Let us now consider the prospect of attracting this stepped-up capital inflow into the petroleum industry. As I have already indicated, I see no evidence whatever that there is a surplus of available capital in the country today. Nor is there the prospect of one in the years ahead. Is there a surplus of capital in the petroleum industry itself? The answer is clearly negative. As I have just demonstrated, there are certainly not enough proved reserves in the ground to get the industry through the 1970's. Similarly, there is no excess cash within the industry. For a representative group of companies that we analyzed, the ratio of current assets to current liabilities at the end of last year was only 1.8 to 1. This is less than the 2 to 1 ratio that is often taken as the desirable minimum. The petroleum ratio compares with an average of 2.2 to 1 for other manufacturing industries, and with even higher ratios for steel, chemicals and so on. At a time when these other industries have been maintaining their liquidity at reasonable levels, it is ironic that petroleum, one of the most vital of all, has not fared so well. Are the industry's profits high enough to attract the huge sums of capital likely to be needed? Although large in absolute terms, when related to investments, the profits are at best average. Industries which do not have to face the risks and uncertainties borne by petroleum have in recent years been earning up to some 20% in relation to their assets against oil's ratio of less than 13%. Among the more fortunate group in 1968 were office equipment, instruments, pharmaceuticals, toiler tries and soft Hardware and tools earned more than 16%, as did the automobile industry. The petroleum industry is only likely to attract the stepped-up capital needs of the 1970's if its profit performance is maintained and improved. drinks. What is the petroleum industry's profit outlook for the future? An adequate answer to this question requires, as one most important condition, a clearer view than we now 33-758 - 69 No. 15 - 7 possess of the tax prospect. I shall not try to go into the detail of the tax bill prepared in the House of Representatives. But I must frankly confess that I am struck by the negative emphasis in some of the proposals now being considered by this Committee. You, yourself, Mr. Chairman have referred to recent proposals as "anti-oil". I note, in this connection, that there are the proposed changes in the depletion allowance, reducing the rate for domestic production and eliminating it for foreign production. There is the new concept of the limit on tax preferences, restricting the use of percentage depletion and intangible drilling-cost expensing. There are the further complexities in the application of foreign tax credits; the proposed restrictions could introduce a new element of double taxation, thereby breaching one of the most fundamental principles of fairness in taxation. Petroleum industry profits emerge as a main target of this array of tax proposals. If the Congress adopts part of all of this package, an investor must expect to earn less from his petroleum outlays. Some people argue that the impact will be slight. In the report of the Committee on Ways and Means, I read the surmise that the proposed reduction in percentage depletion rates "should have only a minimal effect on efforts to discover new reserves". Judging by the Treasury's figures, I find this statement hard to support. there is the psychological impact. Moreover, Once the gate to change has been opened, investors become increasingly nervous. These tax changes are not only retroactive; they cast shadows before them. Any undermining of the existing tax structure will inevitably have a more than proportionate effect on investor expectations, and therefore on capital availability. At the same time, lower profits mean a smaller flow of internal funds available for reinvestment in the industry. In the past, over 70% of the capital spending of the leading oil companies has been provided from internal sources. In the future, under an impaired system of tax incentives, these internal funds could be deeply eroded. I think it is unfortunate that there is so much eagerness to place obstacles in the industry's path at a time when its capital needs are so great, and when the country's petroleum requirements are on such a steady rise. I am, indeed, puzzled by the timing, and by the sense of haste during some of the hearings on the complex and varied tax proposals now being considered by this Committee. I think there is a danger that perspective will be lost. With the Treasury expecting to raise almost $200 billion in revenues during the current fiscal year, budgetary savings and tax simplifications are more desirable than ever before -- but only if they do not backfire on the economy. Tax savings that might risk the future energy supplies of the nation could do just that. I fully agree with those around the nation who feel the need to "do something" about our mammoth and ever-mounting budget. Yet let us not underestimate the gravity of the problem, nor the need for cautious study before far-reaching actions are taken. To sum up, a reduction in established tax incentives could reduce petroleum industry profitability to something well below that of other industries, thereby endangering the future capital supply. This could have serious understood and insufficiently long-term consequences for our balance of payments, our economic stability, and the welfare of the nation as a whole. STATEMENT OF GEORGE V. MYERS Executive Vice President before the COMMITTEE ON FINANCE in behalf of American Petroleum Institute Mid-Continent Oil & Gas Association Rocky Mountain Oil and Gas Association Western Oil and Gas Association October 1, 1969 |