President Barack Obama to the US oil and gas industry: Get out of town. That's the message in the president's budget proposal for fiscal 2011.
Obama doesn't like fossil energy. He thinks anything that encourages production of fossil energy impedes development of what his budget narrative hails as the "clean energy economy." So he wants to tax away oil and gas.
Obama proposes the same errors on oil and gas that he offered in his fiscal 2010 offering but failed to push through Congress. The repetition is portentous. It means last year's menu of economic poison represented more than bumbling by beginners. Obama and his team have had a year to learn. Yet they reject any lesson that challenges their activist agenda. Obama proved his recalcitrance by promising, in his state-of-the-union speech Jan. 27, to keep promoting an unpopular, state-centered, and now politically disastrous program for health care reform.
Beyond arrogance
For the oil and gas industry, the problem goes beyond the arrogance with which Obama is undermining his presidency. It's antagonism. Reiteration of threats to industry capital formation follows a year of regulatory assault. The Department of the Interior has been systematically constricting exploratory access to hydrocarbon resources on federal land as its secretary chides representatives of the oil industry as "kings of the world." The Environmental Protection Agency has been tightening air-quality rules unnecessarily, maneuvering for control over much of the economy via regulation of greenhouse-gas emissions, and siding with the fearful in a controversy over hydraulic fracturing in New York.
Now, the administration says in its new budget proposal, "We are eliminating 12 tax breaks for oil, gas, and coal companies, closing loopholes to raise nearly $39 billion over the next decade." The statement will win populist points with Americans who think electricity comes from room walls and gasoline originates in service-station pumps. But the economic consequences of acting on that statement would be dire.
Those "loopholes" include percentage depletion, accelerated write-downs by independent producers of geological and geophysical costs, and expensing of intangible drilling costs. These aren't "breaks" on the order of a $1/gal tax credit for makers of biodiesel. Two of them are timing preferences that favor the taxpayer and the other, percentage depletion, is available only to small independent producers and limited even for them. Their elimination would hurt small producers, not "Big Oil," and slash drilling and production in the US.
The big companies take their spankings elsewhere. Obama's proposal would repeal the manufacturer's tax credit for oil and gas companies while leaving it intact for other industries. And the proposal assumes passage of cap-and-trade legislation to limit greenhouse-gas emissions, the version of which the House passed last year would hit refining especially hard.
Swirling elsewhere in Obama's fiscal soup are toxins that would gag oil and gas companies along with others: repeal of last-in first-out inventory accounting, reinstatement of Superfund taxation, and adverse changes in accounting for foreign taxes, for example. If everything passed, the Obama proposal would stifle oil and gas activity, upstream and downstream. That's the intent. "As we work to create a clean energy economy," the budget notes explain, "it is counterproductive to spend taxpayer dollars on incentives that run counter to this national priority."
Unproductive expenditure
This statement is not only redundant, it's bonkers. It flows from the delusion that the US can and should displace fossil energy with preferred alternatives and compensate the inescapable cost disparities with green jobs. In fact, any effort to displace commercial energy with the other kind requires unproductive expenditure certain to shrink net employment. And no such effort will knock oil, gas, and coal out of their dominant positions in the energy market anytime soon. Especially if implemented with punitive taxation, it will only push commercial energy work out of the country—along with supply, jobs, and taxable incomes.
The oil and gas industry must hope Congress shows more concern for national interests than the administration has with its budget proposal. It must hope a useful number of lawmakers, unlike the president, still can learn.
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