Obama Proposes Fee On U.S. Oil Production

February 4, 2016 04:09 PM

The Obama Administration dealt a possible blow today to U.S. oil producers who have labored under low global oil prices for a full year. Toward the end of reducing carbon emissions generated from the U.S. national transportation system, the White House has released details of Obama's 21st Century Clean Transportation System. The proposal would incentivize development of high-speed rail systems, autonomous cars and reduce the impacts of climate change. U.S. oil producers would see a $10.00 per barrel fee phased-in over the next five years with proceeds earmarked for clean transport projects.

A press release from the White House notes, "...President Obama’s budget lays out a bold new plan for building a 21st Century Clean Transportation System funded by a new fee paid by oil companies. The President’s plan would increase American investments in clean transportation infrastructure by roughly 50 percent while reforming the investments we already make to help reduce carbon pollution, cut oil consumption, and create new jobs."

OILLow oil prices have narrowed margins for U.S. producers and for oilfield services providers, dramatically trimmed rig counts and been the root of a large number of bankruptcies within the sector over the past year. Climate change proponents may smell blood in the water and are looking to gain a foothold in American energy as oil companies struggle to stay afloat. The $10.00 fee would have been better timed when oil prices were at $100 per barrel and oil producers are crying foul as the timing of the fee appears punitive on the part of the eco-centric Obama Administration.

A White House press release hearkens the initiative to the Eisenhower Administration, saying, "Our nation’s transportation system was built around President Eisenhower’s vision of interstate highways connecting 20th century America. That vision enabled economic expansion and prosperity, fostered a new era for automobiles, and supported the growth of our metropolitan areas. But what remains today of that system is not ready to meet the challenges of a growing 21st century economy. What used to be the world’s leading transportation system is no longer even in the top 10."

According to a Reuters story, BP recently reported its largest annual fiscal loss in 2015 which will force the company to cut up to 7,000 jobs by the end of next year and if the company cannot stop the bleeding, dividends will have to be cut. But BP isn't alone. Royal Dutch Shell's, to name one, profits are down 56% and job market watchers have said up to 450,000 jobs have been lost in response to low oil prices. Earlier this week, the Standard & Poor's Rating Services cut the credit ratings of 10 U.S. oil production and exploration companies including Chevron, Exxon Mobil, Apache, and Devon Energy, according to a Wall Street Journal Article.

With so many oil production and services companies struggling to survive, a $10.00 per barrel fee would reduce profits even further. At $30 per barrel, a $10 dollar fee equates to a 33% tax. It has been said that at current WTI price levels, the actual oil is worth less than the barrel that holds it. Adding a fee to such an environment will increase dificulties among producers and service providers, not to mention add expense for American consumers.

The proposed fee will be part of the Administration's 2017 budget, and according to the White House, "...to meet our needs in the future, we have to make significant investments across all modes of transportation. And our transportation system is heavily dependent on oil. That is why we are proposing to fund these investments through a new $10 per barrel fee on oil paid by oil companies, which would be gradually phased in over five years. The fee raises the funding necessary to make these new investments, while also providing for the long-term solvency of the Highway Trust Fund to ensure we maintain the infrastructure we have."

As the sun sets on the Obama Presidency, the President is surely looking to enhance his legacy, as evidenced by the White House's reference to Eisenhower. But with the world swimming in oil and no end in sight to the supply glut, the timing of the decision appears to be aimed as much at driving oil producers out of business as it is to encourage green investment in U.S. transport.