U.S. Inflation Reduction Act Will Have Mixed Impact On Oil, Gas Markets
Ellen Wald | Aug 11, 2022 11:03
The Inflation Reduction Act, which will likely be passed by Congress this week, contains multiple provisions impacting the energy industry in the U.S. Here is how traders and investors in energy and related companies can expect the legislation to impact oil, natural gas and energy equities.
1. Tax credits for carbon capture, hydrogen and biofuel initiatives/h2
These credits appear in areas of the energy industry that big fossil fuel charged $900 per ton in 2024 with rates increasing to $1500 per ton by 2026. To put this in context, it is about twice the current market price of natural gas. Environmental groups claim these fees would push oil and gas companies to reduce their emissions as quickly as they can to avoid the fees. However, the fees would only apply to companies that aren’t in compliance with EPA methane regulations, and these regulations haven’t yet been finalized and aren’t likely to be finalized until early 2023.
Practically, this means that some companies will be at a huge disadvantage. Such businesses include those that haven’t implemented costly methane monitoring systems, haven’t built systems to capture and use methane to fuel their own operations and are not connected to pipeline networks that enable them to funnel excess methane to the natural gas market.
It also means that producers won’t be able to quickly drill new wells and bring new production online like they used to be able to do in shale oil regions. U.S. producers in these regions used to be able to respond to market forces by increasing or decreasing production quickly. With these new regulations, production will not just cost more but will take longer to come online, because more infrastructure will need to be in place to deal with the methane before drilling can commence. The Permian, or any future shale oil regions that are discovered, can no longer be the nimble oil producing region it once was. Traders should understand that these limitations will make U.S. production less responsive to market conditions in the future.
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