fledgling industries that are not yet able to raise capital. any argument made for eliminating renewable energy tax incentives is intellectually dishonest if it doesn't 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 and natural gas, coal and expand alternative fuels and renewable energies, including all of them, and i won't name them because you know them. american imports almost 50%, i think it's a little bit less than 50% 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 more competitive, us more competitive in the global economy. however, there is a long history using the tax code to promote energy policy starting with intangible drilling costs and percentage depletion provisions that are almost 100 years old. 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 intangible drilling costs are exceptions to the rule that such expenses should be capitalized and deducted over years. it seems the primary benefit of the intangible drilling costs provisions is that it provides 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 mr. hamm, does this conflict with the key objectives of tax reform to lower the rates and broaden the base? wouldn't lower tax rates also provide more cash for additional exploring and drilling, and also if the r & d and accelerated depletion provisions are reviewed in the complex tax reform, do you agree that intangible tax reform and percentage depletion provision should also be reviewed? >> senator grassley, you haven't changed a bit. i remember having this debate for about the last 30 years. a couple of comments. one, intangible drilling costs is expensing out-of-pocket business expense. that's wages. you compared it to r & d. r & d is a credit. there's 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 -- i don't compare the two. i'm all in favor of putting basically everything on the table. it's 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 -- if you don't allow industries to expense their out-of-pocket expenses as harold hamm said, you're going to have some real negative consequences. you won't have $2 gas. i don't think this committee or congress wants to do something that's going to have an adverse economic impact. this happens to be the shale gas revolution as well as the oil revolution is one of the best things that's happened in this country economically in years. congress doesn't want to mess it up.

but i think you ought to look at every credit because that is -- any credit is by nature, it's congress saying we think that this is even more valuable than the dollar you spend. you spend $1 and we're going to reduce your taxes by a dollar, so i'm all in favor of putting a lot of credits and deductions and tax-exempts. we've go the a lot of tax-exempts that aren't taxed. tax everything once. you broaden the scope a bunch by doing so. >> mr. hamm? >> i agree. we capitalize, all the hardware out there, we capitalize that. we do write off the wages. in regard to drilling and, you know, the deductibles in that regard, and it is a provision that encourages new exploration, and we need to look at down the road what's going to happen down the road?

right now we're using 91 million barrels of oil per day. here in the u.s. we're producing about 10%. if you add to the chart the petroleum liquids to that chart, we're at about 9 million barrels a day, so we're producing about 10% of our petroleum needs today, and that's estimated to be going up by 2035, 30% more to 112 million barrels. if we're going to produce our part of that in the future, we're going to have to have incentives like we have in place to do that. >> 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's strengthening our economy. i've 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're not dependent upon any one source, and, third, we want to have 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've got out there. now, on -- on tax expenditures, i know there's a lot of talk about reducing tax expenditures and the strong arguments have been made as to why those that relate to the oil and gas industry, at least the intangible drilling costs, ought to be maintained. i gather though, senator nickles' view is we ought to repeal section 199 for everybody, not just for the oil and gas industry.

>> i would think you -- when you're doing corporate reform, having a uniform corporate rate, not a lower rate for manufacturers, would make sense. that's what i argued when i was on the committee, and i haven't changed my position. >> yeah. one of the -- one of the things that's -- that's 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 tax code. 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 then we put them in place again, and then we let them expire again.

i'd just be interested in the panel's view as to whether whatever we do with these tax 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 credit, some production of the tax credit ought to be 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 relate to oil and gas production are a permanent part of the tax code. dr. jorgenson, did you have a thought on any of that? >> 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 don't have to do with

energy technology. there's something that hasn't been mentioned that i think we need to focus on. senator baucus i think alluded to this, but let's put it front and center. in december 1998, i'm reading from a publication of the energy information administration, the cost of a barrel of oil in cushing, oklahoma, this is west texas intermediate, the spot price f.o.b. 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, seven times greater. we have had an energy price crisis. you're all familiar with that. everybody here has lived through this.

