Taxing Oil Will Stall Progress

The U.S. oil industry is getting smaller and yet smarter all the time. Higher rates of energy efficiency from the use of new technology and a stunning turnabout in domestic natural gas production have revitalized a critical sector of the economy, increasing supplies of clean energy at ever more affordable prices.

The most important question now is not "how much can domestic oil and natural gas production be increased" but rather "will President Obama's call for an $80 billion increase in oil industry taxes stall the recovery?"

The administration is seeking to raise $36.5 billion in new tax revenue between fiscal 2011 and 2020 by ending certain tax credits and deductions for domestic oil and gas production. Another $8.5 billion would be raised by eliminating the foreign tax credit for taxes paid by oil and gas companies overseas. The balance would be an increase in estimated taxes under the House-passed Waxman-Markey energy and climate-change legislation.

Fittingly, Americans today use less than half as much energy for every real dollar of gross domestic product as we did in 1973.

Yet what has happened to the oil industry in recent years is the very definition of improved energy productivity. Since 1985, U.S. refining capacity has increased by 13 percent even though there are 73 fewer refineries. That is possible because it is more cost effective to increase capacity of a refinery than build a new one.

And U.S. refineries are a lot more energy efficient than refineries were years ago, thanks to increased use of a process called "cogeneration" that involves re-using excess heat from refinery processes to produce additional energy. What's more, during the past 20 years, U.S. refineries invested almost $100 billion to generate the cleanest burning fuels in the world. Much of the investment was for equipment to meet air quality standards, while other funds were used for increased processing of heavier crude oils, especially Canadian oil sands, which has enabled the United States to reduce its need for Middle East oil.

Fittingly, Americans today use less than half as much energy for every real dollar of gross domestic product as we did in 1973.

And although significant progress has been made with the use of renewable energy sources as well as improved efficiency, the Energy Information Administration forecasts that half of the energy demand 25 years from now will be met by oil and natural gas. By 2035, demand for energy is projected to grow by 14 percent, so the oil and gas industry is making substantial investments to provide the fuels we will need.

Thanks to the boom in shale gas production over the past few years, the price of natural gas is less than half that of oil on an energy basis. Moreover, U.S. natural gas production has climbed 10 percent in recent years, and we are now the world's No. 1 producer of gas. Experts now estimate that domestic gas resources could last 100 years or more.

That's not to suggest the oil and natural gas industry has ignored biofuels and renewable energy sources. Quite the contrary, between 2000 and 2008, it invested more than $58 billion in new and zero emissions technologies. This represents 44 percent of the $133 billion spent by all U.S. industries and the federal government combined. And the oil and gas industry's investments in low-carbon energy are continuing.

But the Obama Administration's proposed increase in oil industry taxes and fees would divert funds away from energy investment.

If Congress approves the tax increase, domestic oil and gas production will fall, with uncertain economic and environmental effects. There will be job losses, less revenue for governments at all levels, and problems for our country's energy security.

Instead, we should be doing everything we reasonably can to stimulate the production and use of America's energy resources.

Mark J. Perry is a visiting scholar at AEI.

Photo Credit: Flickr user tsuda/Creative Commons

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About the Author

 

Mark J.
Perry
  • Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

    Follow Mark Perry on Twitter.


  • Phone: 202.419.5207
    Email: mark.perry@aei.org

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