President Obama’s crush on oil and gas was short lived.
On January 24, he angered his green base when, in his State of the Union address (SOTU), he stated that he is directing his “administration to open more than 75 percent of our potential offshore oil and gas resources.” He also called for “every possible action” to develop “a supply of natural gas that can last America nearly one hundred years.”
Greenpeace’s reaction: “President Obama announced a potential environmental nightmare when he called tonight for more than 75% of offshore oil and gas resources to be exploited.” Time’s Ecocentric blog chastised him for barely mentioning even the words “climate change.” Others felt that his “cheerleading” for greater shale gas drilling risked the enthusiastic support of environmentalists and accused him of selling out the environment for re-election. Over all, the SOTU “left many eco friendly people more than a little unhappy.”
Not to worry. His infatuation with fossil fuels was merely a short-lived crush.
Days after touting oil and gas in the SOTU, President Obama released his proposed 2013 budget. While the Financial Times declared that “everybody knows it has no chance of passing,” they did acknowledge that it does offer “a foretaste of the priorities he would pursue in a second term.” And, the foretaste will bring his green base back into the tent and “sets up a fight with the oil and gas industry.”
President Obama has frequently attempted to raise taxes on the oil and gas industry, and that theme is repeated in the budget—and some exclusively single out the oil and gas industry. One such tax hike proposal involves the Section 199 manufacturer’s deduction, which was part of the American Jobs Creation Act passed by Congress in 2004, as an incentive to retain manufacturing and production jobs in the US. Section 199 allows a deduction equal to a percentage of net income from production activities in producing new products such as manufacturing, producing, or growing tangible personal property, production of a qualified film, architectural engineering services, and production of electricity and natural gas. While other industries will be able to keep their 9% deduction, the oil and gas industry is already only allowed 6%, but under the proposed budget, Section 199 would be totally repealed for oil and gas companies. So much for the “fairness” rhetoric and American independence from foreign oil and gas.
Generally unique taxes are used to punish undesirable activities. The so-called “sin taxes” are levied on cigarettes and alcohol, gambling, and vehicles believed to emit excessive emissions. While the proposed repeal of the Section 199 deduction for oil and gas development is not a new tax, it does single out one industry for punishment because the administration perceives its activity as “undesirable.” Repealing Section 199 is just one of the changes the President would like to impose which would cause US oil and gas producers’ federal taxes to climb by nearly $27 billion over 10 years—an increase that will be reflected in gasoline prices.
Clearly, the SOTU crush is over, replaced by the original lover: green—who briefly fell out of favor, due to the likes of Solyndra, et al.
Within the President’s proposed budget are startling spending increases for the Department of Energy, the Department of Interior and the Environmental Protection Agency. The increases include $310 million for the SunShot Initiative, designed to make solar electricity cost-competitive with traditional energy—without subsidies—by 2020 and $95 million for wind energy technologies. Additionally, among the priorities the President would like to pursue is the extension of the Production Tax Credit (PTC) for wind energy which Congress specifically did not include in the payroll tax extension bill—leaving wind energy lobbyists predicting the demise of the industry—and the extension of the Treasury Cash Grant Program (Section 1603 of the American Recovery and Reinvestment Act) that expired at the end of 2011.
While greens describe Section 1603 as a program that “provided grants in lieu of tax credits to small renewable companies,” free market, fiscal conservatives—who don’t like subsidies in the first place—would be outraged if they understood how the program is really used. The PTC gave owners of wind turbines a tax credit of 2.2 cents per kilowatt-hour (kWh) of electricity produced during the first 10 years of operation. A 50 MW installation operating at an average capacity factor of 30% would generate 131,000,000 kWh per year. The owner would receive a PTC of $2,891,000 per year or $28,910,000 over 10 years. However, Section 1603 allowed the turbine owners to take a “cash grant” equal to 30% of capital costs up front ($100-120 million, 30% = $30-36 million) that came directly from the US Treasury—whether or not the turbine ever produced any electricity. This removes the performance risk for the developer and allows projects with a marginal net capacity factor to get built—even though, like Solyndra, the project doesn’t attract enough private investment. Plus, the cash grant is a “grant,” not a loan. The government doesn’t expect any money back. With the money taken up front, rather than annually based on actual production, turbine owners do not have the incentive to keep up the costly maintenance, and the turbines can eventually be abandoned. Additionally, much of the money is given to foreign companies—not “small renewable companies.”
These brief samples of President Obama’s priorities, as outlined in his proposed budget, highlight the flaws of his ideology. Instead of building on strength, it builds on failure. Renewables have repeatedly proven that they are more expensive than traditional fuels and are unwanted—requiring mandates and government programs to create an artificial market. There are thousands of abandoned wind turbines rusting in the wind. There were no buyers for Solyndra. Their stock of solar tubes were tossed in the trash. Fledgling companies from all segments of the renewable industry have gone bankrupt. They were surviving solely on subsidies and couldn’t compete without the frequent cash infusions. Yet, the budget promises them billions more—good money thrown after bad.
Meanwhile, the abundant and affordable fuels: oil and gas, are being singled out for punishment as if they are “undesirable.” The increased costs will be added to the growing gas prices, which punish the consumer and hurt our sputtering economic recovery.
Regarding the budget, the Financial Times aptly concludes that President Obama resorted to “gimmicks that will add further complexity” to the tax code. “At some point, however, he will need to produce a more serious document than this.”