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Keep Oil And Gas Prices High - Tax Fracking

Commodities / Energy Resources Nov 24, 2012 - 12:01 PM GMT

By: Andrew_McKillop


Incredible as it can seem to many, freshly re-elected Barack Obama is giving serious thought and attention to banning, or limiting - or taxing - oil and gas extraction by hydraulic fracturing. For natural gas, in the US and soon worldwide, "fracking" has had and will have revolutionary effects on gas supply and gas prices.The drilling process has brought U.S. energy independence within reach - with the important rider that for oil, this also needs $100 a barrel prices - but fracking now faces renewed scrutiny from the Obama administration, and an uncertain future in several states.

Some oil and gas industry leaders remain enthusiastic but cautious that fracking will be fully embraced by the newly re-elected President Obama and by the majority of US state leaders, but this apparent full or majority industry support is belied by the damage to US energy corporation furtunes already produced by "overcheap" natural gas and little prospect of natural gas prices, in the US, even attaining one-half of gas prices in Europe and Asia. Gas industry hopes, at present, are that the US will have a cold winter, following a hot summer, and this may boost gas prices to around $5 per million BTU, pricing gas energy at $29 per barrel of oil equivalent.

Fracking is controversial, and a small number of European Union countries have placed an outright ban on it - in their national territories - but have no qualms about importing "fracked gas", as LNG, and consuming it. Open endorsement of fracking from Mr. Obama and state leaders would make fracking the cornerstone of US energy policy for decades to come. Conversely, if for any reason Obama distances himself from fracking, takes a more cautious and pro-environmental line, argues that fracking has a high climate change impact, and is a "disruptive technology" we may expect major changes. US energy industry leaders will not have long to wait for their first clue as to what the future holds.

In December, the US EPA (Environmental Protection Agency) is slated to release a draft of its long-awaited report on the suspected links between water pollution, GHG emissions and other real or potential impacts of fracking, which uses huge amounts of water, combined with sand and sometimes controversial chemical mixtures, to crack underground rock and release trapped oil and gas. This EPA study is long-awaited for reasons including the depth and scope of the report: the completed study will not be delivered before 2014, but this year's draft will provide indications on which energy policy path the Obama administration will take in the next four years.

Advance notice of the scope, and the editorial leanings of the draft report are already heavily focused by energy sector leaders, analysts and politicians, with congressional Republicans fearing the report will paint fracking in a negative light and give the White House political cover for "cracking down on fracking".  Energy secretary Steven Chu, with a carefully maintained aura of neutrality, has however pointed out a certain number of science-based facts that tend to undermine the economic case for fracking, notably the rates of drilling needed to keep output growing, over and above the groundwater pollution and climate change case built by environmentalists against fracking in many countries.

The economic case for fracking is nonetheless massive. US energy sector leaders, and their political friends in both main parties, have eased off on the "energy independence" claim for fracking. They are now, more than ever, portraying domestic oil and gas production as a key way of generating tax revenues, spurring job creation in "repatriated industries", cutting the trade deficit and saving the nation from going off the "fiscal cliff."

The extreme difference between the case for US shale oil production, by fracking, and natural gas production, by fracking, is very simple to explain: US shale oil producers claim they believe that oil prices "will not significantly decline" from curent levels near $100 a barrel. Conversely, US gas prices are the lowest since 1992 and set to stay that way.

Fiscal cliff reasoning is that tax reform, to be sure, is vital but the US cannot tax its way out of the crisis. Also, there is no way that savings can rise, the US cannot save its way out. Chasing growth is fine, but the US cannot rapidly grow its way out of the crisis. The alternate and providential way to make recovery feasible, is domestic energy. As the CEO of the US Chamber of Commerce, Karen A. Harbert, has said: "Every dollar that we generate from energy is a dollar that we don't have to take out of the Defense Department, the entitlement area, or increase taxes, or send overseas."

Official optimism that Obama and the White House will recognize that remains high.  While many Republicans and some energy industry leaders have doubted his sincerity, Mr. Obama's campaign  voiced strong support for expanded oil and gas drilling throughout his race against Mitt Romney.
The International Energy Agency has recently predicted that the US will become the world's largest oil producer by about 2020, overtaking Saudi Arabia and putting the nation on course to be energy self-sufficient by 2030. Due to fracking, US natural gas output has risen by about 25% since 2007, removing any possible outlook of scarcity. Shale oil could or might do the same thing - if oil prices stay high. This new energy reality puts pressure on the Obama administration to fully embrace fracking and avoid taking steps that could hamper it, many analysts conclude.

Despite some major States - specially New York and California - remaining equivocal on allowing fracking, state level support to fracking has certainly continued to grow. This is another reality Obama has no choice but to acknowledge.

The probable or possible solution, for Obama and other OECD country leaderships facing the same dilemma, is already on offer from the IEA.

The IEA's prediction the US can overtake Saudi Arabia by its oil production, due to shale oil, makes little reference to the oil price background for this forecast. This is however clear: few IEA scenarios give an outlook of oil prices declining below about $75 a barrel, and many IEA forecasts paint a picture of year average oil prices hitting as much as $175 a barrel by 2017 (and a year average $215 per barrel by 2030). The IEA may be studiedly neutral on fracking, but its oil price outlook is high, very high.

Almost never given coverage in IEA reports and studies, high oil prices are effectively treated by the IEA as a major long-term component of the global energy system. For national administrations like Obama's, high oil prices and high turnover and profits for oil producing companies and corporations also have a simple bottom line: high taxation revenue potentials. The European example - several times cited by Steven Chu early on in his job as Energy secretary - is that car drivers can be forced to pay $8.50 - $9 per US gallon for their fuel (up to $378 per barrel), of which as much as 65% goes to the State as oil taxes. The high profits garnered by European oil companies on their home turfs, also generate large State tax revenues, despite the corporate tax hedging and evasion.

To be sure, "high gas(oline) prices" in the US are a very sensitive subject, but little by little, US motorists are learning to think in small litres, not big gallons, and pay more for their fuel. Obama's renewed "personal conviction" the world faces a crisis due to anthropogenic global warming, a hot summer, and hurricane Sandy, all play strong supporting roles in the elite quest to raise energy prices - and taxes.

The bad example of fracking - slaying US natural gas prices and making major gas companies unable to pay taxes, or even stay in business - can be prevented from "migrating" to oil. For this to happen, Obama has to act to prevent oil prices eroding too far. Taxing shale oil fracking "to save the planet" is a certainly possible candidate, for his administration's fiscal cliff-oriented endorsement of fracking.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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