that peaked with the price of june 2008. again, cushing, oklahoma, west texas intermediate, of $133.88. now what is the difference between this experience and our previous experience? these prices have not declined in '73 it was followed by a price collapse, in '79 it was followed by a price collapse, in '81 it was followed by a price collapse. 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'm not against treating these symmetrically with every other form of production. i'm talking about oil and natural gas, but the point is that once you do treat them

symmetrically, you've got to reckon with the fact that we've seen a sea change in the world petroleum market. we have prices that are seven times as high as they were as recently as 1988. that is the most relevant fact about incentives that we're here to discuss. >> can i respond? >> go right ahead. >> sure. >> dr. jorgenson picked the lowest year in history almost. in 1998, if anybody here remembers that, is when our friends from venezuela was dumping oil into america, trying to put all the stripper producers particularly, high-cost producers in america out of business. the price before that had been in the $20 range, twice that, after, that you know, they responded and came back to that, after that procedure was changed, and the administration

was changed in venezuela, so that -- that's how that happened. when the bakken began up there in early 2000, the price of oil was about $25 a barrel, so, yes, we've seen prices spike at $147 for one day, and then they came back, so right now we're, you know, at about an $80 price range, close to that. we're about $15 under branch price, which is considered to be world price here in the midwest, so prices go up and they go down. >> thank you, mr. hamm. >> senator coburn. >> thank you, mr. chairman, and thanks to the individuals testifying. i'm having trouble getting this. senator enzi and i are the only two accountants on this committee, and the thing that i

can't figure out is what we -- what the obvious is not being seen. you eliminate intangible drilling costs, actually you decrease revenue to the federal government and here's why. you take away the capital for exploration. you thereby decrease the amount of revenues and the exploration in this country. if you -- if you had no change in exploration and no change in discoveries, the tax revenue to the federal government would be the same over ten years as it is with intangible drilling costs. there's no difference to what the government takes in. one is a delayed tax versus a fully captured tax at the time of the expensing, so i don't get what the debate is. what i don't understand is why when we're 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 would have been sent out spent here tax-free, not borrowed to create a stimulus, totally tax-free and

energy independence for our country, why wouldn't we do everything we can to do that, still within the parameters that dr. jorgenson set out in terms of the clean environment? i don't 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're 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's going to put us at a major advantage over everybody in the world in terms of raw materials from almost everything that's 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's 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're going to shut down a third of the exploration. and, by the way, they just -- they just pay out $100 billion a year. 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% more against earnings than any other industry in the country, and now we're talking about lessening that, but more importantly we're 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 have said we're not going to amortize those. we're going to allow those to be written off, just like we did with 100% write-off that we gave in terms of new investments 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? >> senator coburn, you're going to be very surprised to hear this answer because i'm going to agree with everything you said. this is not a debate about tax expenditures. that is second order. let's get the big picture in mind. we're not talking about big revenue here. these expenditures have been limited for years to the independents. that's what mr. hamm discussed with us in his written testimony, so i think we are all on the same page here. what we're not apparently on the same page about is essentially what the price system is doing for the energy sector. you're an accountant, or were, mr. 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's going to result from the new structure of oil prices in the world economy, you're fired. you're no longer mr. hamm's accountant, if he's done project analysis ignoring energy prices, and that's what we need to absorb. our market-based economy is working. it's working toward energy independence, and it's working toward a more effective allocation of energy resources toward the domestic sector, which you've emphasized in your question, senator coburn. >> just -- 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 productive capacity. >> thank you, senator. senator menendez. thank you, mr. chairman, thank

you, gentlemen, for your testimony. senator nickles, you know, 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 it allows them to write off these foreign taxes as a tax credit in the united states, and in turn, in my view, short changes the american treasury and the american taxpayer. why should the american taxpayer be in the business of subsidizing foreign oil exploration? why shouldn't we 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 menendez, i couldn't disagree with you more. >> i'm not surprised, but i still want to hear your rationale. >> well, i do. you're talking about dual capacity and you're talking about the ability to deduct overseas taxes against the tax amount paid. i think if your proposal was successful, we wouldn't have international oil companies based in the united states. you would give such a tax advantage to -- to total, bp, lukoil, other international oil companies who wouldn't be facing this tax penalty, double tax would be the result of your proposal, in my opinion, that they wouldn't have to be

