procedure. You could go into greater detail, but there are lots
of both throughout the tax code, not just in energy. I am
talking about throughout the tax code.
And I would also say, kind of since you are talking about a
broader theme, tax all income once. There is a lot of income
that is not taxed.
So the tax code allows deductions. Expenses--you have a
business and you write off your expenses, but in some cases,
you get tax credits. And then in some cases, you do not have to
report the income. You are not taxed on some income.
Tax it. So that way, you broaden the base and unify--or the
simpler way is to allow deductions, but not the credits.
Senator Wyden. Congressman Sharp?
Mr. Sharp. Well, first of all, I wish you well in finding
the answer to that. I do not pretend to have it, and I know
everybody in the country wants a level playing field in every
policy area, and we have never seen one. So I am a little
skeptical of our capacity to reach that.
Let me say something, though. I think the harder question
that you have been dealing with is, what is the purpose of what
you are trying to accomplish with the nature of the provision?
That is partly what Senator Nickles is getting at.
These provisions are not all equal in the way they operate.
And I do not pretend that I know this, but you folks are more
sophisticated on it, but let me give you an example of a
production tax credit.
I think it was extremely important in this infant industry
of wind. I do not have any doubt about that. What I do not know
is how important it really is in the future and how much you
can justify it at what level, because the goal was to buy down
costs, to get an infant industry going, and that has happened.
Now, I cannot tell you, I do not have the information on,
have we reached that sort of level? That is a very useful thing
for the future of this country and its international
competition and our environment and everything else. I do not
have any doubt about that.
But I do not think it deserves a permanent, long-term
guarantee that every kilowatt hour gets subsidized. In fact,
that just means we are subsidizing energy consumption, which,
in the long run, is not the smartest policy.
The same applies to the ethanol tax credit. Once you went
to a mandate, why would you engage in double policy that
subsidizes, as well as mandates? In wind, we have a number of
mandates in a number of States, the Renewable Portfolio
So one of the practical problems you have is, not only do
you need to look at these comparative things, but you need to
see what other policies at the Federal or State level are in
Now, frankly, at the moment, all of these policies are
politically under attack by various forces in various States
and around here, and so I do not know what the outcome is going
to be. So I have only made the answer harder, but I do not
honestly believe that the notion of whether it is permanent or
impermanent is the answer. Frankly, I think all of these things
need a radical and intense review about every 5 years anyway.
Senator Wyden. Dr. Jorgenson? I know my time is up, and
just if you two can give me an answer----
Dr. Jorgenson. With the chair's permission----
Senator Wyden [continuing]. On the level playing field.
Dr. Jorgenseon. With the chairman's indulgence. Senator
Wyden, I would like to commend you and your colleagues for your
excellent work on tax reform. I think we all need to keep in
mind that the Tax Reform Act of 1986 was the result of another
And I would like to commend to you the consideration of
taxes on energy use, which is not part of what you just
In order to have a pretty level playing field, we need to
recognize the environmental hidden costs associated with the
combustion of fossil fuels. Taxes based on energy use are going
to favor renewables permanently. They are going to favor
natural gas permanently. They are going to provide a fair tax
on petroleum permanently. And they are going to recognize the
hidden costs associated with coal.
We are talking about 1.5 percent of the GDP for that kind
of level playing field.
Senator Wyden. Mr. Hamm, quickly?
Mr. Hamm. Good question on the double standard. Things have
always been double standards, I think.
The Chairman. Very briefly, Mr. Hamm. I have Senators who
want to speak.
Mr. Hamm. We brought a trade case here in DC at the
Commerce Department one time when we were being dumped on by
Venezuela and some other countries that were dumping oil here
below their cost of production. And it was rejected, even
though steel, cement, everything else could have gone forward,
but not with oil. They ruled against us.
