What the budget means

Feb. 21, 2011
For the US oil and gas industry, the budget proposal of President Barack Obama arrives in company with one bit of good news: Deep gouges stand almost no chance of surviving Congress.

For the US oil and gas industry, the budget proposal of President Barack Obama arrives in company with one bit of good news: Deep gouges stand almost no chance of surviving Congress. Obama has proposed the same special mistreatment of oil and gas twice before, when both houses of Congress were controlled by Democrats as hostile to the industry as he is. The initiative failed both times. That it would succeed now, with the House under Republican control and Democrats in decline in the Senate, is very improbable.

Even when never implemented, however, budgets have symbolic importance. Obama's budget radiates a misguided orientation that should trouble the oil and gas industry—and its customers—deeply.

Twin confusions

Obama's misconceptions begin with twin confusions about job creation and green energy. His administration continues to assert that profligate state spending achieves net job growth. This assertion girds arguments for energy forms unsupported by markets. Obama's budget message thus speaks of "investing in research and development—especially in the job-creating industries of tomorrow such as clean energy." That might make sense if the program stopped at R&D. But Obama proposes to fund development of noncommercial energy through punishing taxation of oil and gas.

This is a formula for systemically increased cost, which cannot yield net job growth. The link between subsidized green energy and jobs is a sham.

Worse than that is Obama's mischaracterization of the oil and gas tax incentives he would repeal. "We are eliminating subsidies to fossil fuels and instead making a significant investment in clean energy," says the budget message.

Wrong. Of the $43.6 billion Obama's budget supposedly would save in 2012-21 by cutting oil and gas tax incentives, $12.4 comes the expensing of intangible drilling costs, and $18.3 billion comes from denying oil and gas companies use of the manufacturing tax deduction. The former is a timing preference, not a subsidy. The latter is a deduction available to all US manufacturers to boost international competitiveness. Another targeted item, percentage depletion, is available only to small producers and represents a subsidy only to the extent a taxpayer's charges exceed total costs of the affected properties. The total amount by which that happens can be nowhere close to the $11.2 billion the administration claims the end of percentage depletion would save.

The presumed savings from these moves are as illusory as Obama's misuse of the word "subsidy" on which they're based. If enacted, elimination of timing preferences important to independent producers would slash drilling. Denial of the manufacturing tax deduction, along with changes proposed for taxation of non-US income, would encourage large companies to move operations, if not headquarters, overseas. The net effect would be less money for the US government, not more.

The jolt to drilling, moreover, would impede development of unconventional oil and gas resources, the most promising source of energy—much of it low-carbon natural gas—to emerge in decades. To jeopardize this potential source of energy, jobs, and incomes would be breathtakingly irresponsible. It also would punctuate the worst message in the budget proposal.

No moderation

This administration doesn't like oil and gas or the industry that supplies them. Its goal is not just to supplement conventional energy with renewable supplies, which is reasonable; it's to push renewable energy into the market at the expense of hydrocarbons. The costly approach is evident and at work beyond the no-hope budget. It guides policy-making at an out-of-control Environmental Protection Agency and boot-on-neck Department of the Interior.

The budget proposal confirms that Democratic setbacks in elections last November did nothing to moderate Obama's hostility toward the oil and gas industry. The industry must account for this imbedded antagonism as it defends its interests and those of its customers, whose energy costs would soar if the president had his way. There can be no compromise with this administration. There can be only hope for better judgment in the White House come 2013.

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