Washington Insider -- Tuesday

Indiana Study Says Good Time for Gas Hikes

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

In 5 Years, US Will Lead Oil Production Gains: IEA

The U.S. will lead the world in oil production increases by 2021 in spite of the country taking the taking the “biggest hit for now,” the International Energy Agency (IEA) said in its annual medium-term oil market report.

The IEA said that while U.S. light, tight oil (LTO) output is “falling steeply for now” amid a low price environment, the market will begin rebalancing in 2017 and, soon after that, the US oil industry could see a robust increase in oil production.

Another country set to ramp up production is Iran, whose supply has come back into the market since international sanctions on the country were removed recently.

By 2021, the IEA said, “the US and Iran are seen leading production gains among non-OPEC and OPEC countries respectively.”

The report notes that while oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies – at least in the near term. However, the report points to the risk of an oil price spike in the later part of the outlook period arising from insufficient investment.

“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future,” said IEA Executive Director Fatih Birol, launching the report at IHS CERAWeek.

The report sees 4.1 million barrels a day (mb/d) being added to global oil supply between 2015 and 2021, down sharply from the total growth of 11 mb/d in the period 2009-2015. The drop in supply growth comes as upstream investment dries up in response to the current glut that is pressuring prices. Global oil exploration and production capital expenditures (capex) are expected to fall 17% in 2016, following a 24% cut in 2015 – which would be the first time since 1986 that upstream investment has fallen for two consecutive years.

US production is seen reaching an all-time high of 14.2 mb/d by the end of the forecast period, but only after falling in the short term.


ERS: China’s Feed Industry Rising with Livestock Sector Growth

Livestock feed production in China has risen dramatically in recent decades, as rising incomes have led to increasing consumption of meat, which in turn has resulted in increasing livestock production, the Economic Research Service (ERS) reported.

Commercial feed production increased from only 5 million metric tons in 1982 to 198 million metric tons in 2014. Growth in feed production has mirrored growth seen in Chinese meat and egg production, which rose from 15 million metric tons per year in the early 1980s to 114 million mt in 2014. Feed output for swine increased dramatically after 2007, due to government emphasis on modernizing hog production and moving towards greater use of commercially sourced feed.

Chinese feed production for other types of livestock has also grown over time, as modernization efforts and vertical integration efforts have been undertaken for other livestock sectors as well. The growth of the Chinese commercial feed industry has resulted in an increasing reliance on feed ingredient imports from the U.S., including soybeans, sorghum, barley and other commodities.


Washington Insider: Indiana Study Says Good Time for Gas Hikes

The Hill is reporting this week that low fuel prices make this a “good time” to increase gas taxes to help pay for transportation projects. The report cites a study by Ball State University’s Center for Business and Economic Research that argues that the fact that U.S. fuel prices are low and “likely to remain low for the foreseeable future” would help to increase the political viability of moderate gas tax increases.

The study notes that the cost of driving 100 miles is now half what it was in the 1930s and that “according to generally accepted economic models” a five cent increase in gasoline taxes “would have no appreciable impact on key measures of employment or GDP in Indiana,” Ball State’s home. The report also notes that Indiana already has been considering a proposal that would increase the state’s nearly 30 cents-per-gallon gas tax by 4 cents.

The new levy would be collected on top of the current 18.4 cent per gallon federal gas tax, The Hill said.

“Current low prices, increasing fuel efficiency of our vehicles and the long-term decline in real tax revenues suggest this is a good time to enact such an increase,” said Michael Hicks, director of the Center for Business and Economic Research at Ball State. “More importantly, higher tax rates are not necessarily viewed negatively by businesses and residents.”

The study also notes that last year, six states implemented tax increases like those being considered in Indiana.

Transportation advocates had pushed lawmakers to increase the federal gas tax during the debate about a multiyear highway funding bill last year, but lawmakers generally rejected that option and fought to use spending offsets from other areas of the federal budget to pay for that five-year bill. Now, supporters of increasing the gas tax are pointing to the willingness of states like Indiana to consider raising their own fuel levies as evidence that a national hike would be politically palatable.

Still, there are critics aplenty who note that gas tax increases are always toxic, or nearly so, and Republican lawmakers have frequently rejected such measures even as they recognize the growing need for increasing infrastructure investment.

The national gas tax has been the traditional source of transportation funding since its inception in the 1930s but has not been increased since 1993 and so has not kept pace with growing needs. The federal government typically spends about $50 billion per year on transportation projects, but the gas tax only brings in approximately $34 billion annually at its current rate. Transportation advocates increasingly have concluded that the federal gas tax will have to be increased or replaced eventually with a more sustainable funding source to keep pace with rising costs for infrastructure projects.

Perhaps the only factor that can overcome Congressional dislike of tax increases is evidence of need in a fundamentally important sector, so a recent report by the American Road and Transportation Builders Association that some 59,000 of the nation’s bridges are structurally deficient is attracting considerable attention. This is about 10 percent of the total.

The report’s state-by-state rack-up of deficient bridges shows that in four states, including Iowa and Oklahoma, more than 20% of the bridges are deficient. Agriculture’s stake in infrastructure repair is emphasized by the fact that of the ten states with the greatest bridge repair need, five are large ag producers including Iowa, South Dakota, Oklahoma, Nebraska and North Dakota.

In terms of overall transportation infrastructure needs, the Congressional Budget Office says it will take about $100 billion, in addition to the annual gas tax receipts, to pay for a six-year transportation funding bill. So, as the need for new transportation infrastructure becomes ever more acute, it is clear that pressure on lawmakers nationwide to find the necessary funds will increase commensurately.

In that regard, the current decline in gas costs could help reduce the political impact of a tax increase, but what may seem like an ideal time to increase program revenues to academicians likely is fraught with political pitfalls for politicians. Whether estimates of need will be enough to prod tax-averse lawmakers to do the “unthinkable”—raise taxes—remains to be seen, but that fight is extremely important to producers and should be watched closely as it emerges, Washington Insider believes.

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