And subsidies, just one short comment. You want to talk
about credits and subsidies, I have drilled 17 ground holes in
a row and, let me tell you, Webster says that subsidies are a
payment. And I must have got to the wrong window, because
nobody paid me. [Laughter.]
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Snowe. Thank you, Mr. Chairman. And thank you for
holding this hearing. And I want to welcome our former
colleagues, Senator Nickles and Congressman Sharp--with whom I
served in the House of Representatives--who have had
distinguished careers and contributed much to the issues that
we are discussing here today both on energy and on tax policy.
And we are very fortunate to have this extraordinary panel with
such broad expertise in this critical area, though it is
regrettable that we do not have a national energy policy.
In fact, I was thinking, the last time we marked up an
energy bill was in 2007 here in the Finance Committee when oil
per barrel--the cost of oil per barrel was about $60. And today
it averages $86. Last year it was upwards of $95, which is the
issue that I want to get to today with respect to tax reform.
And to what degree do you believe that we should have any
tax credits for--incentives for energy efficiency and
conservation? Because I happen to think that you can maximize,
I think, the investments in this country, and certainly on the
part of the consumers, if they have the ability and the
opportunity to make those investments in weatherizing their
home, providing insulation, providing new forms of technology
It certainly has proven to be very beneficial. Consumers
last year paid the most for energy in the history of our
country, $650 billion. And so, while we see the highest levels
of oil and natural gas production in 14 years, we are also
seeing the highest consumer costs in the history of our
country, and I know that is true in Maine.
The New York Times, a few months ago, did a front-page
story on a couple who had virtually a very low income, $1,200 a
month, and yet their home heating bill was $3,600 for the
season. And a company came in and volunteered to insulate their
house, and they were able to improve the efficiency by 46
percent. It saved more than $1,200 with respect to their energy
The point is, I think that we need to provide some type of
tax credits. Or, on the other hand, when you have overall tax
reform, which I hope we will, because it is long overdue, how
low do the tax rates have to go so that it would benefit
consumers to make these investments otherwise if they did not
benefit from tax credits?
We have had tax credits for energy efficiency, and,
unfortunately, they were reduced to $500. In the stimulus plan,
they were up to $1,500 and a 20-percent tax credit of the
overall costs, and it was a huge bonanza for many people in
Maine, because we have the oldest housing stock in the country.
And so people did make those investments because it was
precisely that incentive. And I happen to think we should be
But I would like to hear from you. If we do not have these
types of tax credits, then how low do the tax rates have to go
in overall tax reform to accommodate this?
We could write 80-percent tax credits for companies, for
production for oil and gas companies, and yet only 20 percent
essentially of any type of tax credits for individuals.
Mr. Nickles. You do not really want my answer, do you?
Senator Snowe. No. [Laughter.]
Mr. Nickles. I am not a big fan of tax credits, but the
difference would be, one, you mentioned comparing companies to
individuals. One is certainly a subsidy for individuals. You
are writing the check for the individual, you are paying 20
percent of the cost. We are not asking the government to pay 20
percent of the cost of drilling a well.
We are allowing individuals to expense the cost of drilling
a well. There is a difference. That is not a subsidy, in my
But the good news is, Senator Snowe, I think help is on the
way. I think the lower natural gas prices--the Marcellus field
in the northeast is one of the most productive fields in the
world. It will grow. It will grow substantially. Natural gas
will have a competitive advantage in the United States.
I believe Harold Hamm or somebody, or maybe Congressman
Sharp, mentioned the fact that natural gas is selling for the
equivalent of about $12 to $20 per barrel or $2 per MCF or
$2.50 per MCF compared to Europe, which is like 5 times as
much, 6 times as much, 8 times as much.
So we have a competitive advantage for your industries now,
natural gas being much, much cheaper. And I know a lot of your
homes in the northeast and in Maine are on fuel oil, not
natural gas, but my guess is conversions will be taking place
and there will be a significant savings that homeowners will
enjoy for decades.
