Within the contradictory bravado about energy in US President Barack Obama's State of the Union Speech Jan. 24 hid raw material for a constructive point about governmental help in the development of energy technology. Bringing that point into focus, though, requires reengineering of Obama's pronouncements.
The president started well on energy by citing impressive increases these past few years in US production of oil and gas, acknowledging the huge potential of shale plays, and promising to "open more than 75% of our potential offshore oil and gas resources" to exploration and development. Then he ran aground.
"We've subsidized oil companies for a century. That's long enough," he declared. "It's time to end the taxpayer giveaways to an industry that rarely has been more profitable and double-down on a clean energy industry that never has been more promising." So Obama plans no departure from his fundamentally mistaken energy course. He will continue to mischaracterize oil industry tax adaptations as subsidies and push for their elimination, hoping to use proceeds to fund adventures in noncommercial alternatives. "Pass clean energy tax credits," he told Congress. "Create these jobs."
Zig and zag
Between his zig and zag on oil and gas, the president worked in a plug for federal help with development of technologies central to production from unconventional reservoirs. "It was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock, reminding us that government support is critical in helping businesses get new energy ideas off the ground," he said.
The president also might have mentioned a genuine subsidy-a tax credit-that complemented federal research on shale technology. The Section 29 credit helped launch coalbed methane and supported early gas production from tight sands and shales. Now, under a new designation, it applies mostly to refined coal.
The origin of Section 29 is instructive. Congress enacted it as part of the Crude Oil Windfall Profit Tax Act of 1980, which imposed a heavy excise tax. Politicians who decry the "subsidies" oil and gas supposedly have enjoyed never mention the $80 billion this misnamed levy extracted from oil producers during the decade it was in effect. Maybe that's why Obama omitted it from his reminiscence.
Section 29's main function was to promote development of alternative fuels, including fuels synthesized from coal. As things turned out, unconventional gas represents the program's rare success. It has become the basis for a booming industry and a supply of commercial energy, now including oil and gas liquids, of a size few observers imagined just a few years ago. Other beneficiaries of Section 29 and its successors haven't fared as well, despite the expenditure of tens of billions of public dollars. Most remain hopefully noncommercial.
That's the normal pattern with governmental support for energy: too much money spent on too little energy. So why did federal support for unconventional gas work?
A key to the answer is the difference in market standing between gas from unconventional reservoirs and most other energy forms attracting subsidies. A market for natural gas existed when subsidies and federally funded research became available; the government didn't have to create one. Its aim with unconventional gas was to boost domestic supply of a substance already in demand. With other energy forms, it also must create markets by manipulating energy choice with consumption mandates and subsidies. Inevitably, the costs become unbearable.
Legitimate role
Obama thus was correct to assert the legitimacy of a governmental role in energy development. But that role should be confined to research and, when warranted by obvious promise, production subsidies, judiciously implemented. The subsidies should aim to help producers overcome start-up hurdles. And their duration should be limited.
The government has scored energy successes when it worked within those bounds. In selecting energy forms for the market, however, its record is consistently poor, its failures far too costly.
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