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Congress’ Next Bad Idea Would Destroy the Shale Boom

by | published January 25th, 2012

Last week, six Members of Congress, led by Rep. Dennis Kucinich (D-Ohio), introduced the “Gas Price Spike Act.”

With concerns over the likelihood of higher gas prices this summer, the bill and its sponsors propose the creation of a “Reasonable Profits Board” that would control the profits of oil and gas companies.

Under the bill, this board – made up of unelected bureaucrats – could apply a “windfall profit tax” on the sale of oil and gas at rates of 50% to 100%. These taxes would take aim at corporate profits that the board feels are “unreasonable” or “unfair.”

Congress would then appropriate the money raised to subsidize electric vehicles and mass transit.

Now you may want to take a second and breathe, because this is no satire.

Oh, and the proposed bill offers no specific guidance on how the board would determine what represents a “reasonable profit.” How do we even begin to define this term? Are some profits more unreasonable than others? And who decides what is “reasonable?”

Yesterday, Apple Inc. (Nasdaq: AAPL) shattered earnings expectations. The electronics company has a profit margin north of 20%; meanwhile, the oil and gas industry has a sector-wide margin a little less than 10%.

And though the price of oil and gas will rise in the future – and despite the name of the bill – a reasonable profits board would do nothing to improve consumers' plights at the pump.

In fact, it would only make things worse for people like you and me.

This Board Would (Knee) Cap Energy Investment

Every day, Kent and I focus on investment opportunities that offer the strongest share appreciation potential and dividend upside.

That's how we've delivered big profits to Energy Advantage subscribers. Last month, the portfolio posted an average gain of 11.6%. Kent has named the best investments in the shale oil and gas boom and has explained how to profit in the “sweet spot in energy investing.”

But this profits board would essentially get to decide how much of a return it's going to let you, as an investor, make year-over-year. After all, your returns come from the profits of the company in which you invested.

There's an image in Washington that public companies are big, faceless giants that are unaccountable to no one.

In fact, they are accountable…They are accountable to shareholders, whether they're institutional portfolio managers or retail investors like you and me.

Here, in the U.S., things may be shaky, but there is one thing that's unequivocally good.

We are in a new age of energy production, due to a revolution in technology and our ability to unlock unconventional energy sources. As we've seen, a number of new energy companies have come on line, and we are entering a new gold rush.

But this all requires investment.

And a reasonable profits board is little more than a death panel for energy investment.

Let's say that Congress decides that a reasonable profit margin for companies like Exxon Mobil (NYSE: XOM) or ConocoPhillips (NYSE:COP) is 4% or 5%.

This is all the money that could be paid to shareholders in the form of dividends. Everything else goes to Washington.

Investors will be far less likely to pick up shares of a company whose upside is limited by windfall profit taxes.

When we categorize investment opportunities, we do so by measuring the potential risks of each investment against its potential returns.

The likelihood of returns for risk-taking is traditionally represented by a bell curve, with extreme losses and gains far out into the tails, and thus unlikely. The profits board would essentially remove certain levels of upside possibility from investors' reach.

If the government caps expected rate of returns, it would deter domestic investment in the energy sector. Why would anyone finance a higher-risk energy project, when government could simply step in and confiscate a greater portion of the expected level of return?

Economies operate on the risks companies take and the reward of their profits. Apple didn't maintain its investors over 25 years because the company capped returns.

But a profits board will not just deter investors in the U.S. It will do something far worse to the entire economy.

The Board Would Drive Investors Out of the U.S.

Forcing investors to assume risks while limiting return (and there is always potential downside to any investment) is fiscal insanity.

Investors will just start looking to foreign markets. And there are plenty of opportunities to make money elsewhere.

Investors will turn to opportunities in Canadian energy firms.

Or to China.

There are plenty of international companies and projects that offer similar risks, but higher returns than Congress' proposed board would ever allow.

Once again, Congress fails to understand that investor capital is central to the huge economic boom we're seeing in the shale fields. But instead of encouraging investment there, Congressmen are proposing ideas that are just going to lead to a mass exodus of capital finance. When prices are controlled or profits are capped, development will stall over time, as companies starve from a lack of investors.

We've already seen how Sarbanes-Oxley reduced the number of IPOs in the United States each year and how investors are flocking to Hong Kong and London to find new public companies.

Now, they're threatening to kneecap another vital industry with harebrained ideas that only work in the vacuum of philosophical policy debates.

This brings me to my final point.

A Profits Board Shows Congress Ignorance of Economics

Hopefully, this is the first and last you will ever hear about this proposal.

But it is a shining example of the fact that only 25% of Congress has any training in economics, a breathtaking statistic, given their role in the economy.

It appears that Congressmen have little understanding of balance sheets or income statements. If they did, they would know that profits are not simply the result of selling goods or services for as much money as possible.

Profit margins are measured by a company's ability to control their liabilities. In order to report a strong profit margin, companies have to stay within a budget on their supplier contracts, their debt levels, and the amount of money they spend.

If a company went out and spent its money recklessly, like, say, Congress does, there would be no positive profit margin, and more importantly, no investors.

If Exxon borrowed and spent the way the U.S. government does, it would have gone out of business decades ago.

Above all else, this shows that we always need to be aware of the attitudes Congress has toward business, and what it means to investors over the long term. This profits board unlikely to happen, but it's founded on such a misguided idea, it's certainly steering eyebrows north.

But what else would you expect out of Washington, a former swamp that traded mosquitoes for politicians… and malaria for public debt?

Sincerely,

James

[Editor's Note: Whatever nonsense comes out of Washington next, you can bet Kent's Energy Advantage subscribers are still laughing all the way to the bank. And Kent is all over the next big trend that will make investors huge returns. Yep, this is big.]

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  1. Robert Page
    January 25th, 2012 at 17:11 | #1

    You mean…”Democrats wouldn’t do that, would they?” The answer is, “Yes, they would.” Class warfare, don’t you know.

  2. Mike Mann
    January 25th, 2012 at 17:13 | #2

    Robert: Couldn’t agree more. It seems the class warriors don’t realize that when you target the top earners, you end up crippling everyone.

    I remember the gas lines in the 70s. This would be another wonderful Democrat-sponsored shortage.

  3. Mike Mann
    January 25th, 2012 at 17:13 | #3

    @Robert Page

    Robert: Couldn’t agree more. It seems the class warriors don’t realize that when you target the top earners, you end up crippling everyone.
    I remember the gas lines in the 70s. This would be another wonderful Democrat-sponsored shortage.

  4. Tom K.
    January 25th, 2012 at 17:16 | #4

    Maybe it’s Govt’s. way of driving down the value of the big oil company’s stock, so the govt. can come in and buy the oil companies cheap. More power and control for govt..

  5. Sailor Jo
    January 25th, 2012 at 17:26 | #5

    @Mike Mann

    Mike, this has nothing to do with top earners. I am among the smallest investors and I think James is right.

  6. Sailor Jo
    January 25th, 2012 at 17:31 | #6

    Though I may be a social liberal, it does not mean I do not understand economics. This targeting of a certain sector is stupid as are subsidies. Market distortions are always damaging. May be we should introduce legislation that demands from members of Congress to qualify for their job. Just don’t leave it to Congress to list the qualifications.

  7. Robert Page
    January 25th, 2012 at 17:41 | #7

    I have heard that Warren Buffet stands to profit handsomely from the canecellation of the Keystone Pipeline project. I haven’t researched the veracity of this myself…does anyone know how, exactly?

  8. Sergio
    January 25th, 2012 at 17:49 | #8

    You are completely righth !

    HaHaHa , populism And old style commumism out of fashion also in China now strike back to US. Hope you now understand us poor Italians that we have to live with this kind of illiterate politics !

  9. danny
    January 25th, 2012 at 18:02 | #9

    Buffet has a huge investment in rail car transportation, and if the pipeline is not built, then what oil that does come to the U.S. will be shipped by rail. He will make an absolute unbelievable amount of money from this.
    Ron Paul WILL stop this type of crap, and insider trading, if the people will just research his record, and quit listening to the talking heads

  10. ELISSA JUNG
    January 25th, 2012 at 19:24 | #10

    TO ROBERT PAGE…HE INVESTED IN RAILROADS..GOT TO MOVE IT ONE WAY OR ANOTHER AND RR. ARE A CHEAPER MODE OF TRANSPORTION.

  11. Robert Berke
    January 25th, 2012 at 20:02 | #11

    This article is a perfect example of newsletter alarmists who love to cry wolf to the unsuspecting public. Kucinich represents the far left wing of the Dems, and nothing he proposes ever passes. Only a moron would think that a tax increase on energy would pass in the current congress. Moreover Kucinich will be termed out in a couple of months. Fuggetaboudit.

  12. moneyman56
    January 26th, 2012 at 00:16 | #12

    Buffet owns the railroad that presently hauls oil out of the Dakotas and has said that if the pipeline isn’t built his company is ready to step in and haul the tar sands oil out of Canada to the refineries in the States. That is how he would profit. Even with ole Warren, just follow the money and you will find why he is playing with the White House on issues.

