A deal’s a deal

Marketplace Staff Jan 5, 2007

KAI RYSSDAL: Two years ago Congress passed an energy bill. It was loaded with tax breaks and incentives for big oil. The new Democratic majority has promised to reverse those tax cuts, and revamp drilling leases that let energy companies skip paying royalties for offshore exploration.

Commentator David Frum says a deal’s a deal.

DAVID FRUM: In the middle 1990s, the Russian government had a problem. Prices for oil and gas had tumbled to historic lows. And Russia needed massive new investment to drill in bleak places like the former penal colony of Sakhalin Island.

Some Western companies were willing to risk buying in at the bottom of the market. A decade later, they’re making huge amounts of money and the Russians resent it.

Last month, the Russian government seized half of one giant gas field, and everybody assumes they are about to help themselves to half of another.

Well, the American government also signed some contracts in the 1990s to drill deep in the inhospitable waters of the Gulf of Mexico. And those contracts also turned out not to be very favorable. The companies that bought at the bottom of that market are also making lots of money.

That’s tough. But it’s business.

Yet the new Democratic majority in Congress wants to emulate the Russians and force a rewrite of unfavorable Gulf of Mexico leases.

They are threatening the whole industry with negative tax consequences unless the leaseholders “voluntarily relinquish their contracts.” And they’re threatening to bar leaseholders that don’t comply from gaining any future contracts.

The Democrats argue that a bureaucratic error has cost the Treasury billions. Normally, oil and gas leases include a provision that charges a rising royalty, if the price rises above a certain level. The Clinton-era Interior Department failed to write that provision into leases signed in 1998 and 1999. But a contract signed in error is still a contract.And against the billions lost by the Gulf of Mexico error, let’s count something else: the tens of trillions of dollars of public and private wealth created by the world’s absolute trust in the pledged word of the United States of America.

It’s painful to suffer through a stupid contract. But not nearly as painful as the costs of bad faith.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.

Raise a glass to Marketplace!

Just $7/month gets you a limited edition KaiPA pint glass. Plus bragging rights that you support independent journalism.
Donate today to get yours!