energy companies

Fiscal Commission Should Support Increased Energy Production, Not Increased Energy Taxes

by Ben Lieberman on November 15, 2010

in Agenda for Congress, Deregulate to Stimulate, Energy, Natural Resources

Among the many suggestions in the Fiscal Commission’s draft report is a 15 cents-per-gallon increase in the federal gasoline tax. No doubt, this proposed tax hike would raise revenues and make a modest dent in the deficit, but it would do so at the expense of the driving public and would disproportionately burden low-income motorists. There’s a better way. If raising energy-related revenues is the goal, why not fill federal coffers in a manner that actually reduces the price at the pump? Washington can accomplish this by allowing more oil drilling.

The federal government controls all offshore areas beyond three miles from the coast as well as vast expanses of energy-rich western lands. Unfortunately, only a fraction of these areas have been opened to energy leasing, due to legislative and regulatory restrictions. For example, a 2008 Department of the Interior report notes that only 8 percent of the estimated 31 billion barrels of oil beneath federal lands is fully available for leasing, while 30 percent is subject to significant restrictions and 62 percent is entirely off-limits. America’s offshore areas hold even greater potential but are also constrained. No other energy-producing nation on earth has limited itself to this extent.

Even with these restrictions, revenues from new energy leases reached $10 billion dollars in 2008. However, the Obama administration has thus far cracked down on domestic energy leasing, which helps explain why leasing revenues dropped below $1 billion in 2009 and don’t look to be much higher in 2010.

The up-front money the highest bidders pay to win these leases for offshore or onshore drilling rights is only the first installment in the payoff to the federal treasury. The energy companies also pay annual rents on each lease, and unless they hit a dry hole they must pay royalties of up to 18.75 percent on every barrel of oil and cubic foot of natural gas produced. Royalty revenues vary with energy prices as well as production levels, but have exceeded $9 billion in several recent years. With more leasing, royalty revenues would go up in the years ahead as new wells come online and start producing oil and natural gas.

Even more significant than the leasing and royalty revenues are the potential tax revenues. Energy company profits are subject to the federal corporate income tax as well as other levies — and the more energy produced the higher the taxable income.

Overall, the extra federal revenues from a judicious expansion in domestic energy production could easily reach into the tens of billions annually, quite possibly eclipsing the $25 billion or so from the proposed 15 cent per gallon gasoline tax increase. But contrary to a tax hike, allowing additional supplies of domestic oil to come online would lower gasoline prices, as well as those for natural gas and heating oil.

It would be an understatement to call increased domestic drilling a win-win situation. Compared to the proposed gasoline tax, it would be win-win-win. While raising federal revenues in a way that reduces energy costs, it would deliver yet another benefit no tax increase could provide – job creation. One study estimates a potential gain of 270,000 energy industry jobs from expanded offshore leasing.

Bills like the No-Cost Stimulus Act (S. 570 and H.R. 1431), The American Energy Innovation Act (H.R. 2828), the American Energy Act (H.R. 2846), the American Conservation and Clean Energy Independence Act (H.R. 2227), and others seek to reap the multiple benefits from enhanced production of American energy. All would serve as a good blueprint as the next Congress continues the look for solutions to high deficits, high energy prices and high unemployment.

Photo credit: christiannealmcneil’s photostream on flickr.

Finding Something to Praise in Obama’s Speech Today

by Iain Murray on September 22, 2009

in Economy, Energy, Environment, Global Warming, International, Regulation, Sanctimony, Stimulus to Nowhere

While this speech is mostly hogwash, I am surprised and delighted to be able to find one thing to praise in it:

Later this week, I will work with my colleagues at the G20 to phase out fossil fuel subsidies so that we can better address our climate challenge

This is the right thing to do, for reasons I explained in my recent paper co-written with Sterling Burnett of NCPA (extract follows jump).

While many governments of developed nations argue for a worldwide reduction in fossil fuel use in order to combat climate change, those same governments also subsidize energy use and production.

In 2001, the countries of the EU-15 (the “old Europe” nations in the European Union) spent $16.77 billion (in 2009 dollars) subsidizing coal and $11.23 billion subsidizing oil and gas.

