Understanding Oil & Gas Economics

Kaiser Proposes Legislation; Bad News For Taxpayers
By Matthew Llewellyn, Founder
USA Conservative Movement
My personal blog

Before we even begin this story I want to explain some very simplified economics.

Imagine you own a small business. As an employer, you have overheard costs. You have to pay your rent, utilities, employees and of course for your merchandise. As time goes on you learn how to balance everything out so that you make a profit, or at the very least break even.

Let's imagine that as part of an incentive to get you to continue selling widgets, you are offered a tax break at the end of each quarter/fiscal year for each widget you buy. So what do you do? You buy some more widgets. It's a popular item, it's just expensive which is why you considered discontinuing it.

You get used to the price of it with the tax incentives offered and you balance everything out so your numbers break even and you are not in debt. Then the tax incentive disappears. Your company has become known for these widgets and you can't just stop selling them. If you did, your company would close. So what do you do? This is going to cost more money out of your pocket now. Something has to be done. But what?

Do you pass the costs along to your customer (the consumer)?

Do you pass it along to your employees by cutting benefits and freezing salaries?

Do you pass it along to the economy by starting a hiring freeze?

Do you pass it on to the employees by laying some of them off?

What do you do?

The truthful answer is this... you do all of them. When you run a business you can't play it small and hope for effective results. When you are faced with potential losses you act swiftly and largely to effect the most positive results.

The consumer will now pay more for the product. Some employees will lose their jobs, sending them to the unemployment line. Some will not be able to get jobs where they were once available, thus keeping them in the unemployment line. Employees will lose benefits, and possibly suffer from salary cuts, sending them to the government assistance lines.

Just to think... all that occurs from a little tax incentive being taken away. Now... let's multiply this into the billions.

If you live in Oklahoma you know who George Kaiser is. He is a philanthropist and a very successful entrepreneur. He is the chairman of BOK Financial Corporation and the controlling share-holder of Kaiser-Francis Oil Company, which is based in Tulsa, OK.

Mr. Kaiser has met with law makers, and, out of the kindness of his heart, having only the best interests of the tax payers in mind, has proposed a tax incentive currently in place for oil companies not be renewed.

Kaiser told the Oklahoma State House Appropriations & Budget Committee that the tax-payer is in much more need of a tax break than the oil & gas industry. Wow! What a man he is folks. Knowing this will effect his own oil company, this man, out of the kindness of his heart, and out of his concern for the tax-payers, wants to eliminate the oil and gas tax incentives. What a saint folks... or wait... is he?

Let's explain the "logic" of how this is supposed to work. More money is needed here and there and there and there, etc. Someone has to pay for it. With everything in place as it stands, the tax-payers may end up paying a few more dollars to cover everything. But, if the tax incentives are removed from oil & gas companies then the State can take the money from them and thus, rescue the tax payer. Kaiser & the sitting democrats will look like heroes folks. Just a thought here... who wants to bet that Kaiser will be making an announcement for office in the near future?

In the 2007 fiscal year, according to the Oklahoma Tax Commission, the rebates (which is the form of these incentives) totaled about $27 million dollars.

It seems like the modern day democrat/liberal mumbo jumbo doesn't it? Give the little guy a break and make those big, greedy oil companies pay their share. It's rather noble really. Robin Hood; Steal from the rich, give to the poor.

Folks... you can not trust democrats/liberals. There is always another card up their sleeve and as soon as they get you to look away, they'll play it.

Remember your course in economics from above? Good. Let's see what's really going to happen.

Bob Sullivan, of Sullivan and Co., has already expressed his concern about losing the incentive. He said it played a huge role in his company. Although Sullivan never used the incentive to make his decision for drilling (such as horizontal drilling, which is part of the incentive), he did use it to pay salaries or to pay for the drilling itself. (Are you still remembering the economics lesson? Good.)

So let's say the democrats get their way and this incentive goes away. What are these oil and gas companies going to do? Just like small business, they are going to have to make some changes. The executives will be faced with the same questions a small business would be. Do we raise prices? Do we lay off employees? Cut salaries? Freeze salaries? Get rid of benefits?

Guess what folks, in order to keep the business alive, they'll do whatever it's going to take. So what does that mean to you, the consumer... the tax payer who is supposed to be helped by this?

First and foremost, gas prices are going back up folks. When you take money away from another place, you have to get it from another. The company will pass the price onto us first folks. Contrary to what you may believe, they don't want to raise prices. The more it cost the less you buy, the less it cost, the more you buy. Nevertheless, they will increase the gas price. That's more money coming out of your pocket. (Wasn't this supposed to put more money in your pocket?)

As gas prices go up you will purchase less, and the oil and gas companies know this, and they will react to it before it even happens. Why? They know it's coming, they'll be prepared. As Bob Sullivan noted, they used money for among other things, paying employees. No more money = no more employees. Where does that send them? Unemployment line folks. Where else? Welfare line. Who pays for the welfare lines? We do. Where does the money come from? Our taxes. What happens when more people apply but only so much money is available? Democrats rush to the rescue. Legislation is rapidly pushed through to provide the money and guess what, you'll pay more taxes. Where do those come from? Right out of your pocket. (Wasn't this supposed to put more money in your pocket?)

If they think it will be necessary, they'll cut benefits. What does that mean? More visits to the emergency room. Why? No insurance. Everyone knows if you can't afford a doctor you go to the emergency room where you won't have to pay. Guess whose taxes are going to pay for that in the long run. That's right, and those are coming out of your pocket too. (Wasn't this supposed to put more money in your pocket?)

Don't forget now, this isn't just one company being hurt by this. Every single oil and gas company in this state will be doing the same things. Laying off employees, ordering hiring freezes, cutting salaries, getting rid of benefits, and let's not forget, raises their prices.

Incidentally... if you look at the really big picture, it gets even worse. Oil for your car goes up as well. What does that mean? Local ma' 'n' pa' oil changing businesses are going to pass that cost along to you. When they get to the point they can no longer afford to compete with bigger companies this will entirely put them out of business. Say good bye to a lot of small businesses, and a whole lot of jobs. I wonder where those people will all end up. Unemployment and welfare line perhaps? Sadly, the economy is already headed towards hiring freezes so don't expect these workers to be getting jobs anytime soon.

Who do you think is going to have to support all these employees who can't find work? That's right... the democrats will rush in, raise taxes, and you, again, will pay the price. (Wasn't this supposed to put more money in your pocket?)

When you look at this stuff folks you have to sit back and really take in the BIG picture. It's like the old saying, "if you kill a butterfly in the past it will dramatically change the entire future." When you play with taxes in the present, it will dramatically change the future. Once something is in motion changes WILL occur.

Of course this is the time of change. President Obama has promised change and keeping in line with it democrats around the country are following suit. Personally, I want to send an email telling them the same thing I do a Sonic car-hop, "keep the change."

Write your State Representatives and tell them you don't want this. Let your voice be heard folks. The only way to stop it is by doing something. If you say nothing, those are the results you will get every single time.

I bid you good day.