Senator Snowe. We are very limited in Maine, and it costs
about $1 million a mile to run the pipeline. So we have to have
incentives in that regard.
There are some areas in which they are making those
decisions to do it, but, obviously, it is not pervasive. We are
the most dependent State in the country on home heating oil.
Mr. Nickles. I can remember your many, many efforts for
low-income energy assistance over the years and wrestling with
you on some of those issues on the Budget Committee and so on,
and I compliment you for your effort and for your
I do think, though, the network expansion through the
distribution lines is increasing the connections so more and
more people can take advantage of this very abundant,
plentiful, cheap resource that we have in the United States.
Senator Snowe. Congressman Sharp?
Mr. Sharp. Well, Senator, I certainly, one, believe it is
important in this Nation for us to put an emphasis on
efficiency for economic, as well as environmental reasons. And
certainly, if we are going to have a tax code--as it is today,
it is stacked full of all kinds of incentives--this is a good
thing to do.
But I do not think that is the best long-term strategy. One
thing is, we need to help Americans understand that there are
going to be radical shifts in price and they need to prepare
for them as they make home decisions and all kinds of others,
and to pretend otherwise undercuts them. And that is not what
you have been doing, but I am suggesting that is what often
The second thing is, if we are going to look at these
incentives, you know better than I do that there are quite
different impacts on different homeowners and different
consumers. It depends on where you are. Did I buy my home
already upgraded and I have already paid for all these
upgrades, or am I the one who gets the taxpayer to pay for my
And then we get into the incentives--I think they have all
now expired--for purchasing vehicles that are huge, from an
individual's point of view. I do not think they can be
justified in terms of helping the consumer in that case. I
think the only legitimate justification is the effort to try to
bring some new technologies into the market or to bring an
infant industry into place.
But to be frank about it, I prefer the general approach
that Dr. Jorgenson has been recommending, which helps us answer
some of these broader questions.
Dr. Jorgenson. Senator, I think we have to recognize that
efficiency is an engineering concept, a technical concept. And
I think this committee ought to shift its focus to cost-
effectiveness; in other words, making the best use of every
Now, addressing the question you raised about efficiency
and conservation, the price system works. It produces massive
energy conservation. Oil use in this country has plummeted over
a period extending over decades. It is now 50 percent of what
it was as recently as the 1970s. That is all due to energy
Prices work in the home fuel market, as Congressman Sharp
just reminded us.
I am reading from a publication of the Energy Information
Administration, which I quoted earlier. I am looking at U.S.
Henry Hub natural gas price histories. My geography is not all
that great, and it certainly is not very recent. I believe that
Henry Hub is in the State of Oklahoma.
That is an area where prices of natural gas were as high as
$12.30 per 1,000 cubic feet as recently as 2008 in the midst of
the oil price run-up. And as Senator Nickles reminded us, it is
now $2.43. That is the figure from May 2012, which is the
We have to use the price system. That is the whole idea of
using a tax-neutral approach in order to achieve our energy
goals, just like our other goals, and the price system is
The Chairman. Your time has expired.
Senator Snowe. Thank you.
The Chairman. We can go back, if you want another round.
Senator Snowe. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Carper. Thanks, Mr. Chairman.
I just want to say to Senator Nickles, my old compadre--
young compadre--and Congressman Sharp, a good friend from the
House: it is just great to see both of you.
Dr. Jorgenson, I do not know either you or Mr. Hamm well,
but if each of you is half as good as I am hearing from my
colleagues, this is a great panel, and we are delighted that
you are here today.
