[rockdoc123]

Yes. I do understand that. Mainly from your writing here and elsewhere. Yet, I still hope you'll try to understand my perspective as well. As I've written in reply to a previous posting of yours, while I respect your many contributions my concern is notfocused on oil companies. Rather it is the larger social system, its decision-making process, and the changes likely to be made in that process as we approach limits-to-growth

Altruistic, but what is the point? The only people currently who make decisions about exploration, drilling, production etc. are oil and gas companies, not the “larger social system” whatever the heck that is.. The oil and gas companies don’t give a flying F%$# about EROEI (rightfully so), it is completely unimportant to any decisions made. So, although it might be nice to sit back and try to analyze what is actually happening with an esoteric view….it will not alter what happens. Unless of course, your goal is to create a totalitarian society where all activities are governed by some group who thinks they know better.

[aspera]

Rock123 wrote: The only people currently who make decisions about exploration, drilling, production etc. are oil and gas companies, not the “larger social system” whatever the heck that is..

I have to disagree. There are a great many decisions made at that higher social system level that affect resource extractors: policies, administrative laws, statutory laws, regulations, etc. And I think that the "...Unless of course, your goal is to create a totalitarian society..." is a red herring; our non-totalitarian, democratic, capitalist system is the source of those laws and regs.

This could run way off topic if we start arguing the about the stability offered up by a system with a rule-of-law framework (try running a modern business without such a framework). So I'll mention just one "larger social system" rule that has at least a minor effect on oil exploration, drilling, production: the oil depletion allowance.

The oil depletion allowance in American (US) tax law is an allowance claimable by anyone with an economic interest in a mineral deposit or standing timber. The principle is that the asset is a capital investment that is a wasting asset, and therefore depreciation can reasonably be offset (effectively as a capital loss) against income.
...
Source: Federal Internal Revenue Code, Section 613(b), and Publication 535 (2013), Business Expenses which are in the public domain as works of the US Federal Government.

https://en.wikipedia.org/wiki/Oil_depletion_allowance

Such rules were created at a time when resource limits could hardly be imagined let alone anticipated. And, at that time, the climate disrupting consequences of a society designed to run primarily on fossil fuels were also not anticipated.

Things have changed since then. These changes may be accelerating. And to the point here, those rules could be changed (at that "higher social system" level). If changed, I'd like it done in a reasonable way, using metrics that make sense, are not easily manipulated, and if possible, are based on first principles.

I also hope that individuals in the oil and gas industry can be part of the change (and I include you guys in that group). But, honestly, I'm getting a strong sense that few folks at this site want to have such a conversation. (I'm looking for a "barn raising" not a "dirt bomb fight." Maybe it's time to look elsewhere. I've heard the web is a big place.)

The oil and gas companies don’t give a flying F%$# about EROEI...

As I and others have said repeatedly, we fully agree with this statement. But we are not talking about the decisions made by those companies.

[Cog]

To single out an industry and not allow capital losses and depreciation, where it is allowed in all other industries, is social authoritarianism. The left is all about "fairness" unless it's a particular ox they want to gore.

[onlooker]

The fact of the matter is the world is NOT interested in disinvesting from FF. And yes to say that somehow the FF Industry is not affected good or bad by decisions from the larger social system and beholden to these same decisions is ridiculous. For instance Subsidies
Fossil fuel subsidies are a staggering $5 tn per year
Yes Trillion.

Then, also CC treaties are strategic decisions that point to the fate global society desires for the FF Industry

Some of us do wish to speak about EROEI and first principles but others do not
https://www.theguardian.com/environment ... n-per-year

[Tanada]

The fact of the matter is the world is NOT interested in disinvesting from FF. And yes to say that somehow the FF Industry is not affected good or bad by decisions from the larger social system and beholden to these same decisions is ridiculous.

This is absolutely true. If you look at real world statistics outside of the UK and USA coal mining is a booming business where new mines are being dug and existing mines are expanding production. In addition the only countries not at least wanting to drill oil are the ones who know they don't have anything to drill, everyone else encourages drill baby drill whether they admit it or not.

[rockdoc123]

But we are not talking about the decisions made by those companies.

Actually you are. If there are no oil and gas companies around making decisions wells don’t get drilled and oil and gas is not produced. As Cog points out the taxation rules applied to oil and gas companies are the same as applies to any other industry, everyone is allowed to write down assets to reduce taxable income. If you want to make things more difficult for companies by taxing them higher etc then they will just fold up their tents and go somewhere else. They are in business to make money, not to provide you with fuel and plastics.

