The Price of Gas and the Severance Tax

Will a severance tax affect the price of gas? Will the drillers leave Pennsylvania if we enact a severance tax? Is a tax of $0.39/mcf higher than any other gas-producing state? Click on the title for some answers.

THE PRICE OF GAS: If you hear someone saying Pennsylvania shouldn't have a severance tax because the gas companies will pass it on as higher prices to the consumer they are just plain wrong. The price of gas is not set by the cost of production. It is totally based on supply-and-demand and set by market forces -- just like the price of soybeans. See Natural Gas as a Commodity midway down this web page: http://www.naturalgas.org/naturalgas/marketing.asp

SUPPLY AND DEMAND: Residential use hardly affects the price at all. In the U.S. only 21% of natural gas is used for residential heating. 79% is for industry & commercial use (fertilizer, power generation, plastics, etc). The price of gas fell in the last couple of years because the recession lowered industrial & commercial demand for gas. The price will rise when those users demand more gas than the gas companies are able to supply. If they were smart they would stop drilling to lower the supply.
http://www.eia.doe.gov/kids/energy.cfm?page=natura...

THEY HAVE TO MAKE A PROFIT OR THEY WON'T DRILL.
Correct, but the profit is based on the market price of gas. In the mid-2000's it was $12/mcf. When it fell to $4/mcf they stopped drilling for a while. They just wait for the price to rise.

THIS SEVERANCE TAX RATE WOULD BE THE HIGHEST TAX IN THE COUNTRY.
Wrong. The tax that passed the House is currently comparable to New Mexico and Montana. And, unlike most other states with a severance tax, the oil & gas industry is exempt from property tax in Pennsylvania per a 2002 PA Supreme Court ruling. The Marcellus gas industry pays nothing to Pennsylvania counties, municipalities and school districts. See: http://www.pennbpc.org/sites/pennbpc.org/files/Tal...
By the way, our proposed severance tax (SB 1155) is a flat rate instead of a percentage, so when the price of gas rises, Pennsylvania's tax will look mighty sweet.

IF THE TAX IS TOO HIGH THE DRILLERS WILL LEAVE
We wish this was true -- but it isn't. The drillers are here when the price of gas allows them to make a profit. Pennsylvania has the resource. The drillers have to be here to get it. And when our gas is gone they'll leave forever.

Get the tax $$ now. When the gas is gone it's gone.