  13. Jackie D
    January 26th, 2012 at 00:45 | #13

    @Robert Page
    I hear Warren Buffet is heavily invested in railroads and plans on sending oil to refineries on them. The Keystone Pipeline would compete with this plan, and Obama must protect his rich 1% buddies, right? at the expense of tens of thousands of good jobs connected with the pipeline, and the millions of Americans trying to save for their retirements who would invest in this energy boom. All those people back to work would help fill the soc sec and medicare coffers, and there would be more tax dollars headed to Washington which should help with our deficit IF congress would get the spending under control. The competition would keep the costs of transporting the oil under control since the railroads wouldn’t have a monopoly.

  14. January 26th, 2012 at 01:43 | #14

    After reading this article I think Atlas Shrugged should be required reading for every member of congress.

  15. Michael Hutchison
    January 26th, 2012 at 01:45 | #15

    And the Board Members shall address each other as “Comrade”

  16. Anthony Rzasa
    January 26th, 2012 at 03:04 | #16

    Just a correction on our form of government. The regressives (progressives) have duped the public that we are a democracy. This is not true. We are a republic. The simplest way to verify this is to ask anyone who still can is to say the pledge of allegiance. I pledge allegiance to the flag of the United States of America. And to the REPUBLIC for which it stands,one nation under God indivisible with liberty and justice for all. If they are not convinced tell them to look at the Declaration of Independance and The Constitution for the word democracy. They will not find it anywhere. My personal view of the Star Spangled banner needs to be updated to “The land of the greed and the home of the slaves”

  17. Bernard Durey
    January 26th, 2012 at 10:31 | #17

    Well,I noticed in one report recently that railroad rates are way down.Something like from $35,000 estimated to $7,000 estimated. Those figures released in a Shah’s Insights & Indictment report. So,if Keystone XL fails to be completed then would they not possibly try shipping crude by rails and come out on the top in the long haul on the rail system. One possible scenario. On other issues one is probably right,many think there will be a change in Congress in the next few months. We had that argument right shortly after the President signed the Health Care Reform Act and the lawsuits that followed. So now on the Keystone and its problems he is not doing the signature act and they still whinning. What would have happened if the President had done the opposite? Not signed Health Care Reform and Signed the Keystone XL project which would run illegal for sometime,possibly. It is kindof like why is the U.S always meddling in foreign affairs. I think there is a clause and/or articleor two or more that may well explain that. Does the U.S. try to accomplish some constitutional amendments which are long and lengthy or not. Once again thanks for your time and I apologize for any typographicals.

  18. Chuck S
    January 26th, 2012 at 11:35 | #18

    @Robert Page
    A lot of oil from North Dakota is transported by trains that Buffet owns. A lot of that oil would go in a pipeline instead if available.

  19. Chuck S
    January 26th, 2012 at 11:46 | #19

    It’s the government spending that’s unreasonable and unfair. The tax on a gallon of gas is much more than the profit.

    The real problem is Kucinich’s own party – restricting oil production anywhere they can. Like delaying the pipeline, restrictions on offshore, and trying to stop fracking. The government causes a problem and then messes things up more trying to fix the problem. Then mess things up even more trying to fix the last problem they made. All the time blaming the companies.

    Incidentally, I think tens of millions of people depend on oil company profits in their pension plans and mutual funds.

  20. Fred Weber
    January 26th, 2012 at 14:53 | #20

    J.i.c. none of you ever heard of it, there’s enough SCALAR WAVE energy out there, locked up in vacuums, to drive the whole earth’s need for energy. The great scientist Nikola Tesla – that barely any of you bothered to learn about – proposed “free electricity for everyone” , back in the ’30′s. Yep, perpetual energy with no new energy input. But “nobody” wanted that, if you get my drift…Tesla worked for Edison, and managed to convince him that AC power distribution was the way to go. He did all the calc’s in his head. (Before that, Edison was pushing DC power.) Americans wouldn’t pay Tesla for his genius, so the Russians ultimately did. If I had ANY sympathy for Big Oil, I lost mine years ago.

  21. Jim
    January 26th, 2012 at 17:24 | #21

    I did not know that it was bash Obama day. For one poster, the 70′s gas lines had nothing at all to do with the Democrats (or Republicans for that matter). It was due to the Saudi/OPEC oil embargo. For a brief time after that, we actually had serious discussions about alternate energy sources; that lasted until Reagan came. Efforts to pass a windfall profits tax on the oil companies have never gone anywhere; indeed, in the last Congress, they could not even repeal tax breaks for energy companies. This proposed legislation has zero chance of passing; the article concluded with a plug for subscribing to Oil and Energy — that was the purpose of the article.