The International Energy Agency (IEA) estimates that developing countries spend around $220 billion annually on subsidies for energy production and consumption, of which $170 billion subsidizes fossil fuels [see Figure I]. Including developed countries, subsidies for energy production and consumption worldwide amount to around $300 billion, the majority of which are for fossil fuels.

Such subsidies reduce energy prices below what the market would set, encouraging greater use and raising emissions levels. Direct subsidies include grants to producers and consumers, government investment in research or infrastructure and preferential loans or tax treatment. Indirect subsidies include trade restrictions, price caps and market regulations that guarantee sales volume and restrict competition.

Many signatories to Kyoto subsidize carbon-based fuel use and production. Such subsidies “tilt the playing field,” discouraging research expenditures by private energy companies in developing alternative energy sources. Producers and consumers of other energy sources then demand subsidies to “level the playing field.” Thus, government intervention causes significant distortions in energy markets.

British Petroleum estimates that countries that subsidize transportation fuel use accounted for 96 percent of the increase in oil demand in 2007.13 Many of them are less-developed nations that subsidize both production and consumption of fuels. The IEA estimates that removing domestic price subsidies in China, India, Indonesia, Iran, Russia, Kazakhstan, South Africa and Venezuela would reduce global energy use 3.5 percent and reduce global CO2 emissions 4.6 percent.

U.S. Energy Subsidies.

The U.S. Energy Information Administration (EIA) calculates that federal energy subsidies amount to $16 billion annually [see Table II]:

In 2007, the federal government spent approximately $5.5 billion on subsidies for the coal, oil and natural gas industries— principally tax breaks for investment — including $3 billion for coal and natural gas, and more than $2 billion for research and development of clean-coal technology to reduce greenhouse gas emissions from coal.

The government spent an additional $1.2 billion for electricity production and use (not fuel specific), and $2.8 billion to increase the energy efficiency of homes and businesses.

It spent an additional $5 billion for renewable energy production and use, mostly in the form of tax breaks.

Finally, $1.2 billion went to the nuclear industry.

The EIA found that subsidies doubled from 1999 to 2007, due mainly to expanded subsidies for renewable energy and clean-coal technology.

Policy Recommendations. There are a number of neutral energy policies that could be implemented at the national or international level to reduce subsidized production and use:

International trade talks should include eliminating subsidies for fossil fuel production and consumption.

National budgets should be reviewed with the goal of eliminating programs that encourage energy use.

Subsidies and tax breaks, or tax penalties, for specific energy technologies should be eliminated to remove price distortions in energy markets.

A neutral energy tax policy, for example, would include replacing the federal tax-depreciation schedule for investment in new capital stock with immediate expensing. New equipment almost always produces fewer emissions per unit of output than older equipment.

Changing the depreciation schedule so that new investments could be written off immediately would make it profitable to replace old equipment at a much quicker pace. This simple change could do more to increase energy efficiency throughout the economy than the current complicated expensing regime.

Unfortunately, given the President’s praise for loan guarantees and tax credits elsewhere in the speech, he is failing to pursue a neutral energy tax policy, but I’ll give him due credit for at least addressing half of the market distortion.

Germanic Hoards

by Iain Murray on August 26, 2009

in Energy, Environment, Global Warming, International, Personal Liberty, Regulation, Zeitgeist

The old central powers (Germany, Austria, Hungary) seem to have come together again in opposition to plans to phase out incandescent light bulbs in favor of the more expensive twirly kind:

Germans, Austrians and Hungarians are hoarding energy-hungry light bulbs, which have fallen out of favour in other European countries, ahead of a European Union ban that takes effect next month.

The scramble for conventional bulbs illuminates the challenges of persuading consumers to embrace environmentally friendly shopping habits – particularly in the midst of an economic crisis. Sales of incandescent light bulbs have risen 34 per cent year-on-year in Germany in the first six months of 2009, data from GfK, the German consumer research group, shows.

In most other European countries, sales of old-style light bulbs have fallen at double-digit rates this year. In the UK, sales dropped 22 per cent, amid a voluntary agreement between retailers and energy companies to phase out light bulbs nine months ahead of the EU ban.

