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 a number of the discussions that took place on tax reform, and you and i have talked particularly about the effort i started with senator gregg, so let's hear your thoughts, level playing field. >> a couple of comments. one, i think you kind of threw in tax breaks and then you said, well, renewables. there's a difference between deductibility and subsidies. most of the renewables gets subsidies, wind, you're talking about 2 cents per kilowatt hour multiply so there's a difference between a subsidy and a deduction, and i think allowing deductions makes sense. tax credits don't. tax credits are basically a deduction off your taxes, so i -- i would make that kind of assessment. one is much more of a subsidy than the other which is basically normal operating

procedure. you could go into greater detail, but there's lots of both throughout the tax code, not just in energy. i'm talking about throughout the tax code, and i would also say kind of since you're talking about a broader theme. tax all the income wants. a lot of incomes aren't tax. allows deductions, extensions. you have a business and you write your expenses and in some cases you get tax credits and in some cases you don't have to report the income. you're not taxed on some income. tax it, so that way you broaden the base, and the unifying or the simpler is to allow deductions but not the credits. >> congressman sharp? >> well, first of all, i wish you well in finding the answer to that. i don't pretend to have it, and i know everybody in the country wants a level playing field in every policy area and we've never seen one so i'm a little skeptical of our capacity to reach that. let me say something though. i think the harder question, as you've been dealing with, is

what is the purpose of what you're trying to accomplish with the nature of the provision that's partly what senator nickles is getting at. these provisions are not all equal in the way they operate, and i don't pretend that i know this, but you folks are more sophisticated but let me give you an example of the production tax credit. i think it was extremely important in this infant industry of wind. i don't have any doubt about that. what i don't know is how important it really is in the future and how much you can justify at what level because the goal was to buy down costs, to get an infant industry going, and that has happened. now, i can't tell you. i don't have the information on have we reached that sort of level. that is a very useful thing to the future of this country and the international competition and our need for environment and everything else. i don't have any doubt about that, but i don't think it deserves a permanent long-term guarantee that every kilowatt hour gets subsidized. that just means we're subsidizing energy consumption which in the long run is not the

smartest policy. the same applies to the ethanol tax credit. once you went to a mandate, why would you engage in double policy that subsidizes as well as mandates, and in wind, we have a number of mandates in a number of states. the rps, so one of the problems you have is not only do you need to look at these comparative things, but you need to see what other policies at the federal or state level are in place. now, frankly at the moment, all of these policies are politically under attack by various forces and various states and around there so i don't know what the outcome will be. i've only made your -- the answer harder, but i don't honestly believe that the notion of whether it's permanent or impermanent is the answer. frankly i think all of these things need radical, intense review about every five years anyway. >> dr. jorgenson, i know my time is up, and if you two can give me your take on the level playing field. >> with the chairman's indulgence, senator wyden, i'd like to commend you and your colleagues for your excellent

work on tax reform. i think we all need to keep in mind that the tax reform act of 1986 was the result of another bipartisan effort, and i'd like to commend to you the consideration of taxes on energy use, which is not part of what you just described. in order to have a truly level playing field, we need to recognize the environmental hidden costs associated with a combustion of fossil fuels. taxes based on energy use are going to favor renewables permanently. they are going to favor natural gas permanently. they are going to provide a fair tax on petroleum permanently, and they are going to recognize the hidden costs associated with coal.

we're talking about 1.5% of the gdp for that kind of a level playing field. >> mr. hamm, quickly. >> good question on the double standard. things have always been double standards. >> very briefly, mr. hamm. i've got senators who want to speak. >> okay. you know, we brought a case here in d.c. at the commerce department one time when we was being dumped on by venezuela and some other countries, dumping oil in here below their cost of reduction and it was rejected even though everything else could have gone forward, but not with oil, and subsidies, just one short comment, you know, you talked about credits and subsidies. i've drilled 17 draw holes in a row, and let me tell you webster says that subsidies is a payment, and i must have gone to the wrong window because nobody paid me. >> thank you, mr. chairman. >> thank you. senator snowe. >> thank you, mr. chairman, thank you for holding this

hearing, and i want to welcome the former colleagues, senator nickles and congressman sharp with whom i served in the house of representatives and who have had distinguished careers and contributed much to the issues that we're discussing here today, both on energy and on tax policy, and we're very fortunate to have this extraordinary panel with such broad expertise in this critical area which is regrettable we don't even have a national energy policy. in fact, i was thinking, the last time we marked up energy bill was in 2007 here in the finance committee when oil per barrel -- cost of oil per barrel was about $60, and today it averages $86. last year it was upwards of $95 which is the issue that i want to get to today with respect to tax reform. and to what degree do you believe that we should have any

tax credits for incentives for energy efficiency and conservation because i happen to think that you can maximize, i think, the investments in this country and certainly on the part of the consumers. if they have the ability and opportunity to make those investments and, you know, weatherizing their home, providing insulation, providing new forms of technology that serve, it's certainly proven to be very beneficial. consumers last year paid the most on energy in the history of our country, $650 billion, and so while we've seen the highest levels of oil and natural gas production in 14 years, we're also seeing the highest consumer costs in the history of our country. and i know that's true in maine. the "new york times" a few months ago did a front-page story on a couple who had virtually, you know, very little income, $1,200 a month, and yet their home heating bill was

