Why President Obama Should Stop Picking On The Oil And Gas Industry

Gas prices are hovering at $4 a gallon across the country, and, in an effort to deflect the political heat and boost his sagging poll numbers, President Obama has intensified his attack on oil and gas companies.

Indeed, just several months after proposing a 2012 budget that would punish and penalise the oil and gas industry, the President now wants to end the $4 billion in “subsidies” that oil and gas firms receive from the Federal government.

I believe that Obama’s populist rhetoric and political approach are wrong-headed, short-sighted and damaging to our nation.

Here are five reasons why:

First, America’s oil and gas industry is an acknowledged world leader in terms of technology innovation and overall wealth creation. At a time when so many domestic industries are simply non-competitive in the global economy, it seems way off the mark for the President to single out oil and gas companies and vilify – rather than support – them.

Second, unlike a number of large industrial enterprises in the U.S., oil and gas companies pay a good amount of taxes. In addition to paying severance taxes to the states whenever they extract minerals from the ground, oil and gas companies also pay corporate taxes. And they employ workers, who pay taxes on their salaries. The big issue isn’t stopping government “subsidies” to the oil and gas industry, it’s overhauling and simplifying the corporate and personal tax codes in this country so there is greater equity and fewer disincentives for economic growth.

Third, the oil and gas industry may generate large profits, but it also pays significant royalties to the U.S. government. Annual revenues from Federal onshore and offshore mineral leases are one of the Washington’s largest sources of non-tax income. And, in fiscal year 2007, the most recent year for which a complete annual report is available, the Federal government alone collected $9.4 billion in oil and gas royalties.

Fourth, the President is using the word “subsidies” very loosely. For example, the government’s accelerated expensing for independent oil and gas companies is intended to encourage much-needed oil and gas exploration by supporting the cash flow required to undertake these capital-intensive activities. Oil and gas companies are also not allowed to write off any additional expenses; Federal law only addresses the timing of the expenses. In addition, a host of other industries receive the same type of government incentives to spur specific economic endeavours that are beneficial to the country.

Fifth, independent oil and gas companies are the ones most likely to lose if this accelerated expensing is ended, not the multinational energy goliaths. And it’s the innovative independents that have recently transformed the oil and gas industry in this country. Working on the cutting edge, the independents have pioneered breakthrough technology that has increased our estimated gas reserves 20-fold; as a result, we now have nearly 100 years of production. The independents have also turned around the decline in domestic oil production. Finally, these nimble companies are creating a host of jobs in many communities. With the economic recovery so tentative, why would the President want to go after businesses like these?

It’s hard to understand. But Obama’s current behaviour isn’t surprising.

His proposed 2012 budget plan shows a decided bias toward clean energy at the expense of the oil and gas industry. The White House numbers say it all. While cutting support for oil and gas, the President wants to put 1 million electric vehicles on the road by 2015; double the nation’s share of electricity from clean energy by 2035; and spend $5.4 billion on what is being called long-term R&D. But, in truth, this so-called “long-term R&D” is nothing but an out-and-out subsidy for clean energy.

The key fact that has been neglected in making this ill-conceived public- policy decision is that oil, gas and coal are the dominant energy sources in the United States. In 2007, our country’s total energy consumption was 102 quadrillion Btu; 96 quadrillion Btu of that came from coal, gas, oil and nuclear, and just 1 quadrillion Btu was contributed by wind, solar and other energy.

It’s fair to say that renewable energy is growing rapidly. Between 2004 and 2009, for example, wind power grew 27 per cent annually, solar water heating grew 19 per cent, and ethanol production grew 20 per cent. But with such a minuscule market share, and no chance of overtaking traditional energy sources anytime soon in terms of overall consumption, continuing to push renewables as a priority makes absolutely no sense for the government – or taxpayers.

But that’s just what the Federal government is doing.

In 2007, U.S. public-sector subsidies and support for electricity production on a dollar-per-MWh basis were $24.20 for solar, $23.40 for wind, and $.3 for oil and gas. The same gap exists when public-sector subsidies and support for non-electricity production are taken into account; on a dollar-per-MBtu-basis, oil and gas gets $.03 while ethanol and biofuels receives $5.72.

Even more distressing is the fact that government funding for oil and gas R&D has steadily declined over the past two decades. In 1987, for instance, government appropriations were $119 million for oil and $45 million for gas; by 2007, these numbers had dropped to $6 million for oil and $2 million for gas. And, if the Obama Administration has its way, this would be zeroed out. 

The venture capital community is partially responsible for the current allure of clean energy and the demonization of oil and gas. Even though renewables can only supply a small portion of our energy needs for a long time to come, VC’s have been plowing money into clean technology start-ups while demanding government subsidies from the Department of Energy to spread and share their risk. There is a certain irony in seeing VC’s – the quintessential American capitalists – insisting on their place at the public trough.

From my perspective, this is a risky – and even naïve – way to spend taxpayer dollars. If, as a country, we want to encourage innovation in energy, we should be supporting real research in all forms of energy; and we should prevent public officials, who have a terrible track record when it comes to picking winners and losers in the marketplace (remember corn ethanol), from choosing our prospective energy sources.

That means the Federal government must acknowledge our country’s tremendous oil and gas consumption – both current and future use. It means that public officials must recognise that the American-born oil and gas industry is a world leader and global wealth creator. And it means that policy makers in Washington DC must embrace this core economic truth when funding Federal programs. Finally, we absolutely must discard today’s simple-minded narrative of good guys (renewables) versus bad guys (oil and gas) in order to safeguard America’s 21st century energy future.