During the past few weeks, talk around the water coolers focused on the recent credit-rating downgrade of America due to its massive debt load. Yet, it’s hard to comprehend a number as large as $14.5 trillion (as of August 2, 2011). What exactly does that include? And how does it affect midstream operators?
According to the U.S. Department of Treasury, the debt burden breaks down thus: $3.6 trillion from the shortfalls of recessions, $2.7 trillion for Social Security, $1.7 trillion for Bush-era tax cuts, $1.4 trillion for interest cost , $1.3 trillion for Iraq and Afghanistan defense spending, $1.3 trillion for other non-defense spending, $901 billion for federal government retirees, $719 billion for the Recovery Act, $678 billion for other tax cuts, $663 billion for other defense spending, $587 for other government programs, $428 billion for military retirees, $391 from the December 2010 tax deal, $272 billion for Medicare Part D and $16 billion in TARP funding.
The nation’s debt has affected the energy’s midstream sector as, much like the Dow Jones Industrial Average (and 401Ks), midstream enterprise values, some represented by the Alerian Index, have been pulled down—all these follow the larger markets. Also, the U.S. credit-rating downgrade could lead the Fed to raise interest rates and therefore, affect the cost of capital for some midstream players. Fortunately, so far this year, the midstream debt, equity and A&D markets continue to thrive.
Also, when President Obama signed a compromise plan to increase the debt ceiling, he authorized $2.5 trillion in cuts during the next decade. This massive budget reduction means numerous government agencies and funding programs are on the chopping block. What does that mean for energy and environment funding?
According to some political pundits, environmental programs and regulations, such as those concerning climate change, will likely be the first to have their funding reduced, especially on issues that have been controversial this year.
Others believe that Congress might repeal billions of dollars’ worth of oil and gas tax incentives. With gasoline prices seen to be high in the U.S. (as long as they are not compared with other nation’s prices) and oil companies seen to be taking in record profits, incentives could be among the hottest items going into the debate. Democrats will crusade for rolling back oil tax breaks, but will face strong resistance from Republicans and oil industry lobbyists.
As a side note, hats off to Texas Governor Rick Perry for throwing his hat into the Presidential race. With Perry’s strong political platform of job and wealth creation in the Lone Star state, both Democratic and Republican front-runners will have to step up their games a notch to pontificate on other issues when the voters are focused on the nation’s economy.
Despite these debt woes and political machinations, most analysts quoted in this issue say the oil and gas midstream sector can expect significant continued demand for more gathering, processing and take-away capacity, which translates into new and expanded systems--even in the mature basins. Such demand is also good news for service and supply companies that support midstream buildouts.
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