Why Congress (USA) Should End Big Oil Tax Credits and Give That Money to Green Energy Companies - Essay Example

?Brian Greenbaum  Jamie Frush  ENG 121 Why congress (USA) should end "big oil" tax credits and give that money to "green energy" companies The US President Barrack Obama has called the US lawmakers to put an end to decade long tax breaks for the biggest five oil companies and employ that money into the clean energy sources. Oil and gas exploration and development (E&D) subsidy has been in existence since the early days of the income tax and is available to integrated and independent oil and gas companies. The Obama administration estimated that it could raise nearly $14 billion by repealing tax credit (Zengerle). In a protest, the American Petroleum Institute would launch new print and radio ads to “educate the consumers” (Snow). All these developments have spurred a nation-wide verbal war. But reality demands some incentives for the green energy industry in terms of reduced competition. The arguments in favor of “Green Energy” are clearly apprehensible on the medium to long term basis. The world’s primary demand for energy is expected to increase by one third by the year 2035. As the time goes on, the price mechanism of the energy market will be more focused on the development in the emerging economies. This will put the developed economies in an uncomfortable position as demand cut back on their behalf won’t have much effect on the prices of the energy. Today the US consumes nearly half of the total oil produced, but by 2035, nearly 30% of the consumption will shift to Asia backed by heavy use of automobiles. Also there is a “Peak oil” situation already in process. By 2020, the oil production from the Middle East and North Africa is expected to decline by 6 million barrel per day. Hence, for a long term policy formulation, preference should be given to the green energy sector. Another long-term concern is global warming. By 2035, the CO2 emission is expected to increase by 20%. Rising fossil energy consumption can lead to catastrophic climate change (World Energy Outlook 2011 Factsheet). A sustainable energy source has some characteristics. The use of the source should not have a negative impact on human life. Also, it will not deplete the source, so that it can meet the need for today and tomorrow in a more equitable manner. Moreover, these are environment friendly and good for human health. The combined basket for green energy also contains green technology. The development and operation of green energy power systems are still in their growing phase. The focus of innovation is still centered on energy efficiency. A lot of industry practices have been standardized. So replacing the old inefficient power systems is no more a problem (Pembina Institute). The oil & gas industry has its own arguments as well. One of the most talked about argument is that rising taxes will not make the gasoline cheap; rather, it may push the price higher. Another argument is that, with the repeal, investment for deep water gas and oil production will be discouraged and this will result in more severe shortage of fuel in the long term. The oil & gas industry observers argue that there will be a possible loss of 50,000 jobs in the near future (Snow). The other major argument is that the exploration of oil & gas is a very capital incentive and risky business. So, the repeal of tax credits will definitely hurt the small producers (Zengerle). There is no doubt that the repeal of tax credits will push the spot price higher, at least for the short term and it will hurt the common American people. Again, without the tax incentives, the exploration sector will not find much investment; hence, companies with heavy reliance on exploration business will definitely get hurt. It takes years of investments to make one single well productive. So, reduction in work force is a possible reality. Also there is no doubt that future-supply will decline substantially as present day exploration activities will decline; and oil still satisfies a major share of total energy needs and will remain in the dominating position in coming days (World Energy Outlook 2011 Factsheet). The counter argument is that all these times the price has increased despite the tax breaks which dates back to energy policy 2005. The repeal in tax credits may marginally push the price higher, but it’s nothing in comparison to the demand-supply mismatch in the energy market. After seeing the BP oil spill and its impact on local marine life and economy, all the deep water activities should be discouraged and the tax credit should be extended for cellulosic bio-fuel production and wind energy (Snow). Historically, every industry that made the US into a world power was backed by the Federal government. These industries created a lot of employment. The same outcome is like to happen as the business environment becomes friendlier towards the green energy industry. Analysis shows that with gasoline price rising 1 cent per gallon, the big companies earn an extra $200 million per quarter (Zengerle). So, there is no dearth of free cash for the big oils. So, the US congress should specifically end the tax credits for the big companies. On the other hand, big oils should significantly diversify their portfolio into the green sector and this will allow them to continue their privileges. Humans moved out of Stone Age despite large availability of stones. Similarly, we should move out of oil as we know where to put the next foot. The problem with free market is that at times it can be very myopic. At best, the markets are reactive. So, finding the equilibrium price between the fossil fuel and renewable energy and then going for investment into the green energy would be a great mistake. Oil & gas industry still enjoy massive subsidies throughout the world resulting in very low market share for the green energy players. Extreme competition has made a lot of new firms filing for chapter 11. China has been planning for mandatory quota system for using renewable energy (China Power New Energy). Similar proactive measures should also be taken by the Federal government to promote green energy. Works Cited China Power New Energy, Annual Report 2010, Management discussion & analysis. Web. http://www.tricor.com.hk/webservice/000735/file/financial_report/eng/E_AR_2010.pdf Pembina Institute, Benefits of Renewable Energy, 2012. Web. April 6, 2012 http://www.pembina.org/re/benefits Snow, Nick. “API launches campaign as senate considers oil tax legislation”. Oil & Gas Journal 110.4, Web. April 6, 2012 http://www.ogj.com/articles/print/vol-110/issue-4/general-interest/api-launches-campaign.html World Energy Outlook 2011 Factsheet, International Energy Agency, 2011. Web. April 6, 2012 http://www.iea.org/weo/docs/weo2011/factsheets.pdf Zengerle, Patricia. “Obama says tax breaks for Big Oil need to end”. Financial Post, 2012, Web. April 4, 2012 http://business.financialpost.com/2012/03/29/obama-says-tax-breaks-for-big-oil-need-to-end/?__lsa=6bb4de53 Read More