Of all the times for the U.S. to be discouraging domestic production of oil and natural gas, right now might be the worst. Libya's descent into chaos is fueling a rapid rise in oil prices, and unrest in other oil-producing countries in the Middle East and North Africa has led some analysts to predict unprecedented oil-price spikes may be looming.
Nevertheless, President Barack Obama's administration has not only stopped issuing permits for deep water drilling in the Gulf of Mexico, it also wants to stop "subsidizing yesterday's energy" so that the federal government can boost revenues and spend more on developing alternative energy sources. The president's 2012 budget, released earlier this month, calls for eliminating a dozen tax incentives that benefit producers of coal, oil and natural gas. Mr. Obama is most eager to eliminate what he calls "costly tax cuts for oil companies."
Big Oil has long been a plump pinata for politicos and environmental groups, but a simple cost-benefit analysis shows that eliminating decades-old tax rules for oil and gas could be a lousy deal for consumers.
The energy industry contends that the deduction encourages capital formation -- and greater production -- in their high-risk business. And many economists have long favored expensing to encourage capital formation throughout the economy. Still, even if we assume that the IDC deduction is in fact a subsidy, are consumers getting a tangible benefit?
Consider natural gas. Thanks to the increasing use of horizontal drilling and hydraulic fracturing, U.S. gas production has soared over the past few years. The result: Methane prices are now about half what they were in 2008.
Changing the tax rules could also slow the surprising resurgence of the U.S. oil industry. After decades of declining production, domestic drillers are increasing their oil output because they are tapping shale deposits with the same new techniques that have helped increase gas production. The result: Domestic oil output could jump by as much as one million barrels per day by 2015, according to the analytics firm Bentek Energy.
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