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Obama’s Proposed Oil and Gas Tax Hike: What Has the Industry Done for Us Lately?

So let me see if I have this right – President Obama’s budget proposes to increase taxes on oil and gas by $36.5 billion over the next ten years, while laying out even larger sums for more politically favored energy sources – especially wind and solar.  And the reason advanced for this is that these “subsidies [sic] are costly to the American taxpayer and do little to incentivize production or reduce energy prices.”

Neither of the claims in this statement is true.  In fact, they are the opposite of truth.  The oil and gas industries are major sources of revenues for governments at all levels in the US, and production incentives have contributed to a stunning turnaround in the country’s natural gas supplies – with higher production and lower costs a major feature.

Let’s take a look at these two myths individually.

Myth 1: The oil and gas business receives significant subsidies from the federal government.

Fact:  Oil and gas production are major contributors of tax and royalty payments to all levels of government. Fortunately, for those interested in facts, the federal government publishes a lot of them, and they tell a stubborn truth.  The oil and gas production business pays about $140 billion annually in royalties and corporate income taxes to the US government.

In comparison, far from being a beneficiary of government subsidies, oil and gas producers receive little–about $2.2 billion in 2008.  The major recipients of government energy largesse are wind, solar, refined coal, and ethanol with more than 60% of federal energy subsidies.  And this money buys us just about 4% of domestic energy production.

Oil and gas, on the other hand, receive about 12% of all federal energy funding, but account for almost half of this country’s energy production.

The $2.2 billion that that the government spends annually on oil and gas is dwarfed by the $23 billion in royalties received by the federal government for production on government lands in 2008.  Beyond the royalties are corporate income taxes of more than $130 billion annually just for the major producers.  In fact, large oil companies pay more federal income taxes than the bottom 75% of taxpayers in the US, about 100 million households.

The White House does not bother to tell us that oil and gas receive less money from the federal government per unit of output than any other source of energy.  To support wind, solar and refined coal in electricity generation, the federal government spends about 2.5 cents for each kWh generated using those sources (we pay 7–12 cents per kWh for electricity around the country).  In contrast, the government spends about one hundredth of that amount, 0.025 cents, for each kWh generated using natural gas (oil use in electricity generation is very small).

Outside of electricity generation, the story is even more dramatic.  Subsidies to ethanol and other biofuels cost $32 for the equivalent of one barrel of oil, about 40% of the current price of oil.  Subsidies to natural gas and oil cost less than 20 cents for the equivalent of a barrel of oil.  These figures come from the government’s own studies of energy subsidies and programs.  As Ronald Reagan once said. “you can look it up.”

Myth 2:  Tax incentives do little to increase supply and lower costs to consumers.

Fact:  Everyone in the US who uses electricity or natural gas is a beneficiary of the amazing benefits of recent natural gas discoveries in the US.  Just five years ago the domestic price of natural gas was about the same as crude oil on an energy basis.  Moreover, we were told by many pundits that the future of natural gas for US consumers lay in imports of LNG, and that vast, expensive new terminals were needed to bring that product into the country.

Maybe these pundits were the same ones who missed the shale gas production boom that has revolutionized the natural gas industry in the US over the past five years.  Today, the price of natural gas is less than half that of oil on an energy basis.  Moreover, natural gas production in the US has risen by more than 10% in the past few years, with the prospects of depletion receding into a vanishing future more than 100 years away.  Imports of natural gas in the form of expensive LNG have fallen to levels below those last seen early in the last decade.

As important as the stimulative effect of incentives on shale gas production has been for the US, an even more important impact may have been the benefit to the domestic economy from lower energy costs.  With gas expensive to transport over water, the US gas market price is determined largely by domestic production, as well as Canadian imports via pipeline.  As domestic production has increased, the US gas market price has reflected internal supply-demand dynamics rather than the oil-based pricing formulae typical of European and Asian LNG markets.  The resulting US price, less than half the energy equivalent price of oil, has saved American consumers, manufacturers, and power generators scores of billions of dollars in 2009.

In fact, the pricing impact of shale gas may even be sufficient to lure back some gas-based industries to the US – ones that fled as prices rose throughout the “naughts.”  The shale gas revolution in the United States has brought all of us, homeowners, industries, production workers, and even the tax authorities an unprecedented bounty from the low prices and increased output.  As prices have fallen with plentiful supply natural gas has increasingly been the fuel of choice for new electric power generation, reducing costs and lowering emissions.

With the future of other reliable sources of electricity, coal and nuclear, uncertain, additional gas supplies permit the US generation companies to continue to meet demand economically.

It is entirely possible that the political class in the US could try to kill the shale gas business.  Such attempts are still under way at both the state and federal levels.  The impacts of any substantial restrictions on US domestic gas production have been explored previously in this space.  If such restrictions on shale gas production come to pass then other sources of energy, including the ones receiving the truly massive subsidies, wind, solar, refined coal, nuclear, would come to the fore as the only plausible alternatives.

