• Energy Tax Facts
  • 8 Oct 13

IDCs Supporting the American Economy

As record U.S. energy production continues to make headlines across the globe, a new report from IHS CERA finds the economic impact of shale development alone is reaching far beyond the well pad – again highlighting why the intangible drilling cost (IDC) deduction is pivotal to the American economy.

According to the report, development of America’s shale resources – pioneered and produced by America’s independent oil and natural gas producers — is having a transformational impact on the economy. As the IHS report highlights, the production of these resources is supporting 2.1 million jobs across the country today, while raising household incomes by an average of $1,200 a year and promoting capital spending across the midstream, downstream, and manufacturing sectors. Overall, IHS predicts this development will spur a total of $346 billion in investments across the midstream and downstream energy and energy-related chemicals value chains between 2012 and 2020, including $100 billion invested in new chemical, plastics and related facilities.

The report also highlights how this production is reducing our national trade deficit, predicting continued shale development will reduce the deficit by more than $164 billion in 2020 — equivalent to one-third of the current level. Meanwhile, a recent report from McKinsey & Company found this production could directly and indirectly add as much as $690 billion a year, or up to 4 percent, to our annual GDP, while creating thousands of jobs and “generating economic activity in parts of the country that have seen little investment in recent decades.”

Unfortunately, if rhetoric threatening to repeal the IDC deduction becomes reality these economic benefits will also take a significant hit.

Removing the 100-year-old IDC deduction from the tax code would strip away roughly 25 percent of the capital available for independent producers – companies who drill 95 percent of America’s oil and natural gas wells — to develop new American sources of oil and natural gas. Less access to investment capital means a decline in drilling activity and less energy output, and consequently, less fuel for the economic engine this production has provided.

As the energy consulting firm Wood Mackenzie recently quantified, repealing IDCs would have a drastic impact. Over the next ten years the study found there would be:

  • Approximately 9 billion fewer total barrels of oil equivalent production;
  • 10,000 fewer wells drilled;
  • 265,000 jobs lost; and
  • a $407 billion total reduction in capital expenditures in the American economy.

Certain states, like Colorado, Texas, North Dakota and Oklahoma would also be particularly harmed and realize an immediate impact in terms of jobs loss.  Wood MacKenzie further indicated that independent producers would be hit especially hard by the repeal of IDCs because independent producers look to spend within the constraints of their cash flow.  As such, Wood MacKenzie stated:

 “[S]ome may be unlikely to have the financial resources or debt capacity to sustain drilling programs at planned rates. Consequently, this reduction in cash flow could result in a larger impact than the one we have modeled in our analysis.”

From private studies to international research organizations, the world is taking notice of American energy. Just this past week, the U.S. Energy Information Administration (EIA) found the United States reached a historic level of oil output producing an average of 7.621 million barrels of crude oil per day last week, the highest daily average since 1989.  In May, EIA data placed the state output of Texas in line with leading energy producers across the globe. As for employment, just look at the Bakken shale in North Dakota – a state with an unemployment rate of just 3.2 percent – and it is clear the tremendous job-impact this development is having across the nation.

These economic benefits are being felt all the way from the well pad to the household energy bill, and the IDC deduction is a major component of what makes it possible. Policymakers need to make certain that any tax reforms they consider do nothing to jeopardize the truly transformational economic engine this deduction supports.