This Forbes.com article reports the plans of President Obama for the petroleum industry.
Granted, President Obama’s newly submitted budget is likely dead-on-arrival in Washington, but it’s still well worth taking a look at it to get a sense of what he would do to the energy industry if he were king instead of just president.
The headline proposal is the president’s idea for an Energy Security Trust, “funded by royalty revenue from oil and gas leases to support initiatives to shift our cars and trucks off oil, cutting our Nation’s reliance on foreign oil.” The budget states that the Trust would be funded with $2 billion of royalty income over 10 years.
That’s a relatively small portion of the $9 billion in annual oil and gas royalties that the government collects from drillers, but as I’ve opined here recently, what do we need a dedicated trust for when congress can just fund research directly? Why complicate matters by creating a new level of bureaucracy, a new middleman?
Besides, according to the budget, the administration appears to be interested in reducing its oil and gas royalties. The president also hasn’t backed down from his desire to charge oil and gas drillers fees (on a per-acre basis!) if they lease federal lands then don’t develop them. This is foolish, simply because there are usually very sound economic reasons why a company might lease an exploration block then decide not to drill it (seismic tests don’t look promising; commodity prices may shift; other opportunities elsewhere offer better returns, etc).
What’s more, the administration would also eliminate in-kind royalty payments, where companies pay their royalties by giving the government oil instead of cash — something that companies often prefer to do in order to conserve cash. Further, Obama would eliminate interest accruals on overpayments of royalties. The budget states that these collective reforms will generate “roughly $2.5 billion” for the Treasury over 10 years. In fact they are more likely to make companies think twice before they lease federal lands (reducing royalties to the feds over the long term), or to be more careful when paying royalties so as not to lend Uncle Sam money for free. The budget also proposes adding new inspection fees that drillers on federal lands must pay to regulators. All this disincentivizes drilling on federal lands and is thus likely to reduce federal royalty income.
The biggest impact on oil and gas drillers from the Obama budget would be in the abolition of some $44 billion in “fossil fuel tax preferences.” The president would eliminate the expensing of intangible drilling costs, which according to the administration’s calculations would reduce the federal deficit by nearly $11 billion between now and 2023. Repealing percentage depletion for oil and gas wells would also bring in $11 billion over the same time period. Repealing the domestic manufacturing tax deduction for oil and gas production would also cut the deficit by nearly $17 billion.
To balance out removing those oil and gas “subsidies,” the administration proposes creating “$23 billion of incentives for renewable energy production” over the next decade, including the permanent enactment of a tax credit for the production of electricity from renewable sources, much needed by the wind power industry.
When it comes to further reducing America’s reliance on petroleum, the president has backed off of his crazy goal, presented in his 2013 budget, of getting 1 million electric vehicles on U.S. roads by 2015. The lackluster sales of G.M. Volt and Nissan’s Leaf have shown that won’t happen. The budget, however, still would direct $575 million in “cutting-edge vehicle technologies” and $282 million “in the next generation of advanced biofuels.” That’s in addition to the $2 billion Energy Security Trust.
Oil and gas fracking gets a mention in the budget as well. The president proposes $12 million to help fund “a multi-agency research initiative aimed at advancing technology and methods to safely and responsibly develop America’s natural gas resources. Specifically, DOE, in collaboration with the Environmental Protection Agency and the Department of the Interior, will focus on minimizing the health, safety, and environmental effects of natural gas and oil production from hydraulic fracturing in shale and other geologic formations.”
And to promote less climate impact from the burning of that natural gas, the budget proposes $266 million for the study of ways to capture and store carbon dioxide emissions, including a $25 million prize for the first “natural gas combined cycle power plant to integrate large-scale carbon capture and storage.”
A last item that stood out for me was President Obama’s goals on reducing America’s emissions of greenhouse gases. Last year, in the 2013 budget, the goal was to get emissions down “17 percent below 2005 levels by 2020, and 83 percent by 2050.” This year 2020 goal remains in place, but the 2050 goal is gone. No word yet on outrage from the environmentalist lobby.