Today, the major incremental supplies of energy are substantial net contributors to employment and tax revenues.  It is not clear how a future energy supply made up largely of net tax receivers could benefit this country economically or fiscally.  We should note also that one of the tax provisions is aimed squarely at disadvantaging domestic oil refiners vis-a-vis foreign competitors.  Since no one else can refine the (lower-cost) muck that many of our refiners process routinely, saving us many billions in costs every year, it is also not clear just how this tax bill is supposed to help us in the USA.

What has happened in the domestic natural gas business in the US is the very definition of how production incentives combined with new technology have revitalized a critical sector of the US economy, increasing supplies of clean energy at ever-more affordable prices.  What was that about incentives not working for our benefit?  Not on this planet.

Conclusion

The Obama Administration is engaged in an all points attack on the best American energies to subsidize the worst. The good news is that the government-dependent energies (wind, solar, ethanol, etc.) compose less than five percent of the total US mix. The bad news is that this percentage is growing. Yet oil, gas, and coal are what consumers prefer because of their lower cost and higher quality (including reliability).

The case for increasing taxes on the carbon-based energies cannot be justified. It is all about an agenda against the master resource where the economic props up the uneconomic. The parasitic energies should be put on notice that it is time to swim or sink. Welcome to the real world of creative destruction.

13 comments

1 smac { 02.24.10 at 4:03 am }

When you say “..this money buys us just about 4% of domestic energy production.” Can you confirm that this figure is based on MW-hours (energy) and not the sneaky trick of capacity in MW (power) ?

2 Donald Hertzmark { 02.24.10 at 9:49 am }

SMAC,
Good question. The data I cited are from a 2008 DOE report on Federal subsidies for energy and are based on kWh generated, not MW capacity. However, Hydro, most of it older and of the reliable storage type, is the main source of renewable + refined coal generation (about 72%), but only a small fraction of the financial support (about 7-8%).

The hydro subsidy is about $0.067 cents per kWh, about twice the rate for natural gas. For wind and solar subsidies fall into the range of 2.4 cents per kWh, about 35 times the kWh subsidy for hydro and more than 75 times the subsidy rate for gas.

Whether there will be a 2010 update of this study . . . .?

3 nofreewind { 02.24.10 at 1:40 pm }

Good article. The fact is that oil and gas actually make energy, enough energy so that the industry/products can be taxed and still be purchased at a reasonable price. Wikipedia states we pay about 50cents tax on a gallon of gasoline or 20% of the price, yet, it is still affordable.

The opposite is true for renewable energies. These so-called energies are the opposite. Instead of creating energy, they are in essence a tax on an ignorant American public which has been deceived into thinking that you can create energy with dollars, dollars which are simply added to our deficit and which our descendants will continue to pay interest on forever. For wind, we are simply paying the price for the privilege of watching the wheels spin.

4 Jon Boone { 02.24.10 at 4:19 pm }

Let’s be clear, Nofreewind. So-called renewables do help convert energy into electricity but they don’t generate modern power performance. Energy can’t be “created.” Wind and solar, particularly the former, generate desultory energy, which is always at work destabilizing the match between supply and demand. The rate of work performed, the power, is appropriate for the early nineteenth century–not 2010.

5 JamesG { 02.25.10 at 9:24 am }

They are subsidizing nuclear power, not solar and wind. You seemed to understand that in an earlier post where you said “Of course, the best (that is, most efficient) way to reduce greenhouse gas emissions is to internalize the cost of greenhouse gas emissions in the retail price of electricity and then allow market actors to adjust their production and consumption decisions accordingly. ”

Well quite: Consider this a carbon tax that will increase prices to the consumer and hence make the case for nuclear more appealing.

6 Donald Hertzmark { 02.25.10 at 2:53 pm }

James,
Worthy sentiments about covering costs and internalizing emissions damages. The USG figures on energy subsidies for 2007 show: Renewables $4.875 billion; Nuclear $1.267 billion. Per unit produced these subsidies amount to $0.024/kWh for wind and solar and $0.00159/kWh for nuclear. This compares to $0.00025/kWh for natural gas.

The problem with the subsidies is that they do not mimic the effects of a carbon tax, since the users are not aware of the extent of the subsidy. In the case of wind and solar, the subsidy is large enough to make the difference between participation and rejection by investors.

7 The warmest January and warmest decade on record - Page 5 - PriusChat Forums { 03.05.10 at 1:43 am }

[...] energy sources as opposed to real subsidies to unreliable sources that cannot sustain themselves: Obama’s Proposed Oil and Gas Tax Hike: What Has the Industry Done for Us Lately? — Maste… Government meddling causes more problems than it solves. Read it all, here is an excerpt: [...]

