Is a Carbon Tax Inevitable for the US?
By Marin Katusa, Casey Research
The political landscape is shifting, and the introduction of a carbon tax in the United States now seems increasingly likely. While many anticipated President Obama would raise taxes on the wealthy, the implementation of a carbon tax appears to be happening swiftly. If Mitt Romney had won the presidency, it might have sparked a revival for coal producers in the US. However, with Obama’s victory, the near-future outlook for coal seems grim, paving the way for natural gas to emerge as the significant beneficiary.
Exxon Mobil Corp (XOM) has recently expressed support for President Obama’s push for a carbon tax. This leads to a crucial question: why would Exxon and other major energy companies become proponents of such a tax?
The answer lies in profit. Exxon has made significant investments in acquiring unconventional natural gas companies, including its recent purchase of the Canadian firm Celtic Exploration for over C$2.5 billion. Additionally, it previously acquired XTO Energy for more than US$30 billion.
The Influence of a Former Rockefeller Company
Exxon’s influence in Washington, DC, is formidable. The company boasts one of the largest lobbying operations on Capitol Hill and is among the top holdings of many US Congress members. This longstanding presence ensures that Exxon will maintain its political clout. Once part of the Rockefeller oil empire, Exxon has positioned itself as a dominant player in the North American unconventional energy sector.
How would a carbon tax specifically benefit Exxon? In the battle for electricity generation in the US, coal and natural gas are often in direct competition. By elevating the costs associated with coal production, natural gas becomes a more appealing option for utility companies. Consequently, this shift would enhance Exxon’s profitability and fatten its executives’ paychecks.
But why focus on unconventional natural gas in the US?
For a giant like Exxon, locating new deposits that can substantially boost production is increasingly challenging. Many of the prime opportunities are in regions where US companies are at a disadvantage. For instance, in Russia and countries of the former USSR, Exxon must navigate complex regulations under Putin’s rule, introducing an element of unpredictability.
Moreover, South America presents considerable risks for American firms. For example, Chevron recently faced asset seizures worth US$18 billion in Argentina. Previously, Venezuela’s nationalization policies taught Exxon and Shell valuable lessons in the regional risks of investment. With ongoing challenges in Bolivia and Ecuador, the options for companies like Exxon to secure consistent returns without significant political threats are dwindling.
Obama: Champion of the Carbon Tax
President Obama is savvy; he understands that simply raising taxes on the wealthy won’t fully address the deficit challenges the US faces. A carbon tax could serve both financial and political purposes: it would position Obama as a champion against “dirty polluters” while generating approximately US$100 billion in revenue.
The coal industry is already under strain, with metallurgical coal prices declining due to diminished demand in Europe and Asia. Thermal coal faces downward pressure primarily from the competitiveness of natural gas and the boom in shale gas production. The introduction of a carbon tax could deal a devastating blow to the thermal coal sector in the United States.
Given Exxon’s backing, it seems that President Obama is not only poised to introduce a carbon tax but may do so at a pace that catches many off guard. This move could solidify his reputation as a hero in environmental reform.
Sincerely,
Marin Katusa
for Economic Prism
[Editor’s Note: Marin Katusa is a seasoned investment analyst and the senior editor of Casey Energy Opportunities, Casey Energy Confidential, and Casey Energy Report. He offers insights on positioning your portfolio to capitalize on the forthcoming energy super-bull.