Oil and gas industry leaders possibly shuddered when US President Barack Obama introduced his nominee to chair the Council of Economic Advisors on Aug. 29. Some may have recalled statements Alan B. Krueger, then assistant US Treasury secretary for economic policy, made as he testified at a Sept. 10, 2009, US Senate Finance subcommittee hearing on the White House's Fiscal 2010 oil and gas tax proposals.
Krueger told the Energy, Natural Resources, and Infrastructure Subcommittee that the Obama administration was studying whether to propose repeals of tax incentives for other industries besides oil and gas. When a subcommittee member, Sen. Jim Bunning (R-Ky.), asked him if the industry was being singled out, the Treasury official replied, "That is correct."
He said the administration believed it was no longer enough to address US energy needs simply by finding more fossil fuels, and that dramatic steps toward becoming a clean energy economy must be taken.
"The tax subsidies that are currently provided to the oil and gas industry lead to inefficiency by encouraging an overinvestment of domestic resources in this industry…. [The provisions also] result in distortions within the industry by favoring investment in nonintegrated firms," he said in his written testimony.
Removing federal tax preferences would have little adverse impact on oil and gas prices, production, and employment, Krueger said. "The relatively small share US share of global [oil] production means that any change in domestic production will have a limited impact on the world supply…[which the Treasury Department estimates] would fall by less than one-tenth percent," he said.
Price impacts
Even if additional costs to US oil companies were fully passed on to consumers through higher gasoline prices, "which is highly unlikely because prices are set on the world market, the cost would be equivalent to less than 1¢/gal," Krueger indicated.
He conceded that a change in domestic producer costs could cause production to move from US independents to domestic and foreign integrated oil companies, but added that total oil finding and lifting costs would rise by less than 2%.
"Of course, the increase in costs would not translate into a one-for-one decrease in production," he said. "Based on estimates of short and long-run supply elasticities, we estimate that the decrease in domestic production due to these proposals will be less than one-half percent, even in the long run."
Upstream oil employment would fall by a similar percentage, he added. Natural gas production job losses would be somewhat higher, but still modest, and would be offset over time with new jobs in other businesses, Krueger suggested.
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