Importance of Affordable, Reliable Energy Cannot Be Overstated
Affordable, reliable energy. It’s something we all depend on. And it’s something most Americans have probably gotten used to taking for granted. That was especially true from about 2009 to 2019, as record U.S. oil and natural gas production led to energy costs dropping sharply at the same time food, education and healthcare costs soared.
But that changed in a big way last year, as policies aimed at decreasing traditional American energy production and distribution contributed to energy costs soaring more than 33 percent.
As a result, two in 10 American households couldn’t pay at least one monthly energy bill in full. Another 18 percent kept the temperature in their home at an unhealthy or unsafe level. And more than a quarter of Americans sacrificed food or medicine in order to pay an energy bill.
These are disturbing and potentially deadly trends during frigid winter months for the more than 1 ½ million Illinoisans living below the poverty line who were already spending about a quarter of their income on energy costs before prices spiked last year. One in three U.S. households were already struggling with household energy insecurity, meaning that although they have adequate access to energy, they oftentimes can’t afford it.
The fact that household energy insecurity is now sharply trending in the wrong direction shows that although policies aimed at addressing climate change are well-intended, their unintended side effects could be more damaging than the issues they are intended to address. The myth that weather-dependent energy sources such as wind and solar are cheaper for consumers is being thoroughly debunked in real-time. Since wind and solar are intermittent energy sources, they require almost 100 percent redundant traditional energy backup and expensive storage to be even remotely reliable. The added expense is passed on to consumers. If you are skeptical, check out energy costs in “green” Germany.
Germany’s retail electricity costs were already nearly three times higher than the United States’ before Europe’s current energy crisis began, with half of the average German electricity bill comprised of taxes, levies and charges to pay for renewable energy build-out known as “Energiewende.” Reuters recently reported that a soon-to-be-released government audit finds Germany’s renewable energy transition “has left Germany with Europe’s highest retail electricity prices and at risk of grid blackouts.”
But the worst may be yet to come.
Germany and the rest of the European Union is currently dangerously dependent on Russia for its oil and natural gas needs and these countries are paying unprecedented prices as a result. Natural gas prices are about five to 10 times higher in Europe than they are here. In absence of access to adequate natural gas and wind generation, so-called “green” European countries are even burning record amounts of coal, laying to waste the greenhouse gas reduction ambitions that were the justification for their unrealistic “green” policies in the first place.
It boils down to this: In the real world, access to affordable, reliable energy is a far bigger priority than idealistically driven renewable energy campaigns that deliver neither. Not only will the so-called “energy transition” – which is essentially a transition from a hydrocarbon-fuel energy system to a metal commodity-based energy system – not happen overnight, it will likely take decades. We don’t currently have the battery technology needed to make wind and solar reliable or access to the quantity of minerals needed to do anything more than merely supplement exploding energy demand growth. We will need a lot of oil, natural gas and other traditional energy sources for many decades to come in order to keep energy reliable and affordable and minimize energy insecurity.
This will require a true all-of-the-above approach that, combined with advancements in carbon capture and sequestration technologies, can allow us to continue leading the world in greenhouse gas reductions and avoid the climate regression and geopolitical nightmare Europe faces. As pump prices continue trending toward $4 a gallon and utility bills follow a similar trajectory, here’s to hoping policies focused on lowering energy costs and allowing the United States to regain its hard-fought energy independence are prioritized.
*UPDATE* Strong U.S. Oil and Gas Production Keeps Energy Costs Affordable
UPDATE: Jan. 14, 2022
Numerous recent reports show that energy costs increased dramatically in 2021, as U.S. oil and natural gas production was unable to keep up with surging demand.
CNBC reported in December that the most recent Bureau of Labor Statistics data show that energy prices increased 33.3 percent in 2021. Gasoline prices specifically were up a whopping 58 percent in 2021, according to the Pew Research Center.
The sudden and sharp increase in energy costs after more than a decade of consistent declines has taken a heavy toll on American households, particularly low-income families. CNBC reported that a recent study by Help Advisor finds that 20 percent of Americans couldn’t pay at least one monthly energy bill in full last year, while 18 percent kept the temperature in their home at an unhealthy or unsafe level. More than a quarter of Americans sacrificed food or medicine in order to pay an energy bill, according to the Help Advisor report.
Ironically, policies aimed at decreasing U.S. oil and natural gas production in an effort to lower greenhouse gas emissions actually contributed to a six percent jump in carbon dioxide (CO2) emissions, as utilities burned more coal due to less plentiful and more expensive natural gas.
