Obama Energy Policy Helps Hugo Chavez, Hu Jintao

| by John Rafuse

News of new drilling scheduled to begin next year in Cuba’s territorial waters – just some 50 miles from Florida’s coast – represents a dangerous irony.

As the U.S. maintains its ban on deepwater drilling, a Spanish energy company is preparing new exploratory wells in the Gulf of Mexico with the help of a Chinese-made rig. And state-owned oil companies from as far away as Norway, Vietnam and Malaysia are lined up to acquire Cuban drilling leases.

While these developments add perspective to the Obama administration’s counter-productive drilling moratorium, they also reveal a far more ironic – and dangerous – policy proposal brewing in Washington: punitive new taxes directed only at American energy companies.

When Congress returns to the nation’s capital this November, the Senate’s agenda will include ending a key tax incentive provided to American energy companies who work overseas. The government calls these companies ‘dual capacity’ taxpayers; this incentive protects U.S.-based multinationals against double taxation on income generated abroad. America’s oil and gas companies pay hefty taxes and royalties to the nations in which they operate. This tax provision prevents those companies from paying twice that tax.

If these important tax protections are removed – as the White House FY2011 budget proposes – America’s future energy, economic, and environmental security will be endangered.

By removing the ‘dual capacity’ tax credit for American oil and gas companies, the U.S. government will give a major boost to foreign competitors – some of which are preparing to drill off of Cuba’s (i.e. Florida’s) shores next year. An excellent summation of the anti-competitive effects this tax increase will have has been provided by industry-leading analysts at IHS CERA. In a new report, energy analysts Daniel Yergin and David Hobbs explain:


Companies from other countries such as the United Kingdom, Netherlands, Russia, Canada, Norway, Italy and China pay less by way of additional taxes on their repatriated income and are therefore able to compete more effectively against U.S.-based companies – in some cases enabling them to afford to bid twice as much for oil and gas concessions.

If our legislators remove foreign-source income tax protections, corporations like BP profit at the expense of American firms. Such a move would also give a leg up to other foreign companies that are held to less-stringent environmental regulations and who use less technologically-advanced equipment. As New York Times reporter Clifford Krauss notes:

The nascent oil industry in Cuba is far less prepared to handle a major spill than even the American industry was at the time of the BP spill. Cuba has neither the submarine robots needed to fix deepwater rig equipment nor the platforms available to begin drilling relief wells on short notice. 

Foreign governments already own approximately 88 percent of proven oil and gas reserves worldwide. With the U.S. economy continuing at a haggard pace while our own offshore reserves are still restricted, we need America’s energy companies to be as strong as ever so they can compete on a level playing field overseas. Eliminating the double tax protections would have the opposite effect.