I want to just follow up a little bit on what Senator
Coburn was saying earlier. I think there is reason to be
optimistic about the future of our country for a number of
reasons, but one of those is--and he alluded to some--we have
become Saudi Arabia. We are and have been for some time the
Saudi Arabia of coal. We are now apparently the Saudi Arabia of
I understand that we have become a net exporter of oil,
and, while we are not the top producer of oil in the world, I
think we might be number three or so. But we apparently have
more drills going today, more wells producing today, than I
think maybe the rest of the world combined, which is pretty
I chair the subcommittee that deals with nuclear safety,
and we have four brand-new nuclear power plants being built in
this country for the first time in 25 years, and I am
encouraged with the technology and the safety of the technology
CAFE, we had adopted CAFE legislation, fuel efficiency for
vehicles, in 2007. Congressman Sharp, that was something I know
you had a whole lot of interest in, and we appreciate your help
on that legislation. But we are ramping up fuel efficiency
standards for cars, trucks, and vans to I think about 36 miles
to a gallon by 2016, and I think by over 50 miles per gallon by
about a decade after that.
Our friends from GE, I think, are online for building a new
solar energy product out in Colorado that is going to be at
grid parity, we are told, by 2016. And we actually have the
ability to use natural gas, I think, to not just supplant coal
and make emissions of utility plants cleaner and safer, more
environmentally friendly, but also to use it to supplant the
use of diesel fuel in a lot of our large vehicles. That is all
pretty encouraging stuff, very encouraging stuff.
We have seen across the country windmill farms deployed.
They are producing a lot of electricity. Senator Snowe and I
have been working on an idea to try to incentivize the building
of windmill farms off of the east coast to capture the wind and
use a lot of that to supply some of the hybrid vehicles that
are being built, and going to be built in the decade to come.
One of our ideas is, rather than just providing a
production tax credit, which is what we use to incentivize the
building of windmills onshore, what we are suggesting is a
different kind of investment tax credit, which would be good
for a limited period of time--a limited offer. And it would
basically say the first 3,000 megawatts of generating capacity
developed off of our coast, or however many windmill farms were
developed that would use it--first one, second one, third one--
when you get to 3,000 megawatts, that is it, that is when the
tax credit goes away.
But the idea is just to get it started, show that we can do
this, and we can do it successfully.
I would just ask, if I could, Dr. Jorgenson, would you and
Congressman Sharp just respond to that idea? If we just did
rely on the production tax credit, we are not going to build
any windmill farms off of the U.S. anytime soon.
The investment tax credit is what is needed, and this is a
different kind of approach, not a permanent one, but as I said,
again, a limited time offer. What do you think?
Dr. Jorgenson or Congressman Sharp?
Dr. Jorgenson. My only question, Senator, is how you are
going to pay for this. That is all. I think that we have to
recognize the fact that the budgetary climate, like the world
oil market, has undergone a major change, and we need to take
that into account when we are discussing tax policy, when we
are formulating tax policy, and when we are enacting tax
And so I think we need to ask ourselves, is the market
doing the job? Is it sufficient to bring forward these
resources that you are talking about? And I think the fact is
that it is bringing forward enormous resources in oil, in
natural gas, and in renewables.
There are many applications of renewables, mainly wind
energy, which you and the Senator from Maine have been focusing
on, which are cost-effective independently of any sort of tax
breaks. And higher oil prices will make them cost-effective for
a very, very long period of time.
Senator Carper. Congressman Sharp?
Mr. Sharp. Senator, I am a great admirer of all your
considerable work on these issues. I am not really prepared to
comment on what you are asking, because we know that it is a
lot higher cost to do offshore than it is to do onshore, and I
think there is a serious cost-effectiveness question that I am
sure you are looking at as you consider just how far we ought
Of course, you have already taken into account that you
assume this is an infant industry that you are only trying to
Senator Carper. Just get them started.
Mr. Sharp. But I am not sure how much we really have to
learn about offshore, since so much of it is going on in
Europe. What we see happening in China, what we see happening
in Denmark, what we see happening in Great Britain, these can
be of benefit to us--they are not always competitive to us--and
we can let them subsidize and buy down the cost of
technologies, and then we can buy up the technologies earlier.
So I am not as quick to endorse that everything has to be
done in America, much as I love this country and believe we
ought to be the source of a lot of the technology.
