Thanks to Greg Staff for this guest article describing how Obama’s energy policies, particularly cap and trade, will lead to further economic trouble for the nation.

Not only is cap and trade bad for the country, but Obama’s intention to change exploration and production tax laws will severely cripple the oil and gas (O&G) industry.

There is a misconception that the O&G sector is still puttering along quite nicely, despite the drop in oil during the past 8 months from a high of $147/bbl to around $40/bbl. Admittedly, $147/bbl was too high and was driven by over-zealous New York City-based speculation. In fact, many oil companies based their 2009 capital budget on oil in the $50/bbl range. Natural gas has seen a similar slide, and budgets for companies whose primary product is gas were set at equivalent levels ($5 - $6 per MCF). Those prices seemed conservative and in fact many analysts thought they were too low.

With the price of a barrel of oil now fluctuating wildly in the $30 - $45 range (and with some predicting $25), the O&G industry has essentially shut down nearly all speculative project work. Big ticket projects are on hold, and most discretionary spending has come to a screeching halt. Houston is about to enter its most difficult time since the early 80s, when oil had a similar percentage drop. Homebuilding is already at 50% of last year and dropping like a stone. Houston’s unemployment rate is likely to jump 25%, from 5.8% to 7.25% or higher, during 2009.

In the general populace, there is no sympathy out there for O&G (nor is there sympathy for Texas to be found in Colorado); the media and many politicians portray “oil people” as fat cats who take advantage of the “poor.” The O&G industry is an easy target – indeed, “get rid of tax breaks for major oil” has been a common rant of the democrats. However, there can be no doubt, what is bad for the energy industries is bad for America, whether you live in Texas, Colorado, or elsewhere.

Democrats have decided that the condition of the O&G industry isn’t bad enough, so Obama, through the budgeting process, intends to make sweeping changes to the tax code as it relates to O&G, including eliminating the deductibility of intangible drilling costs – IDCs.

To explain IDCs, I offer the following from the Heritage Foundation:

“Intangible Drilling Costs are outlays for non-salvageable capital expenditures associated with a mining operation. Because these items have no salvage value, mining operations (including oil and gas drilling) long have been allowed to treat them as expenses. As such, they could be taken in the year in which they occurred rather than spread out over the productive life of the property. Mining for any of the 105 minerals eligible for the depletion allowance is entitled to the deduction for IDCs. Examples of IDCs from the oil industry include the cost of building a road to the site of an exploratory well, of casings for the well shaft, and of pipelines to gather oil from the site which would be abandoned after the well is depleted.

IDCs are important to the oil industry because they are a principal means of attracting risk capital. Typically this has been done by investors forming a limited partnership with an oil driller. They could then use a portion of the IDC deduction to “shelter” other income. Given the extreme risks of investing in oil production, it is highly unlikely that adequate capital would be available without the existence of such tax incentives.”

IDCs are targeted to be eliminated only for the O&G industry – not for other mining endeavors.

Also, please take a minute to read the below-linked article from the Oil & Gas Journal, to gain a better understanding of how this change and other tax changes will increase our dependence on foreign oil and gasoline supplies. The article explains how the O&G industry is being singled out from the rest of industrial America for additional tax burdens.

http://www.ogj.com/display_article/354687/7/ONART/none/GenIn/1/Divisions-form-over-oil,-gas-provisions-in-Obama-budget/

Full disclosure: I do not work for an oil or gas company. I work for a small engineering firm that designs and constructs pipelines and related facilities. Our company has not been awarded a new significant project in six months, and three large projects by major operators have been canceled. All my company has to sell are man-hours. Once our few remaining in-house projects are completed, layoffs are inevitable. Similar outcomes are already occurring for pipe suppliers, equipment manufacturers, and all the myriad businesses that offer services to the energy industries.

The O&G industries face extreme challenges over the next several years, and additional taxes can only hurt. Obama’s requested energy tax burdens, coupled with cap and trade, will spell doom for much of the domestic industry – especially smaller firms that now do not have sources of capital to fund exploration.

Worse still, because these taxes (and cap and trade) have been submitted as a part of Obama’s budgeting process, it appears the provisions are filibuster-proof. After House passage, only 50 votes in the Senate are needed to pass a budget. This is an “end-around” method to avoid proper vetting of the consequences of these tax increases.

Domestic energy supplies equal security for America. Additional tax burdens on domestic energy sources can only diminish our security and our independence from global supply disruptions.

The “change” we will see from this is even higher prices and even more imports in the future.