The Fuse

Obama Proposes $10/bbl Oil Tax, Expected Dead on Arrival

by Leslie Hayward and Matt Piotrowski | February 05, 2016

The Obama administration’s plan to tax oil companies to pay for investments in transportation offers a strategy to create long-term reductions in oil demand. However, given the gridlock in Congress, the state of the economy, and the challenges faced by the domestic oil industry, the proposal fails to meaningfully advance solutions to move the country away from oil.

Oil industry does not like the proposal

So far, the administration’s plan to tax oil production is short on details, but the response from the industry wasn’t short on outrage, focusing on the costs that would be passed onto consumers. The Independent Petroleum Association of America tweeted: “The industry is in largest crisis in over 25 years. This is an energy consumer tax disguised as an oil company fee.” The American Petroleum Institute’s President and CEO Jack Gerard said in a statement that the plan would “destroy American jobs and reverse America’s emergence as a global energy leader.” He added: “On his way out of office, President Obama has now proposed making the United States less competitive.”

The proposal calls for a new $10 per barrel fee on oil paid by oil companies and would be “gradually” phased in over five years.

Analysts estimate that the fee would essentially equate to a gasoline tax of about 24 cents per gallon.

It’s unclear yet exactly who would pay the fee and where on the supply chain the tax would be imposed. Administration officials said that the fee would apply to imported products but not exports. Analysts estimate that the fee would essentially equate to a gasoline tax of about 24 cents per gallon. In the administration’s fact sheet, it noted $32 billion in annual spending from the tax. That would equate to 3.2 billion barrels of oil per year, or just under 9 million barrels per day—which is in line with the Energy Information Administration’s forecast for U.S. production this year. “Other barrels may be covered, too, because… the plan would also shore up shortfalls in the Highway Trust Fund (HTF),” said Clearview Energy Partners’ Kevin Book, who estimates the total amount would equate to 13.7 mbd when taking into account the HTF’s $18 billion per year shortfall.

The proposal is consistent with the administration’s wishes to create a more difficult operating environment for fossil fuels in order to reduce greenhouse gas emissions and spur investment in alternative energy sources. The tax in its current form is almost certainly doomed, and may ultimately be detrimental to progress in energy policy. However, the final proposal might offer some insight. “The oil fee proposal (and its yet-to-be-revealed substantive details) may be more analytically useful as an indicator of future Executive Branch plans to regulate the oil and gas sector,” Book says. He points out three areas where the administration can target the oil sector: Expanding the Environmental Protection Agency’s regulations of oil and gas wells to curb methane emissions; tightening fuel economy standards for light-duty vehicles for model years 2022-2015; and slapping higher royalty rates on oil and gas produced on federal lands.

Upside for transportation

With the revenues from the tax, the President wants to make $300 billion worth of investments over the next decade in mass transit, high-speed rail, self-driving cars, and other transportation approaches designed to reduce carbon emissions and congestion.

A fact sheet of the President’s proposal emphasizes the economic and logistical benefits of this investment on the country at large, discussing the following provisions.

Public Transit Infrastructure: According to the White House, the plan would add $20 billion per year transportation infrastructure above current spending levels, and expand access to public transit systems in cities, suburbs, and rural areas, in addition to bolstering alternatives to flying, such as high speed rail and maglev trains.

Significant investment in transportation infrastructure could allow the country to take significant strides away from an oil dependent economy.

Encouraging State and Local Governments: The President is proposing to invest roughly $10 billion per year to “transform regional transportation systems by shifting how local and state governments plan, design, and implement new projects,” with a goal of improving how public investments are made at the state level. The proposal suggests providing funding bonuses for states which use recommended formulas to reduce oil demand, such as by increasing usage of public transportation, or investing in fueling stations for alternative fuel vehicles (it doesn’t clarify if this means electric, hybrid, natural gas, or all of the above). The President’s plan also includes launching three new competitive grant programs: One focused on regional-scale transportation and land use strategies in rural or semi-rural areas, one “livable cities” program to increase transit access in small towns and cities, and another program to bolster the resilience of existing transportation infrastructure to the impacts of climate change.

Autonomous Vehicles: The strategy isn’t only about bolstering existing forms of public transportation, but also about future technologies such as autonomous vehicles and connected cars. The plan would invest $2 billion per year to develop autonomous vehicles by funding research and development projects, and creating new deployment zones for pilot vehicles. Additional funding would also support development of fueling infrastructure to enable future fleets to move past oil. Finally, $400 million per year would be dedicated to managing the safe integration of new technologies into the transportation system.

Other Economic Benefits: The plan mentions modernizing the freight system, but specifics have not yet been released. Additionally, given the heavy investment in transportation infrastructure, the plan argues that job creation will be a significant added benefit of this strategy.

Finally, since the plan would increase energy costs for end-users, it would provide assistance to low-income families to relieve the burden of increased energy costs, particularly families in the Northeast as they transition away from heating oil.

Targeting the symptom and the disease

Obama’s plan faces long odds in Congress. However, it does include an elegant feature. Namely, it discourages excessive consumption of oil by marginally increasing the cost of petroleum fuels, while investing the revenues in other forms of transportation. Significant investment in transportation infrastructure could allow the country to take significant strides to move away from an oil dependent economy. However, the timing of this proposal is not quite as elegant—oil prices are at their lowest point in over a decade, and industry is suffering. Accordingly, while higher fuel costs may be more palatable for consumers, producers are more motivated than ever to defend their bottom line.