Fossil fuel subsidies are a staggering $5 tn per year 

The oil and gas industry is not universally “subsidized”. They have the ability to write off expenses like every other industry. At his confirmation hearing Rex Tillerson pointed out “I’m not aware of anything the fossil fuel industry gets that I would characterize as a subsidy, rather it’s simply the application of the tax code broadly, tax code that broadly applies to all industry”. For North America that statement holds. The only place where there are actually subsidies are in countries like Venezuela, Mexico and Libya where the government spends money to make fuel cheaper for its populace. Those subsidies do not benefit oil and gas companies, they are there to benefit the consumer

[Outcast_Searcher]

As you probably know companies don’t make drilling decisions based on EROEI.

Yes. I do understand that. Mainly from your writing here and elsewhere. Yet, I still hope you'll try to understand my perspective as well. As I've written in reply to a previous posting of yours, while I respect your many contributions my concern is not focused on oil companies. Rather it is the larger social system, its decision-making process, and the changes likely to be made in that process as we approach limits-to-growth.

Economics solves a LOT of problems, whether you admit it or not aspera. This vague "larger social system" you refer to lets oil companies operate. THEY operate under the economic system, and only survive if they make profits (or at least don't sustain large losses) over time.

And guess what? If we start to (actually) run low on oil, the economics principle of supply and demand will handle that JUST FINE -- via the pricing mechanism.

As I've said on this site repeatedly, if we have PERSISTENTLY high prices for several/many years, THEN come talk to us about running out of oil. The benchmark I tend to use as an example is oil over $150 in today's dollars for 5 years or so. A volatile but persistent rising trend for 5 years where the price is averaging over $150 for years might also signal such a thing.

But guess what, again? There are alternatives. If crude oil persistently is costing over $150 a barrel for quite a few years, consumers buying new cars will switch to HEV's in droves. Current midsize models can get nearly 50 mpg. Or PHEV's, where for city drivers, current midsize models can get well in excess of 100 mpg -- or nearly infinity for all-city drivers. (The cars will occasionally burn a little gas to keep it from getting too old, even if the battery is always charged.) And of course, that would be the real signal to get makers to slam on the accelerator for BEV's due to all the demand for those.

Economic principles work quite well over time for commodities. Some social systems may try skew the results of such principles re how wealth is distributed -- but the principles don't go away. Nor do the overall results re price being greatly impacted by relative scarcity of a given commodity.

It's not that demand for oil would go anywhere near zero, even with a fleet with an overall mpg MUCH higher than, say,100 mpg. (Think petrochemicals, for example). But it would certainly plummet. And that, of course, would tend to impact the price of crude, over time.

[Outcast_Searcher]

The fact of the matter is the world is NOT interested in disinvesting from FF. And yes to say that somehow the FF Industry is not affected good or bad by decisions from the larger social system and beholden to these same decisions is ridiculous.

This is absolutely true. If you look at real world statistics outside of the UK and USA coal mining is a booming business where new mines are being dug and existing mines are expanding production. In addition the only countries not at least wanting to drill oil are the ones who know they don't have anything to drill, everyone else encourages drill baby drill whether they admit it or not.

Looking at the fights that go on in the governments of major developed countries, it's not at all surprising at all to me that it's very difficult to get the world community to agree on policies that have a huge economic impact on various countries.

Given that people will demand to be fed and heated and cooled and transported -- and throw out political leaders who cause scarcity in such basics to burn less fossil fuels, the result over time is obvious.

Either we cross the rubicon as a species, and manage to move to a primarily green economy re energy -- or ALL such fuels that are remotely "affordable" WILL be burned in time.

For one example, in the short term, India is well into a planned decade of high growth, largely fueled by coal. I think you pointed this out on this site within the past year. They chose coal due to economics. I don't see anything likely to change that any time soon.

[Outcast_Searcher]

In my recent Oil Production Vital Statistics post, commenter rjsigmund posted a link to this EIA update on shale oil production efficiency, which in my opinion contains some astonishing data on how the industry has drilled better and better wells, year on year, for a decade. US production is heading higher.

Figure 4 shows how drilling and production efficiency has risen year on year for a decade. When the frackers first drilled, the Bakken wells produced 150 barrels per day initially. By 2017, that had grown to near 700 barrels per day. Following the 2014 oil price crash, the number of active rigs declined (Figure 5). The slowdown in drilling was compensated by this improved efficiency and did not produce the reversal in US oil production that many had expected.

The Efficiency Of U.S. Shale Oil Drilling And Production

Another example of a competitive ecnomic system. When things get tight, there's a huge incentive to get smarter AND MORE EFFICIENT, to continue to make profits. Oil producers have been making great strides in that area in recent years. It's called adaption -- which is something most Cassandras routinely ignore (or largely ignore) in their predictions of (endless) imminent economic predictions of doom.

