The House rolled out its tax reform bill and not only did it put in a big tax cut for all corporations it also gave oil producers an edge by removing incentives for electric vehicles and solar companies.It is nice to see a piece of legislation that does not penalize the oil industry just because it is the oil industry in favor of alternatives. That may be important, the great oil and product drain continues as global demand is now exceeding daily production level and is signaling major crude oil and product supply drops into the end of the year. Oil and refiners will have to really ramp up as we could see a supply squeeze next year as Saudi Arabia is saying they want a $60 a barrel floor for oil.
The big point for oil and all corporations is the fact that the corporate tax rate would be lowered to 20 percent from 35 percent. While Fox News report that it is unclear if this reduction would be immediate or gradually implemented, either way, this is very bullish for oil demand. The reduction in cooperate tax will unleash those competitive animals spirits and corporations will be expected by shareholders to look to take advantage of the tax break. That will cause a surge in economic activity and will increase demand for oil. There will be even more demand for gasoline as the bills takes away the $7500 credit for buying an electric car, so if you want a Tesla you had better buy it now. It also removes that same credit for some solar and geothermal projects but does keep some incentives for renewables in place.
For oil and gas, Bloomberg reports that the House proposal protects three provisions that save explorers billions of dollars annually while chopping a few others. The legislation preserves the use of the so-called last-in-first-out provision, also known as LIFO. These special accounting rules let companies value crude stockpiles at the price they’re selling for, rather than the original purchase cost. The bill also allows continued deductions of so-called intangible drilling costs and preserves a measure that lets explorers reduce taxable income to reflect the depreciation of reserves. All three were thought to be in jeopardy as Republicans searched for offsets to pay for lowering taxes elsewhere. Eliminating the drilling and depletion provisions alone would force energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress’s Joint Committee on Taxation estimated last year. The House bill would also end two smaller breaks for “marginal” oil wells and enhanced oil recovery projects, which involve older oil and gas fields. That would cost drillers about $371 million over ten years, the Joint Committee estimated.
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