As the Rhodium Group concluded in a December report:
“GHG emissions rebounded slightly faster than the overall economy in 2021, largely due to a jump in coal-fired power generation…
“With only modest growth in overall electric power demand in 2021 (up 3% from 2020), the more robust growth in power sector GHG emissions was due to a sharp rise in coal generation, jumping 17% in 2021.”
UPDATE: June 3, 2020
A new Consumer Energy Alliance (CEA) report finds record U.S. natural gas production saved Illinois consumers $24 billion from 2007 to 2017, an average savings of $876 for every resident in the state. The report also finds that residential natural gas prices in Illinois were 25 percent lower in 2017 than they were 10 years prior, due largely to a dramatic increase in domestic production over that time-frame.
According to the report, roughly 1.6 million Illinoisans who are living below the poverty line spend about a quarter of their income on energy costs, placing added significance to the savings that have been made possible by cheap and abundant natural gas. The CEA finds that 80 percent of Illinois households use natural gas to heat their homes during the winter and that natural gas is also essential to the agricultural, manufacturing and utility sectors.
Check out a fact sheet on the report here.
Original Post: April 15, 2020
The cost of living in the United States has increased across the board over the past decade, with one notable exception. At the same time healthcare, education and food costs have exploded (see graphic below), the most recent government data show household energy costs – including utilities and expenditures on transportation fuels – were down just under seven percent from 2008 levels in 2018, the latest year in which data is available.
Considering 68 percent of America’s energy needs are met by oil and natural gas, the decline in overall energy costs can be traced to the fact that domestic oil and natural gas production increased 76 percent during that time-span.
As a result, the typical American family of four has saved $2,500 per year, according to the White House Council of Economic Advisers. Those savings make a huge difference for low-income households, which have historically spent a disproportionate amount of their incomes on energy, making energy price spikes disproportionately impactful as well (more on that in a bit).
Access to affordable and abundant energy is a fundamental need – and the U.S. oil and natural gas industry has met that need in a big way, reversing a troubling trend in the process.
Back in 2008, talk of “peak oil” and “peak gas” was commonplace. Domestic production was perceived to be in irreversible decline and imports were surging to all-time highs. Not coincidently, U.S. energy costs “reached their highest point on record in 2008, when they averaged $24.13 per million Btu,” according to a 2018 U.S. Energy Information Administration (EIA) report.
But thanks largely to industry innovation, the United States is now the world’s largest oil and natural gas producer, and energy costs have plummeted as a result. The EIA reported that in 2016, U.S. energy costs fell to a “record-low energy expenditure share,” adding:
“The U.S. average energy price was $15.92 per million British thermal units (Btu) in 2016, down 9% from 2015, and the lowest since 2003, when adjusted for inflation.”
U.S. households today spend less than four percent of their total budgets on energy costs, down from 5.1 percent a decade ago. Gasoline prices are currently about half of the record-high costs seen in 2008 and have averaged below $3 a gallon for six straight years, while retail natural gas prices declined 24 percent from 2008 to 2018.
However, oil and natural gas bans and restrictions being proposed by mainstream political factions pose a real threat to energy access and affordability moving forward. Such policies would negatively impact a large portion of the population if implemented.
A 2018 Energy Information Administration (EIA) report reveals that one of three U.S. households struggle with household energy insecurity, meaning that although they have adequate access to energy, they oftentimes can’t afford it. In fact, 25 million Americans report they’ve had to choose between energy and food or medicine in 2018, while 14 percent of those surveyed reported they had recently received a disconnection notice.
It is with those facts in mind that several civil rights leaders have advocated for access to natural gas for low-income minority communities, in addition to declining to endorse bans on hydraulic fracturing. As Axios recently reported:
“Revs. Al Sharpton and Jesse Jackson and National Urban League President Marc Morial said energy costs are hitting people of color unfairly hard. These concerns, expressed before the coronavirus pandemic, are poised to expand as paychecks shrink across America.”
As Energy In Depth recently highlighted, Rev. Jackson has worked with local officials in the Pembroke Township community of Hopkins Park – one of Chicago’s poorest suburbs – to bring a natural gas line to the community. The median income in this Chicago suburb is just $16,000 per year and residents have relied primarily on propane and wood stoves for home heating during the region’s often brutal winters.
As Energy In Depth noted, “Why natural gas? Households that use natural gas saved more than $4,000 over a 10-year period, according to a recent study by Shale Crescent USA and the Ohio Oil & Gas Energy Education Program. Low income households, which spend a disproportionate amount on energy, realized savings equal to 2.7 percent of their annual income.”