$3,600 for the season, and a company came in and volunteered to insulate their house, and they were able to improve the with respect to their energy bill. the point is, i think that we need to provide some type of tax credits, or on the other hand, to have overall tax reform which i hope we will. long overdue. how low do the tax rates have to go to make these consumers benefit otherwise if they didn't benefit from tax credits? i've had tax credits for energy efficiency unfortunately get reduced to $500. during the stimulus plan, it was up to $1500. at 20% tax credit of the overall costs. and it was a huge bonanza for many many people in maine

because we have the oldest housing stock in the country. and so people did make those investments because it was precisely that incentive. and i happen to think we should be encouraging that. but i'd like to hear from you, if we don't have these types of tax credits then how low does have the tax credit have to go to accommodate? 80% tax credits for companies, you know, production for oil and gas companies. and yet only 20% essentially of any type of tax credits for individuals. senator nickels? >> you don't really want my answer, do you? >> no. i'm not a big fan of tax credits. but the difference would be one, you mentioned in pairing companies to individuals. one is certainly a subsidy for individuals. you're writing the check for the individual. you're paying 20% of the cost. we're not asking the government

to pay 20% of the cost of drilling a well. we're allowing individuals to expense the cost of drilling the well. there's a difference, that's not a subsidy in my opinion. but the good news is senator snowe, i think help is on the way. i think the lower gas prices in marcellus field and northeast is one of the most productive fields in the world. it will grow. it will grow substantially. natural gas will have the competitive advantage in the united states. i believe harold hamm or make congressman sharp mentioned the fact that natural gas is selling for the equivalent of about $12 to $20 per barrel or $2 per mcf, or 2 per mcf compared to europe which is five times as much, six times as much, eight times as much. so we have advantages now. natural gas will be much, much

cheaper. i know a lot of your homes in the northeast and maine are on fuel oil, and my prediction is there will be a significant savings that homeowners will enjoy for decades. >> question have great limiteded in maine it will cost to run the pipelines about $1 million a mile. we to have incentives. there are mare be plans to do it, but obviously, it's not pervasive. >> i remember your many, many efforts for low-income energy assistance over the years. and wrestling with you on some of those issues on the budget committee and so on. i compliment you for your effort and your for representation. i do think, though, the network expansion through the distribution lines is increasing the pipes throughout the connection so more and more people can take advantage of this very abundant plentiful

cheap resource we have the united states. >> congressman sharp. >> senator, i believe it's important in this nation to put emphasis on efficiency for economic reasons certainly, as it is today, as staffed full of all incentive this is the good thing to do. for one, we need to make americans understand there are going to be radical shifts in price and they need to prepare for it as they make all kinds of home systems and that often is what happens. the second thing is, if we're going to look at these incentives, you know better than i do, there are quite different impacts on homeowners and consumers. did i buy my home and it was upgraded or do i pay for the upgrades or am i the one that

gets the taxpayer to pay for my updads? then we get into the incentives that i think have expired for purchasing vehicles that were huge from an individual's point of view. i don't think they can be justified in terms of helping the consumer in that case. i think the only legitimate justification is the effort to try to bring some new technologies in the as a matter of fact. or to bring, you know, an industry in place. but to be frank about it, i prefer the general approach that dr. jurgensen has been which helps answer some of these broader questions. >> senator, i think we have to recognize that efficiency is an energy concept, a technical concept. and i think this committee ought to shift its focus to cost effectiveness, in other words, making the best use of every taxpayer dollar. now addressing the question you raised about efficiency and

conservation. the price system works. it produces massive energy conservation. oil use in this country has plummeted. over a period of extending over decades. it's now 50% of what it was. as recently as the 1970s. that's all due to energy prices. prices worked in the home fuel market, as congressman sharp just reminded us. i'm reading from the public of energy information, i'm looking at u.s. henry hub natural gas price histories. my geography isn't all that great and it certainly isn't very recent. i believe the henry is in the state of oklahoma. that is an area where prices as natural gas were as high as $12.30 a thousand cubic feet as recently as 2008.

in the midst of the oil price runup. and as senator nickels reminds us, it's now $2.43. that's the figure for may 2012, which is the latest figure. we have to use the price system, that's the whole idea of using a tax neutral approach, in order to achieve our energy goals just like our other goals. and the price system is working, senator. >> sir? your time has expired. >> okay. >> we can go back around. >> okay. thank you, mr. chairman. >> thank you. >> thanks mr. chairman. i just want to say to senator nickels, my compadre and congressman sharpe are a good friend from the house. it's great to see both of you, dr. jurgensen, i don't know or

mr. hamm, but if you two are half as good as i'm hearing from my colleagues, this is a great panel. we're delighted that you're here today. in what the senator was saying earlier, i think it's optimistic to be about the future of our country. one of the reasons is, with saudi arabia, we having for sometime, saudi arabia of coal. we are now apparently the saudi arabia of natural gas. i understand that we have become that porter of oil. while we're not the top producer of oil in the world, i think we might be number three or so but we apparently have more drills going today. more wells producing today than i think maybe the rest of the world combined which is pretty amazing. i share subcommittee deals with nuclear safety, and we have four brand-new nuclear power plants being built in this country for the first time in 25 years. and i'm encouraged with the technology and the safety of the technology that it provides.

cafe, we implemented -- adopted cafe legislation, fuel efficiency for vehicles in 2007. congressman sharp, that was something that i know you had a whole lot of interest in. and we appreciate your help on that legislation. but we're ramping up fuel efficiency standards for cars. we average about 36 miles a gallon by 2016. and i think by over 50 miles per gallon about a decade after that. our friends from g.e. i think are on line for building a new solar energy product out in colorado that is going to be -- add good parity by 2016. and we've actually had the ability to use natural gas, to not just supply coal, and make emissions, but utility plants to be cleaner and safer, more environmentally friendly. al