Date: 11-Sep-09
Country: US
Author: Kim Dixon
 

WASHINGTON - A top Obama Administration official said the U.S. oil and gas industry will survive a proposed repeal of billions of dollars tax preferences and there will be an insignificant impact on worldwide prices.

Current tax breaks for oil and gas production distort the market, leading to over-investment in domestic fossil fuel production, Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist, U.S. Department of Treasury, told a an energy subcommittee of the Senate Finance Committee.

"Because there will be little to no effect on the world supply of oil, removing these subsidies would have an insignificant impact on world oil prices," Krueger told the panel.

President Barack Obama's proposed budget for the 2010 spending year includes ending tax breaks for oil and gas companies expected to raise more than $30 billion over 10 years.

A report issued this week by the Joint Committee on Taxation also said the proposals are likely to have no impact on world oil or gas prices. Still, the bipartisan Senate-House panel said there was no guarantee the policies would lead to a shift to renewable energy sources, an Administration goal.

Under the most dire scenario where domestic producers shifted all costs to consumers, removing the breaks could result in a one cent per gallon increase in the cost of oil, or a one percent increase in natural gas prices, Krueger said.

The American Petroleum Institute, which represents giants such as BP America and Chevron Corp, argued the proposals, with others planned by the White House, amount to $80 billion the industry would lose over a decade.

"The proposals are aimed at crippling our industry," said Larry Nichols, chief executive of Devon Energy Corp and chairman of the industry group, calling any effort to reduce domestic production of oil and gas "absurd."

He warned of higher consumer prices and job losses if the proposals go forward.

"We need to ask if the proposal would cause more than a negligible increase in consumer prices," subcommittee Chairman Jeff Bingaman, a New Mexico Democrat.

The state employs about 23,000 people in the oil and gas industries.

Stephen Brown, a fellow at the nonpartisan research group Resources for the Future, said eliminating the tax breaks would amount to less than one percent of the industry's $3.4 trillion in estimated annual revenue for the period.

A small drop in U.S. oil consumption should help energy security, by cutting the exposure to oil price shocks, he said.

"The near record-high prices that are projected for oil and natural gas over future years suggest that free markets will provide sufficient encouragement" for domestic production, Brown added.

Obama's plan would levy an excise tax on oil and natural gas produced in the Gulf of Mexico, raising $5.3 billion in revenue from 2011 to 2019. This 13 percent tax on all oil and gas production in the Gulf would only affect those companies enjoying a loophole that allows them to avoid paying royalties on the energy supplies they drill. Companies already paying royalties would get a tax credit.

Obama's budget would also place a $4 per acre annual fee on non-producing energy leases in the Gulf. The budget proposal expects the fee to generate $1.2 billion from 2010 to 2019.

The administration is also considering putting an excise tax on oil and gas produced offshore.

Several panel Republicans derided Krueger for what they called pursuing a goal of reduced domestic energy production.

"I wasn't aware that overproduction of American-made energy is a problem," Jim Bunning of Kentucky, the ranking Republican on the subcommittee said.

Krueger said the administration's goal is to have resources invested to yield the highest social return, taking into account environmental harm caused by the release of greenhouse gases associated with oil and gas production.

(Editing by Andre Grenon)