Hopkins Park Mayor Mark Hodge said in a recent TV interview that:
“This community has been overlooked for the past 48 years for natural gas, so we’re in need of industry and we’re in need of jobs, and our school is in need of natural gas.”
In the real world, access to affordable, reliable energy is a far bigger priority than idealistically driven renewable energy campaigns that deliver neither. Fortunately, America’s oil and natural gas industry is meeting those fundamental needs.
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The Most Targeted Oil & Gas ‘Subsidies’ Aren’t Subsidies at All
More than 50 lawmakers are pushing for the repeal of oil and natural gas industry “subsidies” as part of the budget reconciliation bill currently being hashed out in Congress. But ironically, the two most notable “subsidies” in their crosshairs – the expensing of intangible drilling costs (IDCs) and the percentage depletion allowance – aren’t subsidies at all.
A subsidy is defined as “a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.” In other words – a direct government handout. IDCs and percentage depletion are in no way, shape or form government handouts. They are actually tax provisions that have been part of the United States tax code for 108 and 95 years, respectively. The U.S. tax code has always allowed the oil and gas industry, along with a vast majority of the manufacturing sector and households, to utilize tax provisions so that they are only taxed on net income.
IDCs and percentage depletion are also anything but “Big Oil” tax breaks. IDC deductions and percentage depletion are used almost exclusively by small, independent producers who produce less 1,000 barrels of oil per day (BOPD). In Illinois, all but four of the state’s 1,500 operators produce less than 1,000 BOPD. The 50-plus lawmakers targeting these tax provisions say they “simply enhance profits of fossil fuel companies” and do “nothing” to create jobs and reduce dependence on foreign oil, but the opposite is true.
Intangible drilling costs are expenses associated with drilling a well that cannot be salvaged, including employee wages, contract labor, fuel and service costs. All told, they account for roughly 85 percent of an oil and gas producers’ total expenses, according to The Petroleum Alliance of Oklahoma. Small oil producers, like almost all businesses, are able to deduct these ordinary business expenses from their gross income so that they are taxed only on their net income. The Petroleum Alliance of Oklahoma estimates the elimination of intangible drilling costs would result in an immediate 25 percent tax hike on oil and gas producers and a similar reduction in drilling activity.
Percentage depletion is very similar to the non-mineral depreciation deduction that all U.S. companies are allowed to utilize. It can only be used by only the smallest oil and gas companies that make less than 1,000 BOPD and wells making less than 15 BOPD. Oil and gas producers should be the last companies denied the ability to depreciate their assets, considering oil reserves are a textbook definition of a depleting asset. Unlike assets such as a building or machinery, which can retain value even when they depreciate to zero value for tax purposes, oil and gas wells not only eventually lose all value as they become exhausted, but incur costs because they have to be plugged and abandoned. Percentage depletion allows small oil companies to plan for plugging and abandoning wells in addition to retaining a portion of their earnings.
The only way for an oil producer to replace depleting resources is to drill new wells. Otherwise, they go out of business – plain and simple. And considering drilling wells is an inherently risky endeavor (only about 60 percent of wells drilled are successful) these tax provisions are fundamentally necessary and appropriate. After all, deducting the cost of doing business is standard practice for all businesses, and oil and gas companies pay every dime of tax revenue they owe. In fact, the American Petroleum Institute notes that the U.S. oil and gas industry paid an effective tax rate of 34 percent between 2013 and 2017, compared to 26.7 percent for the S&P industrials.
Despite the narrative that fossil fuel companies are heavily subsidized, a recent analysis by the non-partisan Energy Information Administration (EIA) found that in Financial Year 2016, oil, natural gas and coal companies received just seven percent of federal energy subsidies despite supplying 78 percent of the country’s energy. On the other hand, the analysis found renewable, nuclear energy and other non-carbon energy industries obtained 93 percent of federal energy fuel subsidies in FY2016 despite generating just 22 percent of the country’s energy.
Much has been said and written about oil and natural gas “subsidies” lately. But often overlooked is the fact the two most talked about “subsidies,” intangible drilling costs and percentage depletion, aren’t subsidies at all. Without them, the small oil producers most prominent in the Illinois Basin would not be able to continue producing the oil, jobs, tax revenue and royalty income our state and country need now more than ever.
We Need More Oil From American Soil – Not From OPEC and Russia
It has been said many times before, but – to the delight of Vladimir Putin and Saudi Arabia Crown Prince Mohammed bin Salman – remains difficult for many U.S. policymakers to grasp: Reducing domestic oil production does nothing to decrease demand. Instead, it leads to increased dependence on the Organization of the Petroleum Exporting Countries (OPEC), Russia and other foreign sources for the oil we need.
