Just passed by Congress and signed into law by President Biden, the U.S. Inflation Reduction Act will have a significant impact on the oil and gas business.
Economists Ray Perryman and Karr Ingham and Congressman August Pfluger say the bill will do many things, but one thing it won’t do is make much of a dent in inflation.
Saying the legislation “will only have modest impacts on inflation over a period of years,” Perryman observed that it “has a lot of different facets that affect the energy industry.
“Just about every segment has things to like and things to dislike,” the Waco economist said Thursday. “Some parts of the energy world would have been quite content for nothing to pass while others think it should have been much more sweeping.
“In that sense, it is reminiscent of the type of legislation that used to pass in the days when there was more collaboration and cooperation among the parties. This bill, despite being passed by only one very diverse party, aptly reflects George Will’s dictum that democracy is ‘the politics of the half loaf.’
“It’s a safe bet that one party will praise it more that it deserves while the other will be overly critical.”
Perryman said the law mandates drilling on some key federal leases and makes future renewable leases contingent on fossil fuel activity. “It also incentivizes carbon capture technology, which enhances the viability of oil and gas in a world in which climate change is a reality,” he said.
“The provisions dealing with methane are potentially costly, but in reality they reflect efforts that are already well underway to reduce its effects. One of the more encouraging aspects of the bill is a recognition of the need for additional pipeline capacity.
“On the other hand, it extends some provisions that have limited refining capacity. I would have liked to see some inducements to shift production to lower carbon oil, as some of our recent analysis shows that to be highly beneficial, but market forces will drive that phenomenon in any case.”
In an Aug. 12 House floor speech in Washington, D.C., Pfluger said he was voting against the bill because it “weakens American businesses, increases the cost of energy for families and funds a new 87,000-person Internal Revenue Service army to audit low- and middle-income families
“Here’s a pretty good rule of thumb for this legislation,” the San Angelo Republican said “If you are one of Biden’s chosen green special interest groups, you get a handout paid for by American taxpayers.
“But for small independent American energy producers in the Permian Basin, your reward for keeping the lights on is a new, poorly conceived natural gas tax that will raise the costs of everything and give China an edge on our American manufacturers.”
Pfluger said the law “gives tax credits for the rich, a slush fund for loans to their favorite green companies and more regulatory red tape to drive up the energy costs for Main Street businesses and families.
“The crowning achievement of this measure won’t be inflation being reduced, it will be making America more dependent on our adversaries for hydrocarbons, more dependent on Chinese medical manufacturing and supply chains and more dependent on China for critical minerals,” he said.
“If the Democrats’ goal is to reduce baseload reliable power sources and increase our dependency on foreign nations, they’re succeeding. If their goal is to create regulatory red tape to drive up energy costs for Main Street businesses and families, they’re succeeding.
“If their goal is to help American families and small businesses, they are absolutely failing.” On straight party line votes, the bill passed by 220-207 in the House and 51-50 in the Senate.
Perryman said the law “extends but modifies many of the incentives for renewables that were set to expire and it encourages segments such as hydrogen and battery storage to accelerate development.
“It also incentivizes the use of distributed generation such as solar panels by individual customers,” he said. “Although the scale will likely be relatively small, this type of activity can take some pressure off the power grid.
“The incentive to electric vehicles will likely accelerate purchases to some extent,” Perryman said. “This can have some good effects environmentally, particularly if power plants install carbon capture technology, and it will expand the demand for both renewables and natural gas.
“In fact, the effects on natural gas requirements are quite large as much of the incremental power is generated by gas and there is about a 55-percent reduction in British Thermal Units as the conversion to electricity happens.
“On balance, it is a measure that will likely please and disappoint all interested parties,” Perryman said. “Its impacts on climate issues will likely be positive but measured. Given where we seemed to be heading before it was passed, it is likely to encourage production of all forms of energy and provide a more predictable investment climate.
“The world is going to require significantly more of all forms of energy in the future even as we address climate issues. From that perspective, it is overall a positive but not revolutionary step forward.”
Calling the law “the Inflation Reinforcement Act, Ingham said it “will do nothing to reduce inflation and even those who claim it will say the downward effects on inflation will occur years from now, not in the near term when Americans need it most.
“As has been the case leading up to the passage of this bill, continuing to throw hundreds of billions of government spending into the economy will be inflationary, not deflationary,” Ingham said Thursday. “The energy-related components of the bill are hundreds of billions of dollars for climate change and a new tax on the production of natural gas in the United States.
“The methane fee, otherwise known as a new federal natural gas production tax, will be assessed on natural gas producers large and small and it is very likely to endanger smaller independent oil and gas producers in Texas and elsewhere.”
The Amarillo economist said the methane fee is the first instance of a direct fee or tax being imposed by the federal government on greenhouse gas emissions.
“And to what end?” he asked. “The U.S. economy has managed to do something miraculous — dramatically expand domestic oil and gas production and dramatically expand consumption of those products as the economy has grown and produced more to reduce reliance on foreign production while at the same time steadily lowering total U.S. greenhouse gas emissions for nearly three decades along with the U.S. global share of greenhouse gas emissions.”
Ingham said the bill will raise the cost of energy and worsen the damage to the American oil and gas business while achieving little or no environmental benefit.
“The climate provisions of the bill will continue to artificially incentivize an energy mix that forces a shift to renewables much faster than the market would otherwise bring about,” he said. “That will subject U.S. households and businesses to less available and reliable energy at a higher cost.
“Only an energy transition that is purely market-driven can cause everything to happen that needs to happen over an amount of time necessary for those processes to fall into place naturally.
“Why would the United States, with only 12 percent of total global greenhouse gas emissions, unilaterally inflict such great damage on its own economy and its extraordinary domestic oil and gas industry with virtually no effect on global greenhouse gas emissions? But that is exactly what we are about to do.”