Now, that doesn't mean this trend can or will go on forever. If oil supplies truly get very tight vs. demand, then less efficient plays will become profitable as the price rises meaningfully -- and if those profits can be confidently realized -- the less efficient drilling WILL take place to realize them (unless governments forbid such drilling due to regulation, etc).

[aspera]

Cog wrote: To single out an industry and not allow capital losses and depreciation, where it is allowed in all other industries, is social authoritarianism. The left is all about "fairness" unless it's a particular ox they want to gore.

Cog and Rock123 and others: It is hard to believe that the oil and gas industry is being treated identically to all other industries. Why, it would be as if the photovoltaic industry had a "solar photon depletion allowance." Or the solar thermal industry had... well you get the idea.

Now you might think solar depreciation is ludicrous. After all, one might say, the oil won't last as long as the sun and thus should be treated differently (although that logic breaks down: how long must it last? how far away does it have to be? Answering such questions, if it can't be done using first principles, is done by a political process). Consider that such an allowance is apparently allowed for geothermal deposits of hot water or hot rocks. And I imagine the Earth's core will generate heat far longer than there will be recoverable oil in the crust. Rarely have I seen the words "geothermal" and "scarce/depletable" in the same sentence. Quite a muddle.

If economics is supposed to be blind to such preferential treatment, then this uneven state-of-affairs must be the result of a political process.

POLICY/POLITICS: Would there not be reason to make dear a finite resource? Perhaps done through economic policy written at that "higher social system" level. And using the very same economics that O-S says solves such problems? Economics can treat the notion of scarcity in a way quite differently from the non-scarce; but it doesn't always do that, it's a choice we make. The choice as to what resource, what allowance, and how it is claimed are all the result of a political process. And that process occurs at a level quite far removed from the resource industry being regulated.

BIOLOGICAL DEPLETION: It's interesting that two biological (and presumably renewable resources) are allowed a depletion allowance: Timber and Mollusk shells. This provides further support for the notion that the decision as to what gets a depreciation allowance is the result of a political process in this country (not in "...Venezuela, Mexico and Libya.."). Not all biological or renewable resources are currently allowed such a depletion allowance. Thus Cog's claim about, "is allowed in all other industries..." is not correct.

What we might wish was a purely thermodynamic issue, or a purely economic issue, seems instead to be a process that combines thermo, econ, policy-making, etc. in a dynamic social decision-making process. I'd like that process to be infused with a little more first-principle-based science. But I accept that it will also always be messy; an adaptive muddling through.

[rockdoc123]

Why, it would be as if the photovoltaic industry had a "solar photon depletion allowance." Or the solar thermal industry had... well you get the idea. 

It is no different than if you are running a factory and you are allowed to write down your equipment and all your investment over a period of years both oil and equipment are assets. It is exactly the same thing. Oil companies have to spend money to find oil. Those expenditures are treated like expenditures in every other industry where they are deducted against profits. The reserves they find are handled like any asset in another industry which allows for yearly write downs. There is no difference, it is just called something different. Hence Tillerson's comment.

[Cog]

But aspera's goal is not to treat oil and gas equipment and reserves as depreciating assets even though all other types of industries do so. His goal is to punish the oil and gas industries because he doesn't like what they produce. Social environmentalism, in his world, outweighs well established corporate tax code and equal treatment under the law. Bankrupt them if he can. Redistribute most of their money if he can not. I wish aspera would just be honest about his goals instead of trying to confuse the issue.

[aspera]

Cog wrote: His goal is to punish the oil and gas industries because he doesn't like what they produce.

Actually Cog, that is not true. I'm trying to understand these issues. And how different rules and procedures that might make sense at one time, need to be altered for another time, or for different circumstances. I have no desire to bankrupt or punish anyone. And I've never been accused before of wanting to, "Redistribute most of their money..." (that will give some of my friends a good laugh). If something I wrote leads you to believe any of that, then I have written that post poorly.

I wish aspera would just be honest about his goals instead of trying to confuse the issue.

My goals are to understand how to handle finite resources that have been sometimes treated as infinite. I am willing to consider alternatives to the way things have been done in the past. And I'm willing to accept that some past practices make perfect sense as we face the new normal that seems to be emerging. But I'm suspicious of arguments that must be accepted on face value, or just because someone has been "in the industry." That is, I prefer first principle approaches, if available. I prefer peer-reviewed sources, if available. (I'm sure there's more, but that may give you a sense that you have characterized me incorrectly).

[Cog]

Those finite resources you wish to "handle" do not belong to you. They either belong to nation states in the case of Venezuela or public corporations in the case of the United States.

