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Why Big Oil subsidies must go
Diana Smith
Big Oil is exporting American oil to foreign countries. Demand is so high globally that our oil is going to China, Germany or any place with huge energy needs like ours, driving up prices here at home.
Who is to blame for high gas prices? Big oil companies and the members of Congress who support them. Consider this:
- The five biggest oil companies have had a record $137 billion in profits last year.
- These companies receive $4 billion in federal subsidies in the form of various tax credits.
- History shows that when gas prices are higher, oil company profits are higher. (See our chart at olenm.org/highgasprices.)
Those of you in Las Cruces may have noticed the billboards and newspaper ads that OLÉ has put up around Las Cruces, calling on Representative Steve Pearce to stop voting for oil company subsidies. We’re an organization of working New Mexicans who are tired of feeling the squeeze from a crappy economy, high gas prices and the bogus arguments some politicians are making to protect Big Oil’s sweetheart deal.
Big Oil says gas prices are market driven, so if we drill more wells to increase production, gas prices will drop.
It makes a lot of sense until you learn one of Big Oil’s secrets: Big Oil is exporting American oil to foreign countries. Demand is so high globally that our oil is going to China, Germany or any place with huge energy needs like ours, driving up prices here at home.
So we should still just drill more wells, right? Wrong. We have more oil coming out of the ground here than we have had in decades. And Big Oil has thousands of drilling permits for public lands that they have not even used yet. Big Oil says “Drill More!” because they don’t want us talking about how we’re paying them twice — once at the pump and once on tax day, when taxpayers have to make up for the $4 billion in subsidies we are giving Big Oil.
There’s a simple solution to high gas prices. First, ban the export of OUR oil, drilled on OUR public lands, to foreign countries. Otherwise, how can we ever become energy independent? Second, end the $4 billion in subsidies to Big Oil. That means you, Representative Pearce. Let’s spend that money on job creation, unemployment benefits, renewable energy development – anything but giving handouts to the wealthiest, most profitable corporations on planet earth. Especially when they’re charging us $4/gallon for gas!
Diana Smith is an early educator in Deming.
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gofdisk, thanks for your post! Once again you prove my point with your accusations and over the top statements, you make it so easy.
gofdisks,
I am confused by your statement. “The oil companies ought to be paying 90% back to the American people for the American owned non-renewable resource.” Your statement seems to imply that all of the oil and gas being extracted belongs to the people of the United States. That is mot the truth. Many private citizens own mineral rights in lands throughout the United States. As to the US owned lands, they usually get 12.5 of the gross produced. They can also get a hefty bonus per acre when the parcel is put up for bid. It is not unusual for the federal government to get hundreds if not thousands of dollars per acre on these parcels. The government is making a lot of money in the oil and gas business with absolutely no risk.
BTW, finding oil and gas is getting harder and harder. Investors have to either look for new fields where they have not looked before (e.g., Marcellus shale) and they have to go deeper and deeper to find production. If the government increased the royalty rate that the government takes or taxes too high, no investor would dare sink any money into a drilling project which brings us to Dan Foley’s points about the IDC (intangible drilling costs) deduction.
Every industry is different and it is hard to compare the IDC to much anything else. Having been in the business for 20+ years let me offer just two of my justifications. First, drilling is highly risky. Some think that every time you drill a hole, you will hit something – that is far from the case. Just because you have good geology, good equipment, good data, a good operator, etc., there is no guarantee that you will have a productive well. Indeed, the worst situation we run into is that we have to make decision whether or not to keep on trying to work with a well bore in the hopes that it might become productive. For small oil and gas investors such as me, we live and die by wildcat operations. For wildcat explorations, 30% success is a pretty good deal. Without the IDC deduction, fewer investors would be willing to go after the wildcat project. Second, taking an IDC tax break in the year occurred is justified because a lot of IDC expense occurs upfront prior to knowledge if the expense was worth the cost. Thus, you will expend money on the engineer, geologist, labor, fuel, pad prep, lease bonus to the mineral owner (either government or private owner), etc. Unlike tangible drilling costs such as pipe or a pumping unit that can be resold after the project is over, the immediate deduction of IDC is justified because once the money is expended, there is no value left. The tangible drilling costs have value once acquired and put into use are depreciated over the life of the project. The intangible drilling costs have no value once expended.
The Defense budget eats that 8 billion inside of 2-3 days. The oil companies ought to be paying 90 % back to the American people for the American owned non-renewable resource. 30% of that could be generating employment just cleaning up after them.
“So you can see they pay tax rates of roughly 40-50% and for one company in one quarter it was over $8 Billion!”
How can you bring up NPR and Planned Parenthood and not even quote how much they cost? These are programs that actually benefit Americans where they live.
The health care for American women is priceless as it is a major factor that keeps our status as a First World Nation. How dare you put Women’s health as a some extraneous or unnecessary expenditure.
NPR barely holding the line against cultural degeneration and ignorance in our nation.
It turns out that they are all tax “breaks.” I even hesitate to call them “breaks” because some of them amount to little more than Congress defining accounting terms such as “capital equipment.” And the total amount of earnings not collected in taxes (which liberals define as a “subsidy”) is about $4 billion per year. Here is how that breaks down.
