INDUSTRY THUMPED FOR INCENTIVES IN ENERGY POLICY ACT

Bob Tippee

The US oil industry is receiving a public drubbing over the Energy Policy Act of 2005, which US President George W. Bush signed into law Aug. 8.

This matters. Popular aversion toward the industry influences politics.

The view coalescing around the omnibus energy bill is that the oil industry came away with billions of dollars in subsidies and tax incentives.

Typical and ironic was an Apr. 3 editorial in the Des Moines Register that disparaged "billions in incentives bestowed on the oil and gas industry at a time when record prices provide all the incentive the industry should need."

That blast followed the editorial's naturally high praise for the extravagant booty Iowan corn farmers and distillers will receive from the ethanol mandate, a subsidy of historic proportions for which all motorists and taxpayers will pay in many ways.

Indisputably, the timing couldn't have been worse for enactment of incentives for the producing industry. With oil and gas prices at current levels, why should producers get incentives?

In fact, the supposed incentives for the oil and gas industry aren't what critics say they are.

In most cases, they're calibrated, or likely will be on implementation, to oil and gas prices and would have no effect now. Price thresholds for royalty relief for marginal wells, for example, are $15/bbl for oil and $2/MMcf for natural gas. And there are other limits, such as volume ceilings on royalty relief for gas from deep wells on the Gulf of Mexico shelf.

Other measures lambasted as subsidies favor producers without costing taxpayers anything over time. The provision for expensing geological and geophysical costs, for example, is just a timing preference. It lets producers deduct G&G costs as they're incurred instead of booking them in an asset account to be depleted over the life of production. On any given property, the government gets its money either way.

As incentives, G&G expensing and price-sensitive royalty relief are trivial in comparison with a massive government mandate for tax-subsidized ethanol.

Yet it's the oil and gas industry, not agriculture, that gets thumped for "subsidies"—and not just in Iowa.

This column will not appear Aug. 19

(Online Aug. 12, 2005; author's e-mail: bobt@ogjonline.com)

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