Tuesday, February 01, 2011

Oil and Gas Subsidies: A Looking Glass View

The Obama Administration has proposed ending subsidies and tax breaks for the oil and gas industry as part of his next budget. The estimated $36.5 billion in new tax collections and foregone subsidies over the next ten years will not go entirely into reducing the federal government’s budget. Obama is also proposing increases in funding for renewable energy alternatives: $300 million for solar energy, $120 million for wind energy and $55 million for geothermal energy.

The budget is not even published yet, but oil and gas industry lobbyists and renewable energy proponents are already squaring off. There have been previous attempts to end preferential treatment for the oil and gas industry. So far no one has been able to hold up under the heavy lobbying effort that the industry’s ample profits support. The depletion allowance for oil and natural gas has been on the books since the 1920s.

The question has to be asked. If the petroleum industry cannot get to its feet and stand alone in nine decades of operation, what hope do we have in getting the various renewable energy sources off the ground?

However, there is a second question that should be posed. What is the appropriate way to support renewable energy? In my view, public policy missed the mark entirely in its support of the fledgling oil and gas industry of the early 1900s.

Take the depletion allowance mentioned above. It may have been exactly the opposite of what was really needed to support an intelligent energy policy, at least as far as fossil fuels were concerned. It is essentially a tax deduction for the investment in the capital equipment used to exploit natural resources. It is lumped in with depreciation and amortization in the profit and loss statements of the likes of Chevron Corp. (CVX: NYSE) and Valero Energy (VLO: NYSE). Thus oil and gas companies have been rewarded by the U.S. taxpayer to use up deposits that ultimately contribute to the degradation of the environment through carbon dioxide and other toxic emissions. In light of the serious environmental damage resulting from burning fossil fuels, the exploiters of oil and gas should have been levied fines or penalties to discourage such activity.

The idea of imposing penalties on the oil and gas industry for carbon emissions might seem ridiculous by some. Extending the concept to the ethanol industry, use of corn or other edible feedstock could be the target of similar penalties to offset the inflationary impact prices in the food chain. That would be heresy!

It is not likely that anyone in Congress would have the nerve to impose penalties on ethanol producers like Archer Daniels Midland (ADM: NYSE) or Aventine Renewable Energy (AVRW: Nasdaq). So it is back to the tax breaks and subsidy approaches to executing on public policy.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

3 comments:

wsm said...

"Thus oil and gas companies have been rewarded by the U.S. taxpayer to use up deposits that ultimately contribute to the degradation of the environment through carbon dioxide and other toxic emissions."

Are you drunk?

These investments also contribute literally the very fuel that powers the global economy.

Anonymous said...

The person that wrote this article knows nothing about drivers of an economy or why incentives are in place to produce depleted oil fields. She should get a clue

Penny Beer said...

Ultimately, oil gas stocks will not suffer that much from a cut in subsidies and tax breaks. Most of them have a large, or majority, portion of their revenues outside the country anyway. That being said, subsidies are a bad way to engender policy. The market should be left to its own devices within a given framework. This could be done through carbon taxes or pollution taxes. This money might be wasted.