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.
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.