Gulf spill puts heat on petroleum industry

With the state mired in a familiar, fiscal swamp, budget writers are looking for ways to beg, borrow and steal revenues to close the state’s financial hole. One Democratic proposal for more money, pushed by both Senate Leader Darrell Steinberg and Assembly Speaker John Pérez, is a plan to raise about $1 billion via a new tax on oil production.

Pérez, D-Los Angeles, and Steinberg, D-Sacramento, disagree on how to spend the money, for now, but they concur that taxing oil companies in California is part of the road out of the state’s $19.1 billion hole. The proposal for an oil severance tax, once embraced by Gov. Arnold Schwarzenegger, is now opposed by the governor and legislative Republicans alike. For now.

But representatives of California’s oil companies are politically astute. They recognize the state is in dire financial straits and that their own popularity – which was never particularly high in eco-friendly California – has taken an additional hit because of the ongoing oil spill in the Gulf of Mexico.

What’s even more worrisome for those same oil companies is that Democrats believe they have devised a way to hike oil taxes without Republican votes in the Legislature. (This involves a complicated set of budget maneuvers, undoing a tax-swap known around the Capitol as the “triple flip” and replacing half of it with an oil severance tax. See us after class if you want more of the gory details.)

If and when that happens, the state budget will likely wind up in court. But the state’s large oil producers don’t want to let it get that far. Led by Chevron, the largest company in the entire state, the oil companies are now trying to frame the oil tax debate in the same way Democrats are selling their budget framework.


Democrats say Gov. Arnold Schwarzenegger’s budget plan will cost the state 44,000 jobs and that their proposal will save jobs. When asked about the impact of an oil severance tax in California, Chevron’s Steve Burns says the proposal will cost California jobs.

Burns says the oil severance tax idea unfairly penalizes companies that produce oil in California. He says by taxing oil extracted from California wells “you put California producers at a competitive disadvantage. Our view is, why would you want to penalize California companies?”

Burns said the oil severance proposals floating around the Capitol include a “punitive tax” that will force companies to lay off workers in the state. “If it’s more expensive to produce oil than in other places, you won’t invest more” in California. “Investment flows to the point of least resistance,” he said.

Chevron says they provide 10,000 jobs in California alone, and cite statistics indicating another 60,000 are linked to the company’s business in California. Burns says some of those jobs will be lost if lawmakers agree on a severance tax. “I’m a little surprised that they continue to ride this horse,” he said.

The idea to tax oil production is not a new one. It dates back to Pat Brown’s time in the governor’s office. More recently, in 2006 to be exact, the idea was before voters in the form of  Proposition 87. That proposal was overwhelmingly rejected.

But supporters of the tax now see a political opportunity. They argue that public unhappiness with the Gulf disaster, coupled with the state’s dire financial condition, could create the perfect storm to push through an oil severance tax after four decades of discussion. They point to the scuttling of the controversial Tranquillon Ridge project off the Santa Barbara coast, a casualty of the negative fallout from the Gulf spill.

Assembly member Alberto Torrico, D-Fremont, authored his own oil severance tax last month. “While California is struggling with record deficits and education funding is being gutted, big oil is enjoying historic profits,” says Torrico.

But Republicans aren’t budging.  “I don’t think there is any appetite for any more taxes right now,” says Assemblyman Bill Berryhill, R- Ceres.

“We’ve got to concentrate right now on the reduction we can do on the budget before we can even consider the possibility of any taxes. We’re running all the producers out of the state…the only way we’re going to get the state back on its feet is to do something positive (for business), not something regulative.”

Berryhill doesn’t think the oil severance tax has much of a chance at passing, but in this year’s budget crunch, “nothing’s impossible – we’ll see how it goes.”

 California oil companies say they already pay a de facto severance tax because their property taxes on oil wells include assessed values of the oil in the ground.

 In 2006, voters were presented with Proposition 87 – an initiative that would have charged oil companies up to 6 percent in a severance tax, depending on market value. Revenues from the tax levy were slated to fund a $4 billion program “to reduce petroleum consumption by 25 percent, with research and production incentives for alternative energy, alternative energy vehicles, energy efficient technologies, and for education and training,” according to the attorney general’s official proposition title and summary.

Opponents, led by the oil industry, spent $94 million to defeat it. More than $83 million of that came from major oil companies, including Chevron and Aera, a joint operation of Shell and Exxon. Even BP stepped in to contribute, although the company is not based in California.

In the opposition campaign, increased fuel costs were cited as among the possible negative consequences of a severance tax. The study financed by oil companies, conducted by the Law and Economics Group (LECG) said oil producers would simply pass along the cost of additional taxes to fuel consumers.

“Because the transportation, distribution, and refining costs of importing are greater than the corresponding costs associated with California oil production, consumers will pay higher gasoline prices as a result of the severance tax.”

The LECG report, often cited by the industry and other tax opponents, has become a key document in the debate over oil severance taxes. The report stated that California oil already was among the highest taxed oil in the nation due to property and corporation taxes. Imposing more taxes on California oil would reduce domestic production, causing a greater dependence on foreign oil and an estimated loss of 9,850 jobs, according to the LECG report.  

The California Tax Reform Association (CTRA), which supports the severance tax, says imposing the levy would not affect consumers at the pump anyhow, since the price of a barrel of oil is determined solely by its world market value.

 The California Energy Commission says both California and Alaska have seen significant decreases in production since 1996, two years after California refineries began buying more foreign oil than domestic. In 2005, about 37 percent of crude in California refineries actually came from beneath California soil.  
Foreign oil is, among other things, cheaper to refine. California crude is usually very heavy and therefore more costly to transform into gasoline, says the Energy Commission. Foreign oil tends to be significantly lighter and cheaper to refine.

Local governments also could take a financial hit from a severance tax. That’s because the proposed tax could cut into the local counties’ property tax revenues.
If oil-producing properties in California are subject to additional taxes, they may attract fewer oil produce
rs. That, in turn, could threaten the overall property value of certain oil-producing counties. When the value drops, so does the amount of property tax owed to local governments.
Even backers of the oil severance tax acknowledge that a decrease in local property tax revenues is possible, but they note that any loss would be reimbursed by the state. For example, Kern County, the country’s largest oil producing county, might lose between $12.7 and 15.9 million due to the severance tax, estimates the LECG.  

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