Only the most fiscally fit companies can survive in the intensely competitive global marketplace for energy. But a new study by IHS Cambridge Energy Research Associates (IHS CERA) and Deloitte paints a troubling picture of how federal tax rules – and pending tax legislation – are weakening the ability of U.S.-based oil and natural gas companies to compete against international companies. This is putting American jobs in jeopardy at the very time we need to support, not undermine, American-based business.

The new study, “Fiscal Fitness: How Taxes at Home Determine Competitiveness Abroad,” found that American oil and gas companies have faced increasing challenges in competing with their international counterparts since the 1970s largely due to “the interaction between the fiscal arrangements in the home countries of IOCs [investor-owned companies] and the host countries in which they operate, and the home policy objectives.”

Simply put, U.S. oil and gas companies are at a competitive disadvantage because of tax policies in our home country, and we have been losing out to non-U.S.-based companies over the past several decades.

The study evaluated the competitiveness of U.S.-based oil and gas companies (including ExxonMobil, Chevron, and others) on a variety of factors and compared the results to those of our peers throughout Europe, Canada, Russia, and Asia (including BP, Shell, and others).  Of the 10 countries studied, the researchers found that the U.S. government takes a larger share of oil and gas profits earned abroad than nearly all other governments, except for France and India.

The study also found that proposed tax legislation would make this already bad situation even worse: “[P]otential new rules to restrict credits for foreign taxes already paid to a host government, currently under discussion in the United States, would make the United States the least competitive among the analyzed peer group, excepting India.”

The study is referencing the Administration’s 2011 budget proposal to weaken or even eliminate the foreign tax credit only for U.S. oil and gas companies. This tax rule ensures that all U.S. companies can operate in other countries without being taxed twice – once by the host country and again at home. It helps to level the playing field when American businesses compete with non-U.S. companies whose countries have similar rules.  As the study shows, by removing it, the Administration would be imposing double taxation on our industry – and creating an enormous new competitive disadvantage on American companies. You can read more in the Tax Policy section of my blog.

Why does our ability to remain competitive globally matter? And why should the average American care if changing the tax rules for foreign income will disadvantage American companies competing for energy? Because if American companies can’t compete in these key areas, our national interest would be compromised on two fronts: our energy security would be compromised due to constraints on the industry’s ability to develop new supplies; and, we would lose jobs here at home that American companies provide, as there will be less need for American employees and contractors to support international operations.

If we’re serious about American jobs and competitiveness, this is something that should concern all of us. Why should our own government offer BP, Shell, Total and many other international companies a head-start over U.S.-based firms?

I’ve presented my case here, but I’d be interested to know what you think – can American oil companies remain competitive under current and proposed tax policy? Can the American economy?

The report is available by contacting IHS CERA directly. Contact details: Richard Slucher, 202.857.5172 or [email protected].