I think C.S Lewis said it best when he opined:

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

[aspera]

Cog wrote: Those finite resources you wish to "handle" do not belong to you.

You are correct there, I own no oil nor gas resource. Yet when I do own a resource, say for instance a finite resource like land, there are rules, regulations and laws at the local, state and federal level that affect my behavior (whether I'm an individual or a corporation). But you know that.

Cog, I've been honest about my goals. What are yours?

[kublikhan]

The solar industry has a depletion allowance for it's capital investments. In fact it was recently increased.

Depreciation is one aspect of the tax code that facilitates greater investment in renewable energy and ultimately lower costs for consumers.

* The Modified Accelerated Cost Recovery System (MACRS), established in 1986, is a method of depreciation in which a business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions.

* Qualifying solar energy equipment is eligible for a cost recovery period of five years.

* The market certainty provided by MACRS has been found to be a significant driver of private investment for the solar industry and other energy industries.

Accelerated Depreciation Encourages Private Sector Investment
MACRS depreciation is an important tool for businesses to recover certain capital costs over the property’s lifetime. Allowing businesses to deduct the depreciable basis over five years reduces tax liability and accelerates the rate of return on a solar investment. This has been a significant driver for the solar industry and other energy industries.

Accelerated depreciation, along with other successful energy tax incentives such as the Investment Tax Credit (ITC), has helped fuel unprecedented growth in annual solar installations.

Bonus Depreciation
In response to the economic downturn of 2008, Congress took action to further incentivize capital investment by accelerating the depreciation schedule economy-wide. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allowed companies to claim a 100% depreciation bonus on qualifying capital equipment purchased and placed in service by December 31, 2011. Congress included an extension of 50% bonus depreciation in early 2013 in the so-called “fiscal cliff” deal. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017.

Depreciation of Solar Energy Property in MACRS

January 03, 2018 - The commercial solar industry entered the holiday season with an unexpected policy gift from Washington. The new tax plan passed by Congress introduced two provisions favorable for commercial solar installations: a reduction in the corporate tax rate and the expansion of depreciation allowances.

Expanded bonus depreciation
With the new tax bill, Congress increased the bonus depreciation to 100 percent, meaning one can essentially deduct the entire cost of the system in the first year of operation.

Total return
So far, we have analyzed the economic effects of reducing tax rates and doubling the bonus depreciation separately. Each provision of the controversial new tax plan increases the financial return of commercial solar installations. A 27 percent increase in project value should have commercial solar salespeople fa la la la la-ing as they plan for the rest of 2018.

New Tax Bill Offers Unexpected Benefits to Commercial Solar Installations

If you look at what industries are getting the most government assistance, you will find solar gets far more help than fossil fuels do:

A study by the University of Texas projected that U.S. energy subsidies per megawatt hour in 2019 would be $0.5 for coal, $1- $2 for oil and natural gas, $15- $57 for wind and $43- $320 for solar. Many of the renewable energy subsidies come in the form of a Production Tax Credit (PTC) of 2.3 cents per kilowatt hour.

Renewable Energy Subsidies

[aspera]

Kublikhan:

I was thinking that a resource "depletion allowance" is different from "depreciation" of tangible property. Both would benefit the corporation economically, certainly. And both deal with loss over time. But depreciation allows for eventual replacement of the equipment, etc. Depletion was a credit for the exhaustion of the resource (without possibility of replacement). They are economically similar but conceptually different, no?

Your excellent examples for solar seem to be focused on depreciation. Do they ever use the actual term "depletion allowance?"

[kublikhan]

No you're right, I should have said depreciation. Thanks for the correction. But in practice both have similar tax consequences for the company. Sunlight doesn't run out so it doesn't deplete. However solar panels degrade over time, so they depreciate in value. in the end, both result in your initial investment running down over time and being tax deductible as a result.

[asg70]

solar panels degrade over time

Not very quickly. The biggest loss proposition with solar so far has been buying into them when prices were higher and panel efficiency lower. But I think they've pretty much hit a sweet spot at this point such that they would make a reasonably safe long-term investment.

[marmico]

I was thinking that a resource "depletion allowance" is different from "depreciation" of tangible property.

That's the meat of the matter and you correctly sensed a monetary inequity.

High income taxpayers looking for a tax deduction through a limited partnership ("pass through entity") do not look to invest in a widget manufacturer when they can invest in an oil and gas driller.

The oil and gas industry has a tax preference through intangible drilling costs and percentage depletion. The CBO estimates that those preferences amount to ~$23 billion over the next 10 years relative to the widget or any other manufacturer.

https://www.cbo.gov/budget-options/2016/52274