headquartered here. i'm speaking for myself, not for anybody i work with, but -- but tax policy has consequences. windfall profits tax had consequences. this would have tax consequences. you'd put us at such a competitive disadvantage internationally that the growth in international exploration wouldn't be done by u.s. companies. >> but you wouldn't deny that in essence what is happening here is that the same company the united states to drill in federal lands or waters would pay a royalty, and in essence, they are paying a royalty. the only thing they are disguising that royalty as a tax? >> i wouldn't agree with that characterization one iota. treasury has -- has worked -- irs has worked for years with companies to figure out the complicated, and they are complicated, i will grant you that, i'm going to say allocations.

talking about royalties, talking about taxes, 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 and years, but i think if you're not careful, you could -- you could have a lot of unintended consequences. >> well, i'd be happy to get involved in talking about how we tax all u.s. companies foreign income. i think that would be great, but when you -- what you criticized in your testimony that i read 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. 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 next decade. 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, quote, not providing the capital that is fueling america's march towards energy independence. i agree on that view. the reality is that the marketplace has dictated that they will make more than enough money to continue to pursue their exploration whether here or abroad. doesn't seem to me that they need $24 billion our collective money as taxpayers when they will make $1 trillion in profits, not proceeds, over the next decade. i don't think they are going to deter their march towards oil exploration if they lose those $24 billion over the next decade. >> one, i don't think it's a subsidy. two, i think you -- 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'll 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 -- a terrible result. >> it's hard to believe that $1 trillion in profit isn't enough for you to pursue -- a company to pursue their own interest. one final question. you seem to be from all the testimony i read, and someone can correct me if i'm mistaken on that, the one witness who is willing to defend the fact that the big five oil companies received 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? >> well, one, i don't defend 199 period. i think congress, when you're

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're going to have a lower manufacturing rate except for you, i think, is absurd. congress shouldn't be picking winners or punitively picking losers and say we'll give a lower rate for everybody but you, you're just too big. that's just bad tax policy. >> i agree, i'll close, mr. chairman, look, other than -- sometimes we do want to incentivize an effort, manufacturing maybe one of them. i just don't understand how extracting oil from the ground is manufacturing because that would make everybody who owns a well with water, you know, a water company that should be subject to getting the same deduction. i don't think it -- it makes the type of tax policy we'd like, but i thank you for your answers. >> thank you, senator.

before i turn to senator wyden, one observation i'd like all of us to consider. 199 was enacted, as we all know, to replace something called fisk eti which was in the law to counter the advantage that v.a.t. countries had, the v.a.t., the european countries were rebated back to the countries that gave them exports. that company had export subsidies. we took our regime, fisk eti to -- taking it and the wto has ruled it illegal and then we came up with our 199 manufacturing incentive, very crude, but it was a very rough offset to deal with the ability of v.a.t. countries to get a subsidy on exports. that's the origin of 199 which

raised the question, we should try to enact something that deals with that v.a.t. advantage. senator wyden. >> thank you, mr. chairman. i think it's been a good hearing, mr. chairman, and i think we've sort of had a wake-up 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 five years i've worked with two very thoughtful conservatives here in the senate, senator gregg and now senator coates and another democrat senator begich and we've produced a tax reform bill. it's modelled after the '86 legislation where you clean out a lot of the clutter, hold down the rates and keep progressivity, and it's been joined by the tax committee 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 two years, was dealing with these issues that we're talking

about here today, the energy question, and i came to those discussions saying, highlighting a point we've heard this morning, that natural gas is a huge, strategic american advantage. i mean, 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've 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 can't have a double standard on tax breaks. we can't 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're going to have to get rid of the double standard. the second issue that we've sort of touched on a little bit this morning is the idea that we ought to, quote, 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've 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's get rid of everything but not put an asterisk by it, just go down the row, level playing field, and senator nickles, you've been at