  22. Mike Mann
    January 27th, 2012 at 09:59 | #22

    @Jim The President could do it all himself. He’s pushing massive hikes in capital gains taxes, the highest since the late 70s. Problem is, capital gains are already double taxed. At the corporate level, and then at the dividend level.

  23. Sailor Jo
    January 27th, 2012 at 16:42 | #23

    @Anthony Rzasa
    Thanks. On top, it is undemocratic to shove god down the throat of everyone. The pledge of allegiance is an afterthought and does not mean much. Why would I pledge allegiance to a flag and not my home country? Even though it says “and what it stands for” that part is rather muddy as nothing says what the flag stands for. Just another brain wash. If a government does good for the people they are happy and loyal without indoctrination.

  24. Sailor Jo
    January 27th, 2012 at 16:51 | #24

    @Mike Mann
    Please explain. How is my capital gain (buy for 10 and sell for 12 or whatever) taxed on the corporate level? I would rather level the taxes between short and long term. Money in my pocket does not smell differently because I made quick profit as opposed to a slow profit.

    At the same token I rather challenge property taxes. I bought my place with income that has been taxed and then I get taxed so much that after 25 years I paid twice for my place. It gets even worse when property values go up which does not add a cent to my income and yet I have to pay more. Then, when property values go down, the millage rate is raised to keep the county coffers full.

  25. Benton H Marder
    January 30th, 2012 at 08:03 | #25

    It’s all a political shake-down, y’know. The profits board would intervene only if the company did not make the appropriate canpaign contributions. What constitutes ‘excess profit’ is politically defined according to the necessities of the politicians. In plain English, it’s called ‘pay to play’. Yes, in such a case smart money will move over sea to more honest markets—HongKong, Singapore, Bombay. This is already happening. There is a difference between shearing the sheep and skinning the sheep.

  26. Paul
    January 30th, 2012 at 17:15 | #26

    Enough of the Obama-bashing. This is about Dennis Kucinich. Kucinich was re-districted into a primary fight with Marcy Kaptur, who, if I recall, was able to be re-elected many times in a much more politically moderate district. I certainly hope Kucinich loses, as he is an old-school far-left type who is probably not representative of most of the people in his old district, much less of those in his new district. This is a proposal that will get nowhere in any Congress, much less the current Republican-controlled House.

  27. Jim
    February 1st, 2012 at 09:35 | #27

    One poster noted, the President could do this himself. How????? Taxes are the product of legislation; indeed, this article was about proposed legislation in Congress. On the issue of capital gains: If you invested in GE, bought and sold stock in the company over the last couple of years (the stock has doubled in value since 2008), you likely made money on the sale of your stock. As has been widely reported, GE paid no federal income tax through various tax breaks and loopholes during the last reporting period. Where is the double taxation there?? Many companies report no profits; nevertheless, the stock in those companies can appreciate in value (and they can also be paying dividends). Remember the tech boom? In any event, the average wage earner (not the trust fund investor) pays income tax, puts his money in the bank, and pays taxes on the earned interest (taxed at the ordinary rate). Isn’t that at least as unfair as taxing capital gains or dividends? As one poster notes, there are many instances of double (if not more) layers of taxes on money in the country; maybe the rich and powerful just complain more loudly and have more clout to be able to influence the tax code so heavily. But, if the issue is one of fairness, where should taxes fall: on those who already have favorable tax treatment (through the capital gains rate) or those who pay at the ordinary rate?

  28. February 6th, 2012 at 21:08 | #28

    I just emailed Kucinich and said he was ignorant of economics or trying to destroy our country. Plus why didn’t he do us a favor and resign from Congress?

  29. February 6th, 2012 at 21:34 | #29

    @Jim Jan.26
    Where did you get your misinformation about “oil companies never being subject to a windfall profits tax”? Read up man–1980,under that genius Jimmy Carter the windfall profits(actually in effect an excise tax) was enacted by the wisdom of Congress. It collected 80% less than gov’t estimates–till 1986 it collected zero due to low oil prices. Oil imports were not subject to the tax–so oil imports increased at the expense of domestio oil production. Reagan cleared the mess by guiding Congress to repeal in 1988.

  30. Jim
    February 9th, 2012 at 23:47 | #30

    Thanks for the correction on the windfall oil profits tax. It obviously did not hurt the oil companies; they are still going strong,and it did not hurt r&d.

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