Domestic manufacturing tax deduction — $1.7 B. This is a tax deduction given to every manufacturer in the US, it was “designed to keep factories in the United States.” If that deduction were eliminated for oil companies only, it would mean singling out oil companies from all other manufacturers.
Percentage depletion allowance — $1 B. Any industry can write down a portion of the cost of its capital equipment as part of the cost of doing business. Right now, oil in the ground is treated as capital equipment. Again, this “subsidy” amounts to how the cost of doing business is defined. All companies get it, not just oil companies.
Foreign tax credit — $850 million. Companies get credit for taxes they pay to other countries. All companies get this “subsidy,” not just oil companies. Should a company pay tax on tax? Should only oil companies pay tax on tax?
Intangible drilling costs — $780 million. According to CNN, “[a]ll industries get to write off the costs of doing business, but they must take it over the life of an investment. The oil industry gets to take the drilling credit in the first year.” Among these four tax “breaks,” this smallest one was the only one that treated oil companies differently.
The above tax “breaks” explain how much tax revenue is not collected from all oil companies. How much is collected? In 2011 Exxon grabbed headlines for it’s $10.65 Billion in a single quarter. The number nobody talked about was the $8 Billion in Taxes or 42% of income before taxes. So you can see they pay tax rates of roughly 40-50% and for one company in one quarter it was over $8 Billion! Yet for some reason we want to attack these folks????????
So once again the left talks in platitudes without any real facts! Lets talk about the actual subsidies going to things like renewable energy:
The NRG Energy Project is receiving roughly $1.6 Billion in subsidies (NY Times Nov 11 2011)
How about other left organizationslike the Taxpayer subsidies of NPR or subsisides of Planned Parnethood?
I only offer these as examples of real subsidies becasue the Diane only offers up gross generalizations with out offering any real examples. You have to ask yourself why does she do that? Either she doesn’t know the facts or she doesn’t want you to know the facts.
The difference between me and Diane is I am willing to say we should be looking at all these “Tax Breaks ” and “Subsidies” not just the ones I disagree with. Maybe just maybe if the left will step away from the rhetoric and try to find REAL solutions to the REAL problems we face then maybe just maybe we can actually fix what is hurting this country! A Guy Can Hope Right?
@ Skeptic: Also, the theories that oil companies control the price of oil do suffer at explaining why oil prices fall.
Let’s put aside the argument, for now, as to whether or not oil companies are partners in the OPEC cartel or whether they are merely beneficiaries of it. Let’s just consider the Cartel.
Cartels are not stupid, and they are not completely immune to market pressures, including those of supply and demand. Many cartel members believe that they bring order to what would otherwise be a chaotic set of circumstances (that Free Market thing). Our sometimes Saudi friends have often increased supply to moderate price (and also to punish cartel cheaters).
Here’s a gem from my 1984 economics class text book, “Economics” 2nd Ed., Bryns and Stone: “Perhaps the most dangerous of all threats to a cartel is that high prices and profits will induce potential competitors to enter the industry or to develop substitutes for the cartel’s products. For example, there has been increasing emphasis on developing alternatives to petroleum as an energy source since the OPEC cartel became effective….”
Your thoughts?
Michael J. Flynn
First left me correct the number it should be 10 million barrels a day of imports, not 19, I hit the wrong key, sorry. The data for that is here:
http://205.254.135.7/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm
And the numbers I quoted EW-aif were for the latest month of data available from EIA, Feb. 2012. We are exporting crude, in very small amounts, due to the fact that some of the oil storage gets full at the refineries or terminals, and thus it is surplus on the market since demand is down here in the US and logistically it is easier and more profitable to export it. A day to day tactical business decision. But again the amount is so small, it is hardly more than a rounding error. The products are exported because it is most efficient to keep refineries running at full capacity, and as demand is down here in the US, that excess product goes overseas, most to South American countries. But again, the amount of products exported is also a small fraction of our imports.
And Mick, I also believe all subsidies and tax incentives should be removed from the marketplace. It distorts supply/demand fundamentals and leads to irrational economic consumer behavior which leads to putting inefficient and expensive products on the market that do nothing but reduce our competitive economic position in the world economy. Government subsidies for alternate energy, and I support their advancement, should be all focused on R&D through universities to find breakthrough technology advancements that are CHEAPER than fossil fuels. Not continuing to roll out and implement antiquated, expensive, uneconomic technologies which do nothing except make money for the special interests subsidized and again hurt our economic competitiveness. Why subsidize a Soilyndra if China can make this old fashioned junk cheaper? Why not find a new technology made in America no one can duplicate at our price of actual production without subsidies?
I tend to agree that we should eliminate ALL government subsidies.
But we can say that the money wasted on now bankrupt solar companies is producing zero energy.
Also, the theories that oil companies control the price of oil do suffer at explaining why oil prices fall.
It is not to difficult to understand that oil is a GLOBAL commodity. When one reflects that the dollar is cheap
and that China has grown to take the lead in cars purchased, it’s not too difficult to see that oil prices will rise.