Senator Carper. With respect to nuclear power, one of the
reasons why we are building some new nuclear power plants, as
you know, is because we provide some financial assistance and
encouragement through the Federal Government.
Let me go back to something that you said, Dr. Jorgenson,
if I could. I think you said we have seen a sea change in the
price of oil. And here in this country, I think we produce
about 2 percent of the world's oil. However, about 2 percent of
that is in oil reserves, and we use about 20 percent on a daily
basis of the oil that is consumed in the world.
When you look forward, if we look at China coming online,
we bought 11 million, 12 million cars last year, with this year
expecting to sell maybe 14 million, maybe next year 16 million,
in China. I think last year they caught up with us, and they
have a whole lot more people, as we know.
What are the implications for that consumption of oil in
those countries? What are the implications there for the price
of oil across the world?
Dr. Jorgenson. China is not alone, but the point is that
China and India and many countries which have finally
discovered the key to economic growth are going to be the
source of growth of demand for a very, very long time to come.
That is what is behind the sea change that has occurred in
world petroleum markets.
And we need to respond to that, and we will respond to it.
We will respond to it by having more energy efficient vehicles.
We will respond to it by using hybrid vehicles when that is
appropriate. And we will respond to it, as I said to Senator
Snowe, by energy conservation.
That is exactly what the price system is going to do. It is
also going to push us very strongly in the direction of
domestically produced fuel, natural gas that is available now
in large quantities due to the very highly skilled work that
has been done by Mr. Hamm and his colleagues in the oil and gas
Senator Carper. Now, when the U.S. auto industry and others
who sell cars, trucks, and vans here look at the ramp-up in
fuel efficiency standards in the next 10-15 years, I think they
have a concern that since we do not have a very high tax--at
least Federal tax; our State tax is really on motor fuels--they
are concerned within the auto industry that there is not going
to be an incentive for people, and the price of oil will go
down, and there is not going to be much of a market incentive
for people to buy energy-efficient cars. So we need to keep in
place the tax credits that we have to incentivize some of those
Would your message to the auto companies be, ``Chin up?''
Dr. Jorgenson. Well, let me just say, on tax policy--let us
just focus on that--my proposal that I described here for an
environmental tax system would raise the taxes at the Federal
level on motor fuels by about $0.39 per gallon at the pump. We
are talking about an incentive to conserve. We are talking
about an incentive to use more efficient vehicles. We are
talking about achieving those goals, not just writing them into
Senator Carper. Over what period of time would that be?
Dr. Jorgenson. This is a period of time--well, this is an
incentive that is going to be permanent, and we know that
Senator Carper. In terms of a ramp-up, it would be
implemented all at once or over a period of months or years?
Dr. Jorgenson. I would certainly put it--we are not talking
about big numbers here; $0.39 per gallon, I think that is
something that could be introduced in the code tomorrow.
Senator Carper. Thanks very much.
Mr. Nickles. You probably do not want to introduce it, not
before November. [Laughter.]
The Chairman. Let me just ask a question that came to my
mind, Dr. Jorgenson. You keep talking about letting pricing
determine technologies and development, and I understand that
is a big, huge driver. And I agree that oil demand has pushed
up commodity prices significantly, whether it is China, India,
or other developing countries.
But the question comes down to price volatility.
Essentially, I presume you are saying there is not much the tax
code can do about price volatility. If prices are going to be
volatile, they are going to be volatile.
Look at coal. The demand now is soft with demand for
natural gas rising. It is just that the world is so
complicated. There are so many different dynamics worldwide,
many of them unexpected.
So I presume when you say, let price decide, you are
saying, let the price be what it is and let entrepreneurs and
developers just do what they can and develop whatever they can
given the price signals they have seen.
Dr. Jorgenson. Well, I would like to go back to a point you
raised earlier, Senator. You said that we need to have a
diverse source of energy supply, and we do in this country.