Germany, home of the Green Party founded by Petra Kelly and Joseph Beuys amongst others, seems to be doing so for reasons of comforting domesticity:

The shopping behaviour appears to contradict the stereotypes of Germans and Austrians as environmentally conscious. But Hans-Georg Häusel, a psychologist who uses brain science to explain consumer behaviour, said they were reluctant to change. “There is a fear that they could destroy the snug atmosphere of their homes,” he said.

CFLs will surely get more affordable and provide better quality light.  In the meantime, however, it seems that the Germans, Austrians and Hungarians have decided that, even if a German’s home is not his castle, it deserves to be as well lit as possible.

Image: Professor Joseph Beuys in the 1960s.  He was still wearing that hat when the author heard him speak in the 1980s.

The Energy Tax Budget

by Iain Murray on February 26, 2009 · 8 comments

in Economy, Energy, Environment, Global Warming, Stimulus to Nowhere

“Not one dime,” said President Obama in his address to Congress, referring to how much extra tax people earning under $250,000 a year will have to pay in his budget. Unfortunately, even if you don’t have to pay extra tax, you will have to pay extra fees for your energy, which are passed on to the government via energy companies. That’s the effect of the President’s cap-and-trade scheme for carbon emissions, an important part of his new budget. Energy companies will have to pay the government for permits for each ton of carbon dioxide or equivalent they emit in the generation of power. They will pass on these costs to the consumer, as has happened everywhere a cap-and-trade scheme has been tried. The Administration will split the revenues between $15bn for alternative energy pork and about $52 billion per year to help pay for the Making Work Pay tax cut/welfare check of $800 for “95 percent of all American workers.” By raising the price of fossil fuel energy and thereby making expensive alternative energy more competitive, the program is also aimed at reducing the amount of greenhouse gases emitted.

How much will cap and trade cost households in increased energy costs? Well, we know from a CBO study last year that a 15 percent reduction in emissions from 1998 levels would cost each household at least $660. That target is about 25 percent more stringent than the budget target, which is simply a return to 1990 emission levels by 2020 (far less than environmentalists demand). So we can apply simple arithmetic to estimate that the current budget cap and trade program will cost each income quintile $510, $660, $870, $1125 and $1635 (in 2006 dollars, slightly more in nominal values) respectively. This is a significant offset to the $800 “tax cut” per worker.

To those who might object that most households have two income earners these days, that’s not true. While the “traditional” family model of a husband supporting his family only accounts for 7 percent of householders now, dual-income families actually account for just 29 percent of households. Moreover, it is the bottom three quintiles that have on average just one earner, meaning that they suffer proportionally more from this energy tax increase.

Finally, for the highest quintile, the lower income limit is just $88,000. If you earn that amount, even if you have two income earners in the household, you will likely lose money from these stealth energy taxes. So will the average household earning between $35,000 and $55,000. So much for “not one dime.”

My Heart Bleeds

by Iain Murray on September 19, 2008

in Economy, Energy, Environment

From today’s Greenwire:

NEW YORK — The crisis roiling Wall Street is threatening to choke financing for green energy projects. Venture capitalists and private equity firms could fill the void as traditional financing options dry up. Indeed, private equity fund managers say the current turmoil could turn into a net positive for them: As debt markets turn their backs on green energy companies, many will look to venture capital and private equity to get backing for new projects or expansions. But the new, highly risk-averse environment will make it that much more difficult for companies to convince investors to put money behind renewables. While the sector is still very popular, the chief worry among money managers is protecting existing portfolios and guaranteeing that any new investments will net them strong, long-term returns.

Oh dear, what a shame, never mind. In a threatening recession, with a looming energy crisis, the last thing we should be doing is wasting money on projects that are not economically viable and that will actually make energy more expensive, which is all that renewable energy projects have been able to do so far. Now, I don’t mind venture capitalists doing it, or private investors putting up their own money because they believe it is important, but the mainstream funding sources must concentrate on what is viable and what will produce the affordable energy the economy needs. The renewables industry has to get its act together, and stop leeching off the rest of the economy. If it can do that, I’ll be only too happy to applaud its true maturation.