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Friday, June 22, 2012

The Potential Upside of Captivity

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With states looking to raise taxes on oil and gas production and better regulate the most controversial drilling practices, we can expect industry to soon trot out its tried and true argument against such moves. As they did here in Colorado a few years back when our governor proposed a hike in severance levies, oil and gas companies will promise to leave any place where taxes or regulation increase.

Such blackmail deftly plays to our reflexive fears of job outsourcing—and those fears are understandable. Indeed, in a "free-trade" era that has seen corporate decision-makers dream of putting "every plant you own on a barge" and shifting production to the lowest-wage nations on earth (a direct quote from GE's then-CEO Jack Welch), offshoring is very real in too many industries.

But, as a new study highlights, when it comes to natural resource extraction, there's a little secret the oil and gas industry doesn't want voters to know: namely, that the "we will leave if you tax or regulate us!" threats are hollow when it comes to fossil fuels thanks to their captive status.

Before we get to the study, remember how energy economics fundamentally differ from those of other industries. Specifically, remember that unlike textile or electronics firms, whose raw material inputs are common and that can therefore move production all over the world, fossil fuel companies are extracting a resource that is relatively rare, altogether finite and—most important—tied to specific geographies. Additionally, because of both scarcity and consumers' insatiable demand, these resources retain their long-term value like few other commodities, meaning if one company leaves a fossil-fuel-rich area, another will surely move in to exploit the vacuum.

That brings us to the analysis by the nonpartisan Headwaters Economics, which proves this reality. Contrasting oil drilling investment in Montana and North Dakota, the study found that "oil production has more than doubled in North Dakota, where the oil resource is best, while Montana's production, where the tax rate is roughly half, has declined by 14 percent." In other words, despite Montana trying to lure oil companies to the state with lower extraction taxes, it has failed because the best resources are geologically trapped in North Dakota.

This dynamic has been replicated in almost every area with valuable energy resources. Wyoming, for example, has a relatively high severance tax compared to its neighbors—and is nonetheless experiencing a drilling boom because it has some of the best natural gas resources in the world. Likewise, as ProPublica reports, states that have tightened their environmental regulations have subsequently seen near-record levels of fossil fuel extraction simply because energy development remains hugely profitable. Meanwhile, energy states that have short-sightedly succumbed to hysterical fear-mongering about energy-industry job flight have needlessly deprived themselves of billions of dollars in public resources.

Way back in 2007, I wrote a column about the potential for the rise of "captive industry populism" whereby the public strategically leverages its power over industries that are inherently anchored to a given locale. You can imagine such policies affecting everything from tourism to transportation to food production to drinking water to, yes, energy.

Because of corporate money's influence, of course, such a politics hasn't yet emerged. But if the economy continues to struggle, you can bet it will—as it should. After all, if it's just "good business" for unmoored companies to use the threat of flight to get local governments to reduce taxes or regulation, then its similarly good business for local governments to be just as hard-nosed when dealing with companies that can't back up such threats with action.

Anything less would be a needless double standard—and another bilking of taxpayers.

David Sirota is a best-selling author of the new book "Back to Our Future: How the 1980s Explain the World We Live In Now." He hosts the morning show on AM760 in Colorado. Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

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