Mr. Spear. Again, not a answer from Ms. Smith as regards “which specific tax credits”, but a brief summary from the Democratic Policy & Communications Center. This note, although partisan, mentions several other voices such as the Heritage Foundation and others from the traditional Right who share some of these views.
http://dpc.senate.gov/docs/fs-111-2-195.pdf
Enjoy.
Michael J. Flynn
DJ, your statistics are interesting, but the last one is puzzling– Why are we exporting ANY oil if we are still importing 19 billion barrels a day? And which year are you talking about?
Mr. Spear, this may not be the answer to your question (which was directed at Ms. Smith), but below is the summary of HR 601 End Big Oil Tax Subsidies. None of New Mexico’s congressmen were cosponsors. It did not get out of Committee.
SUMMARY AS OF:
2/10/2011–Introduced.
End Big Oil Tax Subsidies Act of 2011- Amends the Internal Revenue Code to require seven-year amortization of the geological and geophysical expenditures of covered large oil companies. Defines “covered large oil company” as a taxpayer which is a major integrated oil company or which has gross receipts in excess of $50 million in a taxable year.
Denies certain tax benefits to any taxpayer that is not a small, independent oil and gas company, including: (1) the tax credits for producing oil and gas from marginal wells and for enhanced oil recovery, (2) expensing of intangible drilling and development costs in the case of gas wells and geothermal wells, (3) percentage depletion, (4) the tax deduction for qualified tertiary injectant expenses, (5) the exemption from limitations on passive activity losses, and (6) the tax deduction for income attributable to domestic production activities.
Prohibits the use of the last-in, first-out (LIFO) accounting method by major integrated oil companies.
Limits or denies the foreign tax credit and tax deferrals for amounts paid or accrued by a dual capacity taxpayer to a foreign country or U.S. possession for any period with respect to combined foreign oil and gas income. Defines “dual capacity taxpayer” as a person who is subject to a levy of a foreign country or U.S. possession and receives (or will receive) directly or indirectly a specific economic benefit from such county or possession..
1. Subsidies for Proven Assets – We could all make good arguments against subsidies of any kind, but why subsidize proven technologies and assets? So, Dr. J., it seems more logical to stimulate new and potentially renewable energy technologies rather than to subsidize proven technology. (Google Methane Hydrates)
2. Import/Export Controls – I’m am a friend of the Free Market, but in the presence of Cartels and Crony Capitalism, there is no free market. I would not go so far as to prohibit the export of crude or refined products, but why use eminent domain to claim land for a pipeline that is not in the interest of the community through which it travels (Keystone Pipeline, for example)? This goes to the Cartel complaint: if the local market price of oil is the same as the world price, why would you need to pump it to the Gulf from Canada? Of course, the answer to that is obvious; even with cartel behavior there are gluts in the market. This is quite often how cartels fall apart. Minor cartel players cheat (can you cheat a cheater?) by breaking ranks. Look at gas prices in Cushing, Oklahoma.
So, I am opposed to Export Controls, but come on, how long are we going to pretend that the sheiks in Arabia control the Cartel?
3. US Near Refining Capacity – It is in our National Interest to have a secure refining capacity. Perhaps we should be subsidizing the refining side of the market. Delta Airlines has recently purchased refineries in the Pennsylvania area in a microeconomic attempt to free themselves from the effects of Cartel behavior and lax enforcement of speculators. Many will say that Environmentalists are to be blamed for the current state of affairs in refining capacity (those are the Many who write propaganda for the Cartel), but I think not.
As ever, Michael J. Flynn
The IPAA has stated this research on the so-called “subsidies”:
“We’ve reviewed federal assessments of energy tax issues by the Congressional Research Service (CRS) and the Energy Information Administration (EIA). These include intangible drilling costs and percentage depletion – unfortunately characterizing them as “tax incentives” or “subsidies”. Nevertheless, the results are still revealing, considering the dominant role played by fossil fuels in our energy sources. For example, a CRS memo dated May 16, 2011 on “Energy Production by Source and Energy Tax Incentives” concludes that while fossil fuels (including oil, natural gas, and coal) accounted for 78 percent of domestic energy production, they received just 13 percent of energy related “tax incentives” in 2009. Meanwhile, renewables accounted for more than 77 percent of the roughly $20 billion in “tax incentives” that went to energy, but generated less than 11 percent of domestic energy production. Renewables have received additional boosts as part of Federal spending packages enacted under the banner of economic recovery.”
And if you look at the data and facts, the US exported all of 59,000 barrels a day of crude oil, while we imported 19 million barrels a day. This database will show you the tiny nature of oil and product exports compared to our huge importation of crude.
http://205.254.135.7/dnav/pet/pet_move_exp_dc_NUS-Z00_mbblpd_m.htm
And the larger exports of refined products helps our balance of payments (crude oil is our largest import in terms of money we ship overseas), and keep jobs and economic activity in America. But I know some would love to see all oil and gas industry jobs exported anyway. Really, these kind of uninformed rants about evil oil are ridiculous.
Diana,
You stated that “These companies receive $4 billion in federal subsidies in the form of various tax credits.”
Question: which specific tax credits would you propose to eliminate.