Thursday, April 28, 2011

Oil and Obama -- The Two Don't Mix

The Gas Price Freakout

Ready-made energy incoherence as a gallon climbs towards $4

Man-at-the-pump angst is harming President Obama politically almost as much as gas prices surging toward $4 are hurting the middle class economically, which explains the energy panic that Washington began in earnest this week. The 2011 debate isn't likely to be any more instructive than its 2000, 2005, 2006 or 2008 vintages, but maybe this time politicians can keep things in the general vicinity of planet earth.

They're off to a lousy start. Mr. Obama usually begins his gas price narrative, now a campaign trail staple, by explaining that there aren't easy solutions. That's true—there's not a lot the political class can do to change gas prices in the short run—but then the President goes on to mention that there happens to be one easy solution: raising taxes on the oil and gas industry. This is also his stock answer on the budget deficit, world hunger and everything else.

In a letter to Congressional leaders Tuesday, Mr. Obama called for repealing some $4 billion a year in "subsidies" in the tax code, and even Speaker John Boehner chimed in that oil companies "ought to be paying their fair share." No doubt the reporting of first-quarter profits this week will be a demagogic moment, but really? The junk economic theory is that increasing the U.S. costs of investor-owned oil producers—which together hold a mere 6% of world reserves—is supposed to lower the price of a global commodity.

Oh, and Mr. Obama wants to devote the proceeds to even more spending on "clean energy." The problem here is that some renewables (ethanol) increase the cost of driving, while the others (wind, solar) are irrelevant in transportation. We trust anyone not recharging his federally subsidized $109,000 electric sportscar at his personal windmill is blinking in amazement.

One of the main so-called subsidies that Mr. Obama wants to eliminate is for the expensing of intangible drilling costs, which has been part of the tax code since its inception. This immediate deduction—rather than amortizing the costs of development over a longer period—provides the capital and cash flow necessary in an industry where the risks are huge and returns are realized over many years, if not decades.

The rest of the items on Mr. Obama's list are tax credits offered to all manufacturers, not just oil and gas. Mr. Boehner's full comments at least revealed the right instincts—namely, proposing to eliminate such carve-outs in return for a lower corporate tax rate as in the Republican budget. The same reform should apply to clean (as well as all other) energy concerns too.

The liberal drive to tax Big Oil is rooted in an ideological commitment to higher energy prices, not consumer relief. The U.S. Energy Information Administration reports that the effective U.S. corporate tax rate for the oil majors was 26.3% in 2009, not counting royalties, excise taxes or bonus bids for leases. The effective rate typically tracks production and rises and falls with the price of oil. In 2008, it was 42.3%.

U.S. gas prices last peaked in 2008, largely due to a dollar plunge and global demand, before crashing along with the economy. Now prices are rebounding, with political unrest in the Middle East and North Africa tacking on a premium beyond the market fundamentals of rising demand as the world economy grows. Then there's the Ben Bernanke premium. The most important step the government could take to stabilize if not lower oil prices is to correct the Federal Reserve's weak dollar policy, which has sent commodity prices soaring across the board.

Failing that, what matters is overall energy policy, where the Administration isn't any better. Leave aside the vast, energy-rich regions of the country that are off limits to development or even modern seismic testing, especially along the outer continental shelf. The Environmental Protection Agency's bid to regulate carbon has created new political uncertainty, while the agency has immobilized Shell's plans to drill in the Arctic Ocean by withholding the necessary permits.

Mr. Obama is also taking cover on the grassiest knoll of energy politics, suggesting last week that "illegal activity by traders and speculators" is responsible for the oil run-up. This gambit is known as shooting the price discovery messenger. Yet the President directed the Justice Department to launch a criminal investigation, and Attorney General Eric Holder said this week he had already uncovered "a couple of things that are disturbing." That must be some crack squad.

But if they're honest, they'll agree with the Commodity Futures Trading Commission, which at George W. Bush's direction launched an exhaustive investigation in 2008. The agency concluded that speculators—otherwise known as traders—were putting downward pressure on prices. The liquidity they provide helps to smooth volatility. In any event, the Federal Trade Commission already polices the gasoline markets for manipulation and anticompetitive practices, including a unit that since 2002 has monitored retail and wholesale data nationwide on a daily basis.

Rising gas prices are stealing the gains of middle-income voters, so this is an important debate to have. Too bad Mr. Obama's Washington can't seem to escape the energy incoherence — phantom speculators, easy villains — of his predecessors.

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Blogger SNAKE HUNTERS said...

Bravo Sir No Slappz!

Barack H. Obama's ineptitude in handling foreign affairs, plus the
administration's policies in Iraq, Afganistan & Libya combined are enough to ensure his defeat in 2012.

However, there is nothing more politically devastating than Obama's silly notions of 'wind & solar', and plug-in cars to address this nation's energy needs.

We have proven energy reserves in Alaska's ANWR, Nuclear power, Coal and Vast Compressed Natural Gas Potentials in Pennsylvania, Upper New York and West Virginia awaiting serious development of
Shale Gas, CNG, and distribution to Trucking & Bus Fleets Nationwide.

Clean, affordable and it's ours!

The North American Continent holds the worlds foremost energy resources in super abundance.

What we lack is leadership!

The OPEC Stranglehold of $100+ Per barrel of Petroleum will prove to be Obama's Achilles Heel.

___ ___

3:37 PM  
Blogger John Washburn said...

We can't drill in ANWR
We can't drill in the Gulf
We can't pursue oil shale
We can't pursue reserves through fracking

We BURN 40% of our corn crop for fuel.

History will judge us all as fools!

11:52 PM  
Blogger no_slappz said...

reb and john washburn,

It's true. Our own president is permitting other nations to fleece Americans, and he's doing it while raising the debt level of the US to levels that may well bring on an action that is effectively a restructuring -- otherwise known as a bankruptcy.

He's willing to pile on the debt, while withholding an available option for repaying it.

Thus, he's saying that it's better to crush the economy than to drill and burn a little more oil in the US.

What a moron.

12:59 PM  

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