As U.S. oil demand has surged to record levels this summer, policies implemented to deliberately decrease or discourage American oil production have resulted in imports from OPEC nearly doubling from pre-pandemic levels. U.S. oil imports from Russia – which is now in cahoots with OPEC as the most notable “+” in the OPEC+ alliance – have also surged. Russia now supplies more oil to the U.S. than any other foreign source aside from Canada.
Incredibly, just eight months after our OPEC imports fell to their lowest level since 1973, the White House recently begged the infamous cartel to increase oil output to keep gasoline prices from soaring ever closer to $4 a gallon.
We’ve been at the mercy of OPEC before. The oil embargo and gasoline shortage crisis of the 1970s and record OPEC imports and $4 pump prices endured earlier this century are just a couple examples. But there is a big difference this time around – we are now under OPEC’s thumb by choice. America now has the ability to ramp up domestic oil production to keep energy costs affordable, but we have instead turned to an international foreign cartel for relief.
The justification for these policies is the belief that constraining U.S. oil and natural gas production will drive down greenhouse gas emissions and help combat climate change. But the disconnect between the intended outcomes and reality is quite stark. Not only do these policies continue to increase energy costs and forfeit our hard-won energy independence, they increase greenhouse gas emissions as well.
Every barrel of oil we choose not to produce in the United States and instead import from overseas increases our carbon footprint, considering imported oil has to be shipped by boat from countries with far more lenient environmental regulations than our own. The same can be said for oil that is transported by rail or truck rather than pipeline, which is why the shutdown of the Keystone XL pipeline makes similarly little sense.
Since reaching a record 13 million barrels per day prior to the pandemic, U.S. oil production has been down about 1.6 million barrels per day this summer. But U.S. oil demand has bounced back to pre-pandemic levels and isn’t expected to wane any time soon.
In fact, the Energy Information Administration (EIA) expects oil to remain the United States’ primary energy source through at least midcentury. The EIA’s projection even takes into account low renewable energy costs and continued renewable energy growth moving forward.
It’s not difficult to see why the EIA is bullish on oil demand. Not only is overall energy demand growing at a faster pace than renewable energy growth – highlighting the fact that renewables are merely a supplemental energy source rather than a replacement traditional energy – more than 55 percent of U.S. petroleum demand is non-gasoline and has no scalable substitute. Even if the 265 million gasoline- and diesel-powered vehicles currently on American roadways disappeared tomorrow, we would still need a lot of oil for many years to come for the 6,000-plus petroleum-based products we use everyday. For instance, petroleum-based feedstocks used to make personal protective equipment for healthcare workers and packaging for products shipped via Amazon and other e-commerce companies are currently driving oil demand growth.
U.S. oil demand will remain strong for decades and the most realistic way to resume the recent the unprecedented combination of low energy costs, economic growth and emissions reductions is producing as much oil and natural gas on American soil as possible. Outsourcing our energy needs to OPEC and other hostile sources will only lead to higher pump prices, increased emissions and Putin and Crown Prince Salman exchanging more high-fives for years to come.
Illinois Oil Production Just Under 3.65 Million Barrels in First Half of 2021
Illinois crude oil production totaled 3,647,520 barrels in the first half of 2021, according to reports submitted to the Illinois Petroleum Resources Board (IPRB) by Illinois first purchasers. Click here to download our first half 2021 Illinois oil production report.
Average daily oil production in the state was 20,264 barrels per day in the first half of the year, a slight 0.7 percent increase from the same time period last year. Monthly state production has consistently been between 615,000 to 640,000 barrels so far this year, with February (466,864 barrels) being an outlier, primarily because of extreme cold weather that drove some production offline for a significant time.
White County remains by far Illinois’ top oil producing county, totaling 1,053,888 barrels of production in the first half of 2021. That represents just under 29 percent of the state’s total production for the first half of the year. White County is on pace to surpass 2 million barrels of annual production for the third straight year.
The other top-10 producing counties in the first half of 2021 were Marion (379,948 barrels), Crawford (303,660), Fayette (233,792), Lawrence (210,689), Wabash (174,253), Franklin (151,904), Wayne (138,300), Clay (137,326) and Clark (106,172). Forty-three Illinois counties produced oil in the first half of the year, with the top-15 producing counties again accounting for more than 90 percent of the state’s total production. All 15 of those counties have passed resolutions of support for the Illinois oil production industry.