Tax plan called bad for small oil firms

• Article
• Comments ()
• Click-2-Listen
• Videos

By Amanda DeBard

President Obama says his energy plan will make the nation independent from foreign oil, but he's also cheerleading for policies that analysts agree could tax domestic oil and gas companies out of the production business.

The president wants to increase federal spending on renewable energy by about $150 billion, including creating a "smart" electricity grid that would move renewable energy to anywhere in the nation. His goal: to eliminate oil imports from the Middle East and Venezuela by 2020.

But experts doubt that renewable resources can grow fast enough to replace all that oil - about 21 million barrels a day - especially if Mr. Obama succeeds in erasing federal subsidies for drilling in the U.S.

"He's trying to have his cake and eat it, too," said Steven Hayward, an environmental researcher at the American Enterprise Institute. "If you want to decrease oil imports, then you need to increase domestic production, not tax it."

Mr. Obama proposes to raise $30 billion over 10 years by repealing tax incentives for oil and gas drillers. On the surface, those changes would seem to whack Big Oil. In fact, small oil and gas companies that drill 90 percent of the nation's oil would be most disadvantaged by the change, experts say.

Lee Fuller, vice president of government relations at the Independent Petroleum Association of America (IPAA), said repealing the provisions would primarily hurt small, independent drillers. He predicts that small firms would cut their 2011 budgets for new oil and gas development by as much as 50 percent should the Obama proposals become law. An average small company, which drills 10 new wells a year, would probably drill five in 2011, he said.

"Five new wells a year doesn't produce enough oil to operate, so companies will slowly go out of business," Mr. Fuller predicted.

Mr. Obama also wants to repeal a tax credit for wells that produce small amounts of oil and gas, which are already barely profitable. Yet these types of wells, called stripper wells, supply nearly 20 percent of the nation's oil and 12 percent of its natural gas.

The tax breaks are so integral to the economics of the oil business that many investors would abandon the industry even if oil prices again skyrocket, Mr. Fuller said. The United States is already seeing a dramatic decline in production owing to the now-lower oil price; half as many oil and gas rigs are operating now compared with last year.

"The Obama administration's budget blueprint amounts to a 'war on domestic production,' " said Sen. Lisa Murkowski of Alaska, the ranking Republican on the Senate Committee on Energy and Natural Resources. "Punishing the domestic oil and gas industry will not bring on the 'age of renewable energy' any faster."

Environmental advocates like the Sierra Club disagree. It says taxpayers shouldn't have to subsidize an "environmentally unfriendly" industry that can survive without government help.

"We don't think taxpayers should have to pay for dirty energy of the past when they can help advance clean energy of the future," said Josh Dorner, a Sierra Club spokesman.

The Obama administration offers a mixed message about its intentions with regard to oil.

Interior Secretary Ken Salazar says it is not the administration's intention to discourage domestic production, and has repeatedly said that oil and gas are important to Mr. Obama's overall energy plan. He also has said the administration might reconsider its initial plans to repeal the breaks.

Whatever the administration's view, experts acknowledge that the bulk of U.S. energy needs will have to be fulfilled by oil and gas at least until the middle of this century, even if renewable sources ramp up quickly as the president suggests.

"Saying we'll get off oil at some undisclosed date in the future, and that we'll get on something else, isn't a plan," said William Kovacs, the top energy policy expert at the U.S. Chamber of Commerce. "It's the biggest spoof ever foisted."

"We can't become oil independent in a reasonable amount of time," agreed Charles Ebinger, a Brookings Institute expert on energy markets. "To make people believe we can is a bit disingenuous."