Tax incentives for drilling aren't enough to merit U.S. oil industry support of the proposed deficit reduction package. Like everyone else, producers need economic growth. Without growth, markets shrink for oil and--especially--natural gas.
Supporters of the package say trimming the deficit will stimulate growth. Indeed, the Federal Reserve Board might reward the effort by relaxing monetary policy. But lower interest rates won't offset the recessionary effects of a tax hike worth at least $16.2 billion its first year, including a 120/gal hit on gasoline. The new excise, atop the 25-30 cents/gal gasoline price jump that followed Iraq's invasion of Kuwait, would raise transportation costs across the economy and absorb funds that could be spent elsewhere. That's no way to make an economy grow.
And discouraging growth is no way to balance the budget. Recession will reduce government revenues, despite the tax hike, and increase entitlements spending. Results of the proposal, then, would be deepening of a recession now in the making, inflation to the extent the money supply rises while output falls, more deficit growth, and the continued absence of federal spending discipline. That's too much for producers to pay for drilling incentives.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
