Mad Dog Liberal

As President Obama renews his calls to end tax incentives and subsidies for the nation’s top five oil companies, I want to remind everyone that back in 2005 the top executives of these same companies testified before Congress that they didn’t need government help. Big Oil subsidies, put in place during the fledgling years of U.S. oil exploration, tax incentives were meant to ensure that America would have a domestic oil supply and gasoline. The incentives and subsidies were meant to offset the costs of drilling at a time when finding oil was little more than a crap-shoot. But back in 2005, oil industry leaders testified that they no longer needed these government inducements to drill because oil was selling for $55 a barrel.

Now it’s six years later and oil is selling for $80 a barrel but now Big Oil is decrying the potential loss of those same tax incentives and subsidies. They now are floating claims, repeated by their wholly owned Congressional lapdogs, that oil is harder to find now; they face greater global competition; and ending subsidies will drive up gas prices (the fearmongering tactic). What’s more, a lot of Conservative politicians and bloggers are splitting hairs over the term “subsidy” as if the name by which we call the billions of dollars we hand over to oil companies makes a difference. The fact that all of benefits to oil companies are tax loopholes designed specific for that industry doesn’t mean it isn’t wrong to protect their billions and scream “class warfare.”

First, I want to explain what incentives or subsidies we’re talking about:

1. Intangible drilling cost credits allow oil and gas companies to expense certain expenditures involved in drilling and exploration, rather than amortizing it over several years.

2. Oil companies are allowed to depreciate property at a much faster rate than other industries.

3. Deductions for tertiary injectants directly subsidizes the cost of additives (fluids, gases, etc.) that are pumped into oil and gas reservoirs in order to boost production. Essentially, paying companies to act in their own best interest.

4. Percentage depletion allowance grants companies the ability to deduct from taxes roughly 15% of the revenue generated from a well even if that exceeds the well’s total value. By contrast, other types of business can only deduct an amount that represents the actual decline in value of an asset or investment. Oil companies can continue to take this 15% deduction on every well as long as it’s producing any amount of oil.

5. Oil companies are allowed to pay the U.S. taxpayers in oil rather than cash when drilling on public land. This ‘royalty-in-kind’ program relies on the oil companies to self-report on the amount of oil and gas extracted, however, as well as the value of that oil and gas and the processing and transportation costs that they deduct from the royalty payments. A system strongly questioned by the General Accounting Office (GAO) and inherently ripe for corruption.

6. Oil companies have been given exemptions from royalties owed to the U.S. Treasury for certain leases of federally held land in off-shore Alaska, the Outer Intercontinental Shelf and the Gulf of Mexico.

7. Foreign tax credits are intended to prevent double taxation of companies that might be taxed abroad but some companies, especially oil companies, have used this exemption even when they haven’t paid any foreign taxes.

Obama is seeking to boost revenue about $4 billion a year by the elimination of these tax incentives and subsidies, amounting to roughly $45 billion over the next ten years. You’d think that Congressional leaders on both sides of the aisle would line up behind him on this but instead the Republican party members are calling this “un-American” and claiming this will not only raise prices at the gas pump for Americans but will cause the loss of additional jobs because of the financial burden added to oil companies.

Which brings me to the protests raised by the same top oil executives who claimed six years and twenty-five dollars a barrel ago that they didn’t need those government incentives.

1. Oil is getting harder to find. This is patently untrue. Advancements in technology for locating shale formations and the resulting oil reservoirs easier to find than ever before. This has been evidenced by the rapid increase in U.S. oil and gas production in recent years.

2. Oil companies are facing greater global competition. The recent increase in domestic U.S. oil production and the heavy investment by the top five oil companies in Canadian tar sands production means that the U.S. oil market is not as closely tied to the global markets as in previous years.

3. Ending tax breaks will cause an increase in consumer gas prices. According to estimates by tbe Office of Economic Policy, removing these subsidies from oil companies might effect their production by “as much as” one-half of one percent. Given that this is the high range of the actual impact to the oil companies bottom line, there could be no legitimate expected increase in gas prices for consumers. And given so small an impact to the overall production of domestic oil, it naturally follows that these companies would also be unlikely to lay off any workers.

So if you have any lingering doubts as to why Republicans (and Democrats from oil-producing states) continue to oppose efforts to roll-back these needless subsidies, simply check their legislative voting record against the campaign contributions they’ve received from the oil and gas industry.

In budget negotiations over the past week or ten days, Congressional negotiators and Vice President Joe Biden found about $1 trillion in cuts that they could agree on and were allegedly trying to pin down another $1.4 trillion when Republicans walked away from the bargaining table over the suggestion that $400 billion could come from closing tax loopholes and ending certain subsidies and credits.

One such loophole; the “Last In/First Out” (LIFO) provision. This is an accounting method that allows companies to assume, for tax purposes only, that all of their inventory was purchased at the last (most expensive) price. When they sell that inventory, they falsely reduce their taxable income. International accounting standards refuse to recognize the use of LIFO accounting but the greatest beneficiaries of its use are the oil and gas industries so Republican lawmakers refuse to consider its repeal.