Government intervention can stop an industry or make the good times roll

There was lots of news yesterday about the House passing a budget that covers all federal operations for the 2016 fiscal year.

I will leave the heated political observations to others. They seem to all be having fun.

What I’ll focus on is several ways that the sausage-making legislative compromises affected some of the wide open frontiers I’m watching.

Export ban on crude oil

Since the 1970s there has been a ban on exporting crude oil from the United States. Advent of the shale oil revolution has revealed the distortions created by the ban. Primary issue is the refineries here in the US are structured to handle heavy crude while many refineries overseas are structured to handle light sweet crude. It would be more economical to export light crude and import heavy than rework all the refineries. Lots of new supply of sweet crude has created a pricing discount on crude produced in the US. Rephrasing the same point, the inability to export crude has held down the volume of sales from the oil patch.

The House bill proposed to lift the ban on exports. This means American producers can compete in the world market. This will likely increase the volume of sales here along with a small increase in price at the producers’ level while there will likely be zero impact at the consumer level.

Tax credits for wind and solar

There are huge tax subsidies for installing wind turbines and solar power. For solar there are subsidies at both individual and industrial scale. The massive subsidies were set to expire at the end of 2015.

Multiple articles I’ve read indicate this might just collapse both industries. In more detail, other articles explain the extravagant tax credits are the only thing that allows large wind and solar projects to get anywhere near something that is even close to economically viable.

The House bill extends the subsidy for wind power another two years and solar power another three years (if I get the timing right). That would take the subsidies out to 2017 for wind and 2018 for solar. The Wall Street Journal indicates there is some sort of “phase out” that could carry those out another three years for wind and four years for solar.

I don’t fully grasp the subsidies, particularly the year-end cutoffs, but apparently at the industrial level, the credit for wind power is 2.3 cents per kW generated. After the extensions, the credit would scale back over three years to 80%, then 60%, then 40%.

Use of Russian rocket engines on Atlas 5 rockets

ULA is the main contractor for lifting military satellites. They don’t have a rocket engine they can put on their main Atlas 5 lift vehicle so they buy Russian engines. After Russia started making problems in Ukraine, the Congress limited the number of Russian engines which ULA could use. That puts a crimp in their launch schedule.

The House bill lifts that ban. ULA can buy as many Russian rockets as they want. That made Sen. John McCain quite irritated. He promises to reimpose the limit in the next budget, or perhaps prohibit ULA from using the engines at all.

Make sure you have lots of lobbyists in DC

The whims of high-stakes negotiating in the smoke-filled rooms of Congress can make or break your company and perhaps your entire industry.

By the way, that is why any industry that wants to stay alive hires tons and tons of lobbyists.

Sources:

• Wall Street Journal – The Last Obama Budget
• Beyond the Black – Budget bill lifts ban of Russian engines on Atlas 5
• American Wind Energy Association – Wind energy gains predictability from tax credits’ multi-year extension (Article has hint that the expansion of wind power in recent years was only financial viable with the credit. Article also says indirectly that continued interest of investors is contingent on having the big subsidies remain in place.)

Update:  The bill passed the Senate the same day as the House and was quickly signed by the President. I haven’t read of any changes made to the bill as passed by the House.