Oil Subsidies on the Hill

Posted on 05/17/2011 @ 01:24 PM

Tags: Government, Environment, subsidies

Surging gas prices, a ballooning deficit, and record profits for the oil industry have renewed interest in subsidies on Capital Hill. In response law-makers are rushing to hold hearings, and propose legislation on this politically sensitive issue.

The relationship between high gas prices and record paydays for the oil industry is fairly straight forward. As world crude-oil prices increase (which is determined on the international market and by some speculative trading), profit margins grow, while production prices stay relatively flat. Companies such as BP, Exxon, Shell, Chevron and ConocoPhillips, are able to pass these increased prices on to the costumer at little expense to operations.

What doesn’t seem so straight forward is why the oil industry continues to receive billions of dollars worth of subsidies in the form of tax breaks? This year alone the oil industry saved $4.4 billion through special tax breaks. While consumers struggle to fill their tanks, major oil companies are reaping a windfall. It also deprives our economy of billions of dollars of revenue and sadly reaffirms our commitment to a fossil fuel based economy, which is both irresponsible and dangerous in the face of global climate change.

Government subsidies for the oil industry have been around for a long time, and just don’t make sense! For instance the expensing of intangible drilling costs, which includes exploration and development dates back to 1916, and the oil-depletion allowance has been going strong since 1926. The newer but more absurd Domestic Manufacturing Deduction established in 2004 to encourage companies to manufacture in the US, or in this case drill and refine, is totally misleading, because oil companies are going to follow the oil no matter where it is. Does anyone really believe Chevron would be less inclined to drill of the coast of the US, where there are proven oil reserves, if they did not qualify for a 6% tax break? NO!

The Center for American Progress concludes that because of all the tax loopholes oil giant’s, such as Exxon Mobile’s, effective federal income tax is about half of the 35 percent standard for US companies. While the exact number is debatable, it’s clear that the oil industry does not need these tax breaks. Furthermore as the industry argues removing these tax loopholes would have little to no effect on domestic oil production. When the price of oil was low, around $60 a barrel, ConocoPhillips CEO Jim Mulva testified, ‘with respect to oil and gas exploration and production, we do not need incentives.’

In response, Senator Robert Menendez (NJ), a long-time champion for the dissolution of oil subsidies, has introduced (S. 940) that would repeal several tax breaks for five major, integrated oil companies: BP, ExxonMobile, Shell, Chevron and ConocoPhillips. The bill is estimated to save $21 billion over the next decade, with the savings being steered into deficit reduction.

A procedural vote has been scheduled for this evening (Tuesday, May 17th). While it looks likely that the bill will not be able to muster 60 votes, law makers are hoping to use the vote as a bargaining chip in the budget debates.

See FCNL's official position on these subsidies.

Watch the Senate Finance Committee hearing on Oil and Gas Tax Incentives from May 12th, 2011.