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Why an Oil Company Backs Jerry Brown

The investment in diverting elsewhere California government’s thirst for revenue is already paying off.
Commentary

Note: This article originally appeared in the Orange County Register on April 4, 2012

Why would Occidental Petroleum, America's fourth-largest oil company, donate $250,000 to a tax-hiking ballot initiative in California?

California's expansive state government has found itself chronically short of funds as much due to a 31 percent boost in state spending from 2003-07 as to the economic slowdown. As a consequence, it may seem that tax-increase proposals have outnumbered jobs created in recent years.

Many big corporations backed Gov. Arnold Schwarzenegger's $24 billion tax increase in 2009, reasoning that the taxes proposed beat the alternative: hiking taxes on business or the state's oil industry.

California has the third-largest proven U.S. oil reserves, with the highest gas tax and the fifth-highest overall tax on the oil industry. But, taking more from California's oil producers is a perennial favorite as it satisfies two important constituencies: environmentalists and consumers of government services.

Squeezing tax revenue out of oil isn't that simple, however. California crude is heavy and sulfur-laden, making it more costly to refine and thus discounting its value by about 10 percent. A California oil "extraction tax" would act to destroy oil reserves by making locally produced oil more costly to recover, inadvertently boosting foreign oil, which California can't tax. As a result, the value of Occidental's California oil reserves drop to the extent taxed.

The power to tax is the power to destroy. What you tax, you get less of.

With this in mind, Occidental's $250,000 contribution to Gov. Jerry Brown's $9 billion tax hike initiative for the November ballot looks less like civic-minded corporate charity and more like a prudent investment. Especially since higher oil taxes would reduce the value of Occidental's California oil reserves by hundreds of millions of dollars.

But there's another rationale for Occidental's assistance to the governor.

Last October, Occidental Petroleum's CEO cited the snail's pace of drilling-permit approvals in California as the reason for a slowdown in Occidental's oil and natural-gas production. California granted 14 drilling permits out of 199 applications received through October 2011, a 7 percent rate. In 2009, 37 of 52 were granted, 71 percent.

California's oil industry and its allies pumped up pressure on Gov. Brown, reminding him that, with one of America's highest unemployment rates, California could ill-afford to turn away $1 billion in oil industry investment that would generate more than 6,000 jobs.

Weeks later, the governor fired the environmentally minded bureaucrat who was sitting on the drilling permits, replacing him with Mark Nechodom, the husband of California's Democratic secretary of state, Debra Bowen. In short order, financial analysts raised their share-price projections for Occidental by $12 – equivalent to about $8 billion in market value.

Seen in that context, giving $250,000 to raise taxes on every Californian and say "thanks" for a few drilling permits is a good investment.

California is already overtaxed, with state and local government spending 22.5 percent of the state's economy – 46 percent more as a portion of the economy than Texans spend.

Rather than rent-seeking or trying to shift tax hikes onto others, California's business leaders would do well to seek broad tax reform and rate reductions of California's tax code – a tax code rated by the Tax Foundation as being the third-worst for business and job creation in the nation.