WASHINGTON (Dow Jones Newswires), Sept. 11, 2009

The Obama administration opened a new front in its effort to impose $31.5 billion in taxes on oil and gas companies, saying that the nation puts too much emphasis on oil and gas at the expense of other industries.

The chief economist in the Obama administration's Treasury Department testified before a Senate panel that current subsidies "lead to overinvestment" in the oil and gas industry. That went beyond previous statements about the need to protect taxpayers and was the clearest signal yet that the federal government hopes to end its role in nurturing domestic oil and gas production.

"To the extent that current subsidies for the oil and gas industry encourage the overproduction of oil and natural gas, they divert resources from other, potentially more efficient investments, and they are inconsistent with the Obama administration's goals to reduce greenhouse-gas emissions and build a new, clean energy economy," Alan Krueger, the Treasury's chief economist, told the panel.

"That's absurd," said Devon Energy Corp. (DVN) Chief Executive Larry Nichols, the chairman of the American Petroleum Institute, before the panel. "At a time when respected energy studies agree on the need to increase all sources of domestic energy, it makes absolutely no sense to discourage production of our leading sources, oil and natural gas."

For years, Republicans encouraged oil as part of an "all of the above" strategy intended to reduce reliance on imports, especially from unstable parts of the world. But the Obama administration is trying to shift the debate amid a focus on global warming. Oil is viewed by the Obama administration as part of the problem because transportation accounts for more than a quarter of U.S. greenhouse gas emissions.

The new rhetoric isn't sitting well with Congress. Sen. Orrin Hatch, R-Utah, warned that the U.S. would be "at a tremendous disadvantage" if the country turned its back on oil, gas and coal. Jeff Bingaman, D-N.M., a moderate voice in the Democratic party, cited "concerns" about some of the proposals, urging sensitivity to regional interests. Sen. Jim Bunning, R-Ky., used stronger language.

"We are 62% imported from not very friendly countries right now on oil," Bunning said. Krueger replied: "That's correct. The best way for us to reduce" -- but Bunning cut him off. "Is to become less independent -- is that what you're saying?" Bunning said.

The Obama administration also may run into inconsistencies as it shapes its own energy program. By taking away tax incentives for gas production, the U.S. would be discouraging a cleaner-burning fossil fuel that is seen by some environmentalists as central to transitioning away from coal.

"This counterproductive approach is also at odds with the administration's own carbon reduction policy because it would discourage the production of natural gas, our cleanest fossil fuel," said Nichols.

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