8 JamesG { 03.06.10 at 3:21 pm }

Donald I don’t think you grasped my point. Nuclear subsidies are lower because none are being built. The subsidies for Wind and solar at least produce something whereas the subsidies for nuclear are totally research at the moment. However just you wait around a while and see how that changes. The nuclear option has been officially sanctioned by Obama and seems to have all party support. Then the subsidies will rocket way past the others.

But the main point is that this is the carbon tax that the administration promised. They have a mandate from the voters for it. Clearly the voters decided they wanted to pay more for electricity in order to develop alternatives to fossil fuels. Well they are getting their wish and happily not via the cap and trade boondoggle and not by adding more administrators. We’ll see if they are still happy about this in a few years time.

9 Consumer Energy Alliance { 03.11.10 at 2:23 pm }

Allowing access to domestic oil and natural gas resources as part of a comprehensive energy strategy would significantly reduce U.S. reliance on imports, improve domestic energy security, diversify supply, increase economic development and generate local, state and federal revenue. We should support a national energy policy that provides a comprehensive, long-term solution to help the United States meet ongoing and future global energy challenges by ensuring proper development of all available energy resources, long-term price stability for consumers, enhanced national energy and economic security, and a consistent regulatory structure for industry.

10 DebK { 09.17.10 at 9:41 pm }

Try reading this for a different slant: http://seattletimes.nwsource.com/html/localnews/2008103325_alaskatax07.html
Sarah Palin increased windfall taxes on oil and gas companies last year in Alaska. In fact, “In the fall primary of 2006, Palin upset Republican incumbent Gov. Frank Murkowski, whom she criticized for giving too much of a break to the oil industry.”
Windfall taxes have also been raised in other parts of the world with little harm done to the oil and gas companies as “An accounting benefit eases the sting for oil companies. They get a huge deduction on their state taxes when calculating their federal taxes.”
Obviously this site has its’ hands in the pocket of Big Oil and Gas. The boom is over, just switch your portfolio over to alternative energy, boys.
Oh, and “nofreewind” – I think you are full of wind.

11 DebK { 09.17.10 at 10:12 pm }

Here’s another one fer ya: http://www.economist.com/blogs/freeexchange/2010/05/petrol_taxes
quote: America notably has one of the lowest national petrol tax rates of any developed nation. The rate was last increased in 1993, and its value has eroded significantly since then, in real terms and relative to the market price of oil. It’s an absurd state of affairs given America’s dependence on oil. It’s more ridiculous still when one considers that the federal government has been running short of funds to pay for and maintain its highways for years, and the federal highway trust fund is basically dry. America can’t afford its infrastructure.

And: http://www.businessweek.com/bwdaily/dnflash/content/may2008/db2008051_596535.htm is an interesting read.
That’s all the time I’m spending on this. Good night.

12 DebK { 09.17.10 at 10:37 pm }

Sorry, me again. I had a non sequitur in my first comment. What I should have said was, upon reading this quote from same source: “From 2003 to 2007, Exxon’s earnings grew by 89%, while income taxes grew by 170%. Much of that growth was overseas. Oil-producing countries charge companies like Exxon dearly to dig for oil. Arrangements vary from country to country, but Russia and Libya charge companies up to 90% of the revenues they collect for extracting oil, according to Fadel Gheit, senior analyst for Oppenheimer (OPY). These arrangements—whether production share agreements or royalty contracts—are not disclosed by companies and governments.” Given these statistics I would think that Big Oil would rather drill at home in the USA. How’s that refudiation thingy workin’ fer ya?

13 Scott Brooks { 01.08.11 at 2:37 am }

DebK

If you think the standard of living in any of those high tax countries is better, then by all means move there. And i bet it not American workers that man the rigs in these other countries. They are just using the oil companies expertise in drilling.

If you think taxes don’t affect drilling in areas who think taxes will spur their economies, here’s a wakeup call:

“The industry, however, warns new taxes are already discouraging future exploration and development in newer, more expensive projects needed to boost waning production in Alaska’s oil patches.”

Then there’s the government closing oil rich reserves to drilling for enviro reasons like ANWR.

I’ll never understand people who think that taxing companies will benefit taxpayers and consumers as well as job creation. I think the taxes should be on the consumers so that they can be more transparent on what the governments stick us for as it all ends up in the product’s market price. The only other thing that effects commodity prices is hedge hording. Large financials such as Morgan Stanly did that on market speculation.

As for the oil companies making huge profits, have you ever heard of supply and demand. since oil is a world wide commodity and supply can quite meet demand, you have prices going up. Exxon is not the largest player on the market and much of the oil or gas is imported.

So if your wining about the price of gas why not let the oil and gas companies increase domestic production buy opening fields and not taxing them? Only certain fees could apply for certain regulatory agencies.

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