Obama and Alaska at Odds About How to Tax Energy

Whenever new governmental policies affect investments, investors can normally adapt to the situation. Normally, these policies will steer the industry in a certain direction that can be rather predictable. It is much more difficult, though, when governmental policy goes in opposing directions. Based on current legislative proposals, it appears that the federal government wants to go in one direction while Alaskans want to go in the other. 

Let's look at what's going on with these two opposing proposals and what it could mean for investors in the energy industry.

Flaming out fossil fuels
The most recent budget proposal from the Obama administration can be viewed through several lenses, but the overlying theme is to foster greater alternative energy growth and increase governmental revenue from fossil fuels. Whether you agree with this policy or not, it's clear that energy is one of the focal points of the budget, with the Department of Energy receiving an 8% increase in spending in the face of several departments seeing budget cuts. 

If the proposed budget were to move forward as is -- a highly unlikely situation -- several tax incentives for exploration and production will expire, a proposal that would equate to about $3.9 billion a year spread across the entire industry. It would also set up an Energy Security Trust fund by increasing royalties from oil produced on federal lands and waters. This increase would total about $250 million a year for the next decade. As expected, several fossil fuel advocacy groups such as the American Petroleum Institute and the Independent Petroleum Association of America have come out vehemently against these proposals and claim that these proposals will reduce exploration.

It's difficult to know exactly what will happen to the oil and gas industry if these policies were implemented, and there are several other factors that need to be considered as well. America has pulled so far ahead of other countries in drilling technology, it may take decades before everyone else catches up. Also keep in mind that energy capital expenditures for 2013 are expected to be 7% greater than last year and are approaching all-time highs. So while these kinds of moves would take some wind out of the energy space's sails, it will take a lot more to leave them dead in the water. 

Trying to reclaim the throne
For many years, Alaska held the title of largest oil-producing state in the United States. But ever since its peak in the late 1980s, production has been on a steady decline. Also, with shale gas becoming easier and easier to access, Alaska has now fallen to No. 4 in terms of total production.

Sources: US Energy Information Administration, author's calculations.

With so much of the state's economy tied to the success of the oil industry, Alaskan legislators are worried that the current tax structure has stymied production growth in the state. So this week, the state legislature has agreed on a massive tax overhaul that will save the industry $750 million a year in taxes. The hope is that lower taxes will drive reinvestment into North Slope and Alaskan offshore drilling. 

Drilling in the North Slope of Alaska is inherently expensive, and it has caused several major oil companies to steer capital expenditures away from the region. Both ConocoPhillips  (NYSE: COP  ) and Royal Dutch Shell (NYSE: RDS-A  ) have put major holds on their drilling programs in Alaska as of late, citing both high costs and regulatory uncertainty for the cutbacks. So while the more lucrative tax incentives may help, it may not be enough to turn Alaska's production numbers around. 

What a Fool believes
Agree with these policies or not, they are not binary outcomes for the industry. The Obama administration's proposals to do away with tax incentives for the oil and gas industry and increased royalty revenue will probably have a negative effect on exploration and production, but they won't cripple the industry. There are still several benefits to producing oil and gas in the U.S., and our dominance in shale gas drilling has led oil majors Chevron (NYSE: CVX  ) and ConocoPhillips to restructure their growth plans to incorporate more U.S. shale drilling rather than exploration plans overseas. 

As investors, we don't need to play this situation as a binary outcome situation, either. With global demand for energy growing at a staggering pace, there are opportunities for both fossil fuels and alternative energy to grow immensely. Don't let political rhetoric or emotional biases cloud your judgement when investing, especially in the energy space. One of Warren Buffett's tenets of investing is to not let political and macroeconomic forecasts obscure your investment theory. Rather, take a step back and invest in great businesses dispassionately. While following this advice may not be easy, your portfolio will thank you for it.

Warren Buffett doesn't invest in a lot of energy companies, but the ones he does invest in stand out as pillars of the industry. One of those companies is National Oilwell Varco. From drill bits to deep-water rigs, National Oilwell Varco has almost every part of the oil services industry covered. Learn more about how this Buffett stock and whether its good enough for your portfolio as well by checking out The Motley Fool's premium research report on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.

Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 21, 2013, at 10:30 AM, Kay10 wrote:

    Obama needs more money for the Muslim Brotherhood. Alaska can't get in his way or Eric Holder will sue them.

  • Report this Comment On April 21, 2013, at 10:35 AM, paultheuglydog wrote:

    I don't worry about my ecological footprint. I waste water by leaving it run while shaving, brushing my teeth, washing dishes, and by taking really long showers. I waste electricity by leaving my lights, tv, radio, and computer on 24 hours a day. I never recyle. I litter too. I just don't think that people can affect something as big as the environment.

  • Report this Comment On April 21, 2013, at 11:55 AM, RHO1953 wrote:

    Obama wants to tax EVERYTHING!! He wants to accrue as much power and wealth for the government as possible. He wants an omnipotent Federal government that controls everything in this country. He despises capitalism.

  • Report this Comment On April 21, 2013, at 12:09 PM, Stevegarry22 wrote:

    We have seen what the democrats did policy wise the last two years of the Bush administration, and the first two years of the odama administration.

    Their policy's and the Ethanol mandate is why gas prices started soaring in late 2007 to today's $4.00 per gallon. It was the jump in the price of gas that started the depression, and has contributed to nearly 18% of the actual population unemployed.

  • Report this Comment On April 21, 2013, at 12:56 PM, stevema1 wrote:

    What does he not want to tax. The democrats see nothing wrong with taking OUR money, after all they feel we will not spend it right so they have to do that for us. I say bullCRAP.

    Let me explain how my day goes and how I conserve energy, I wake up with the TV in my room on the computer on and most of the lights, I go into the bathroom to re leave myself I do not have to flush as the flapper never seats so it runs 27-7-365 and runs out a pipe I added so as to not fill up my septic system. I have breakfast ten off to do yard work, I start my tractor that blows enough black smoke to make China's air look great, Then I change the fluids in it by just opening up every plug on the dam thing and letting the oil go back to where it came from.

    I will leave it at that.

  • Report this Comment On April 22, 2013, at 11:55 AM, djkumquat wrote:

    obama and "progressives" are truly corrupt and regressive. funny comments. unfortunately, obama and his followers really do believe that the rest of america is stupid and wasteful as can be, and that we all need government to offset or correct our horrible, dumb behavior. i'd rather not encourage these nanny state-ists. unfortunately, most of them have no sense of humor, and would take some of these comments literally. cheers!

  • Report this Comment On April 22, 2013, at 12:00 PM, djkumquat wrote:

    meanwhile, AK is moving in the opposite direction on taxes...

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