That does not mean it has to be the same diverse supply every
year or every decade. Things change, including technology and
supply and tax policy. And so we need diversity. That is
something that contributes to low volatility.
But this country has, as Mr. Hamm would be the first to
tell you, a very competitive industry on the supply side of the
fossil fuels. We are a very competitive industry in the supply
of renewable energy sources, both solar and wind, and,
therefore, you should think, as you just suggested, in terms of
relying on these very, very well-structured markets.
But they are not going to do the job by themselves. That is
where we come to the hidden costs of energy combustion that I
have harped on over and over in this hearing. And so we should
not say that free markets are the answer, but nobody here has
said that. I have not heard a single voice in support of that
on the panel or from the Senators here who are present.
So we need to let markets work, but we have to recognize
the fact that the government has a role, and I have tried to
spell out what that should be.
The Chairman. Mr. Hamm, what should the government do with,
to use Dr. Jorgenson's term, externalities, that is, those
costs, environmental costs, associated with fossil fuel?
Mr. Hamm. Well, certainly, I think the marketplace will let
it work, and it has worked. More supply brings down the price
of oil. We see that that is coming on.
The Chairman. But the environmental costs of fossil fuels.
Mr. Hamm. The environmental costs of fossil fuels, as I see
it, in our business at least, are minimal. We are drilling up
there with eco pads, we are not disturbing much of the land. We
are very good stewards of the land. We have small costs of
production of these fossil fuels as far as environmental issues
The Chairman. Senator Hatch? Thank you.
Senator Hatch. I want to thank all four of you for being
here today. I have been listening very carefully, and I want to
compliment you, Mr. Hamm, for having the guts to do what you
I agree with you on the intangible drilling and development
cost deduction. It has been a tremendous benefit for the oil
industry, at least the independent oil industry in this
country, without which I do not think we would be as far along
as we are.
The real question that we have is, should we have any of
these tax expenditures or deductions in lieu of the fact that
we might reduce corporate tax rates low enough so that that
would take care of it?
But in your industry, it is a special industry, there is no
question about it, and there is a lot of risk involved, a lot
of money involved. You can go broke easier in your business
than almost any business I know, and I just want to compliment
you for what you have been able to accomplish and the guts that
you have had to get the things done.
We would like you to weigh in and help us to understand
what we really do need to do with regard to tax reform.
Professor, I have enjoyed your remarks very much today.
Dr. Jorgenson. Thank you.
Senator Hatch. And of course, Phil, it is great to see you
again, and Don. We appreciate all that you have had to say,
both of you. And this has been a very interesting hearing for
So with that, thank you.
The Chairman. Thank you, Senator. I might say, though--and
I do not know who first coined this phrase--there is no such
thing as a free lunch. But I am thinking of the tremendous gas
development in eastern Montana, but also the very significant
impacts on the community--schools, waste water treatment, clean
water, housing, huge adverse impacts.
Now, there are some very positive impacts, the revenue and
so forth, but there are huge adverse impacts to these local
communities. Law enforcement just cannot keep up with the boom-
and-bust that is developing in, let us say, eastern Montana.
So I do think we all have a role to play together to kind
of help each other with respect to those provisions.
Let me ask this. Is there anything else that anybody wants
to say, or has anybody said anything so outrageous that it
needs a response, from either side of the table?
Dr. Jorgenson. Could I correct an error?
The Chairman. Sure.
Dr. Jorgenson. The Henry Hub is in Louisiana. I realize
everybody else here knew that. I had to read it.
The Chairman. Everybody knew that. [Laughter.]
Thanks, everybody. This is, obviously, a very complex,
extremely important subject. It is not the last time we are
going to be dealing with it. So, I would just urge us to keep
working together as we solve it.
So thanks very much for taking the time. The hearing is
[Whereupon, at 12:07 p.m., the hearing was concluded.]
A P P E N D I X
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