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Treasury: Oil, gas 'overproduction' a threat to security

Bob Tippee
Editor

For oil and gas, the national-security argument has always been a two-edged sword. The back edge now slashes savagely.

US producers see security as a reason to encourage domestic production of oil and gas. Their position makes perfect sense.

But the politics of energy is rarely sensible—less so now than ever.

When producers base their policy arguments on security, they traditionally have had in mind the benign goal of lowering US dependence on foreign oil by raising domestic production.

The back edge of the security argument pursues something quite different: lowering dependence on foreign by lowering the use of oil altogether. And one way to lower the use of oil is to produce less.

The back-edge logic undergirds a Department of Treasury report explaining the Obama administration's revenue assumptions in its budget proposal for fiscal 2010.

The budget repeals a series of tax measures crucial to independent producers—especially small producers—such as percentage depletion and expensing of intangible drilling costs. It also denies oil and gas companies of all size use of the manufacturing deduction available to companies in other industries since 2004 as a way to help them compete internationally.

In each case, the "reason" offered by Treasury reads like this: "The [measure or its result], like other oil and gas preferences the administration proposes to repeal, distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent the [measure or result] encourages overproduction of oil and gas, it is detrimental to long-term energy security and is also inconsistent with the administration's policy of reducing carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade program [emphasis added]."

The first slash thus amputates the correlation between domestic oil and gas production and energy security—the front-edge security argument.

If the budget passes, the next lacerations will befall oil and gas production. They'll be deep.

Confronted with shrunken access to economically viable energy and the need to pay for costlier alternatives, Americans who buy fuel and pay taxes will do their bleeding later.

(Online May 22, 2009; author's e-mail: bobt@ogjonline.com)


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