Monday, July 18, 2011

Energy Implications of a Federal Default

Much of the attention concerning a possible failure to increase the US debt ceiling by month-end has focused on the government's ability to borrow, and on how individuals might be affected, whether as recipients of social security, pay or pensions from various branches of the federal government, or as consumers seeking car loans or mortgages. I haven't seen a lot of discussion about the potential impact on energy, other than some speculation about higher oil prices. As I started to consider how different categories of energy might be affected, it occurred to me that a list, or a set of lists was the best way to tackle this. It's not intended to be comprehensive, and I would welcome your input on what I've overlooked.

The first category of energy impacts concerns companies or individuals who are awaiting a check or wire transfer from the government, for which funds might not be available in the absence of a prompt deal to extend the debt ceiling. These include:
  • Projects that have qualified for Treasury renewable energy cash grants, but have not yet received the funds, or that hope to qualify shortly. Since this program started in 2009, the Treasury has disbursed $7.8 billion to project owners and developers.
  • Companies that sell energy to the federal government and its various branches. This includes start-ups selling renewable aviation and diesel fuels to the Department of Defense, as well as firms selling the government the large quantities of electricity and conventional fuels it uses. (I will be attending a joint Army/Air Force energy forum tomorrow.
  • Companies with contracts related to various energy efficiency programs initiated under the stimulus or previous legislation, including weatherization.
  • Individuals who receive federal energy assistance.
The next category includes companies that aren't expecting cash, but are relying on loan guarantees from the federal government to help them secure more attractive financing--or in the case of some risky projects and technologies, any financing at all--either from commercial lenders or directly from the Federal Financing Bank.

  • Beneficiaries of the Department of Energy's loan guarantee program that have not yet secured loans are a good example of this category. Note than many of the projects listed on the Loan Program Office's site have only obtained conditional approvals, indicating that their financing has not yet closed. They would be vulnerable either to a protracted default or one that undermined confidence in the government's "full faith and credit" to such an extent that a federal loan guarantee wouldn't aid in lining up lenders.
The next category covers the large number of entities that benefit from energy-related tax credits and deductions. Although they aren't directly vulnerable to a default, they are exposed to the risk that their particular tax benefits might be canceled or reduced as part of an agreement between the Congress and White House to extend the debt limit.
  • Refiners and others blending ethanol into gasoline and collecting the Volumetric Ethanol Excise Tax Credit.
  • Producers of biodiesel and cellulosic biofuels and small ethanol producers, all of which receive tax credits for producing renewable fuels.
  • Oil and gas companies benefiting from the various tax credits and deductions that have been in the administration's cross-hairs since it took office.
  • US manufacturers, including oil and gas companies, power generators, ethanol producers, and a wide array of non-energy recipients of the Sec. 199 deduction for manufacturing their products in the US.
  • Purchasers of electric vehicles eligible for the tax credit of up to $7,500 per car for EVs and qualifying plug-in hybrids, or up to $4,000 for natural gas vehicles and other alternative fuels.
  • Car manufacturers and dealers depending on these tax credits to help sell their vehicles.
Then there's the effect on the vast majority of us who aren't in line for an energy-related grant, loan guarantee, or tax credit, but could see the ripple effects of all of these concerns in our energy bills, along with the more basic question of how a default might affect the price of oil and other mainstream energy sources. That subject deserves a posting of its own, but my quick take on this is that while a default could certainly drive up oil prices by means of a weaker dollar, that could be offset by the reduced oil demand that would follow the slowing of the US and global economies in the aftermath of a default. Up, then down, perhaps? I will join you in hoping we don't have to find out the hard way.

No comments: