Podcast – Severance Tax in Pennsylvania

With the election days away, I had an opportunity to discuss a potential severance tax in Pennsylvania, which has become a major issue in that state’s race for governor.  The challenger, Democrat Tom Wolf, has called for the tax.  The incumbent, Republican Tom Corbett, has long resisted but seems to be changing his mind.  I discussed the issue with Dr. Tracy Miller, a Professor at Grove City College in Grove City, Pennsylvania.  I also recap news from low oil prices, earnings from Shell and Range Resources, a grumpy T. Boone Pickens, and more.

News Recap For the Week of October 27

Monday

  • The StarTribune said investors in North Dakota are looking at a range of ideas, including plastics and fertilizer, to use gas currently being flared.
  • Royal Energy made a major find in the Sacramento Basin, said the Sacramento Business Journal.
  • Grist profiled Ed Mitchell, a candidate for the Monterey County’s Board of Supervisors, who wants to limit drilling in North County, California.
  • Business Insider Real Clear Energy, and The Boston Globe took a look at dropping oil prices and the limits of OPEC power.
  • The Denver Post wrote an article saying fracking may be killing babies.

Tuesday

  • MIT researchers have come up with a potential solution to desalination challenges, according to a post at the Energy Collective
  • The BBC said Russia and Ukraine appeared to have worked things out.

Wednesday

  • Lithuania launched a new ship that should help it diversify supplies for itself and its neighbors, according to Foreign Policy.
  • The U.S. Energy Information Administration (EIA) released new data making predictions on U.S. liquefied natural gas (LNG) exports.  In particular, domestic gas prices would rise while the overall economy would benefit.
  • More focus is being placed on natural gas liquids, said the Wall Street Journal.
  • Ohio’s Governor wants higher oil and gas taxes, according to The Columbus Dispatch.

Thursday

Friday

  • The Morning Consult did a poll of oil and gas popularity.
  • The Pittsburgh Post-Gazette said Range Resources had a great quarter, mostly in the Marcellus.
  • The New York Times said Royal Dutch Shell also had a great quarter, largely coming off the success of liquefied natural gas projects in Nigeria and elsewhere.
  • The Times also had an expanded story on the Russia-Ukraine deal.
  • Some in the oil and gas industry are looking to go hard after fracking opponents, said Fuel Fix.
  • Forbes ran an editorial by a contributor named Michael Lynch who said fear is not a good basis for energy policy.

Interview with Grove City College Professor Tracy Miller (Starts at 14:13)

Prof. Miller said that natural gas is a big issue in Pennsylvania, creating conflicts between environmental concerns and those who are enjoying economic benefits.  He also pointed out that the state has earned a great deal of money from the shale boom, which has allowed the government to make investments in parks and other popular programs.  Some of that is from royalties and some is from an impact fee on oil and gas wells.

Democratic Gubernatorial Candidate Tom Wolf is proposing a five percent severance tax on natural gas (and presumably oil) production.  That simply means the government takes five percent of the market value of the gas coming out of the well.  Mr. Wolf’s pitch says the money will be used for spending on education, infrastructure, and alternative energy.  Prof. Miller pointed out that this could been seen as a transfer of wealth away from rural areas where natural gas is being produced to the large cities, like Philadelphia.

Some of the discussion appears to be changing over time, with politicians appearing more willing to tax shale production as the industry becomes more stable.  The current Pennsylvania Governor, Republican Tom Corbett, has been more reluctant to tax the industry but seems to be changing his tune as the election winds down.  Prof. Miller said the argument in Pennsylvania tends to be over taxes and regulation, rather than a argument over whether to drill or not.  Politically, natural gas drilling is a winner.  Prof. Miller does not expect the government to attempt to hurt the industry, rather it may seek to take a larger tax bite.

Prof. Miller shared his opinion on the proposed severance tax in Pennsylvania.  He feels that the overall level of taxes and government spending are relatively high in the state.  As an example, the state spends $14,900 on each student per year, and that is $2,900 above the national average.  The gas tax has recently been increased.  So in Prof. Miller’s view, the state is not short of funding.  The problem is the severance tax is being proposed simply to increase the government’s funding.  Prof. Miller would not necessarily object to a severance tax that was used to offset some other existing tax, like a cut in the personal or corporate income tax.

We also discussed the argument often used by supporters of the tax, that the gas producers are not fully paying for their negative impacts to the region.  Prof. Miller said the severance tax is not the right way to solve that problem because the tax would probably hurt landowners more than producers.  Moreover, the existing impact fee makes more sense for recouping the cost of damage done by gas production.  Prof. Miller said that many people feel the impact fee needs to be higher to cover damage to roads, for example.

However the election comes out, it will be interesting to see what becomes of the proposed severance tax in Pennsylvania.