As anyone who reads my blog is aware, I am a Texas oil and gas attorney who only represents mineral, royalty and surface owners and I never represent oil companies. My passion has always been helping land and mineral owners make the best use of their land and mineral assets and get the best compensation and terms for leases, pipeline and utility easements and surface use agreements. However, the current political discussions regarding the oil and gas industry seem to disregard some important facts that we may all want to keep in mind.
The oil and gas industry has been the subject of many public discussions, and that is a good thing. Regardless of your political view, the suggestions that we eliminate fracking, limit oil and gas production offshore and on federal lands, transition away from oil and gas and remove what have been called “subsidies” to the oil and gas industry, involve a number of potential unintended consequences that we all should be aware of. These include:
- All the plastics and a number of medicines in our life are derived from oil and gas. Without petroleum, there will be no cell phones, computers, appliances, cars and many other items that we use in our daily life. (Maybe that’s a good thing!). If the supply of oil and gas becomes limited, all these things will become more expensive.
- Airplanes must have aviation fuel to operate. Maybe someday we will have electric airplanes, but it is probably not going to be in any of our lifetimes. I suspect that the batteries that would be required would be so heavy that the plane would never get off the ground.
- I have heard folks say that since we can produce synthetic motor oil, we should be able to produce synthetic fuels. However, synthetic motor oils have a base of distilled crude oil. They are not completely man-made.
- All businesses are allowed to depreciate their capital expenditures, i.e., their purchases of equipment that they use to make whatever product they are manufacturing. The theory is that the depreciation deducted from taxable income is saved and used later to buy new equipment when the current equipment ends its useful life. An oil company’s biggest asset is their reservoir of oil and gas. They are allowed a depletion allowance by the federal tax code, which is, in effect, a depreciation allowance for their reservoir. They then use these funds to explore for and develop new oil and gas sources. It is this allowance that is being called a “subsidy” by politicians, but that’s really not an accurate description. If we are going to do away with the depletion allowance, then shouldn’t we do away with depreciation for all businesses? Be aware that both diminished manufacturing and diminished energy production will result.
- The energy industry pays literally trillions of dollars in property taxes to local governments. In Texas, the oil and gas industry has built and maintains most of the schools and colleges. Without these taxes, we will need to find another source of revenue to build schools and to fund educational operating costs. The alternative will be either state income taxes or substantially higher property taxes for individuals. These kinds of taxes are often regressive and hit the poorest folks harder than anyone else.
- Limiting oil and gas production is going to make gasoline and diesel fuel more expensive. That means the things that get to market by rail or truck, such as groceries and may other products we use daily, are going to be more expensive. Again, higher prices for these products disproportionately burdens the poorest of us.
- There will be literally millions of people who will lose their jobs. These include not just folks that work directly in the industry, but all the satellite industries that serve the oil and gas industry and its workers. I’m not sure they are all going to “just learn to code” or start manufacturing solar panels overnight or even in the short term. The majority of solar panels are currently made in China, and while making them in the United States is a great idea, it’s unclear if U.S. made products will be able to compete on price, and even if they are able to do that, gearing up the entire industry is going to take a while. Also, keep in mind that all solar panel manufacturers to date, such as Solyndra, Solasta and Evergreen, have gone bankrupt, despite huge federal subsidies. So how do all the unemployed workers keep food on the table and pay their mortgage until then?
- Most royalties from oil and gas production don’t go to the rich. Most royalties go to middle and lower income and retired people for whom the royalties are used for their living expenses. How do they pay their rent or mortgage and buy food if their royalties go away?
- Contrary to popular belief, most oil and gas production is not done by the big oil companies. Instead, most production comes from thousands of small, independent companies. In fact, by one estimate, 83% of all oil and 90% of natural gas and natural gas liquids in the United States are produced by independent oil and gas companies. The big companies may be able to weather policy changes like eliminating the depletion allowance, but those small companies and their owners and employees will be the least able to withstand those changes and many will go out of business. That will result in oil and gas production being centered in fewer and larger companies, thus decreasing competition in the industry.
- Production of natural gas has a lot to recommend it. It is used without producing carbon emissions and is relatively inexpensive. Isn’t punishing both oil and gas production throwing the baby out with the bathwater?
- The United States has some of the most rigorous environmental regulations in the world. If we restrict oil and gas production in this country, we will need to buy more from countries, like those in the Mid-East, with few or no environmental regulations associated with their energy production. Therefore, one result of restricting production in this country will be to increase carbon emissions in other energy producing countries.
Clean energy certainly a goal to work towards. However, in the short term, be aware of the sometimes unintended consequences that may result by eliminating or diminishing the oil and gas industry in the United States. Our discussions regarding policies that affect the oil and gas industry need to take all these factors into account for the discussions to be meaningful and the resulting policies to be rational.