Jack Gerard, head of the American Petroleum Institute, is a paid lobbyist and advocate for the oil industry. He is not known for measured temperate presentations. Recently, he indicated that the federal government should not raise or reduce taxes, what many call subsidies or tax expenditures, on oil companies and the industry. He also added that the feds should not impose new environmental regulations on fracking operations or on limiting GHG emissions from refineries. Gerard’s all-encompassing petition and request for exclusivity on behalf of his members, sounds like the familiar “not in my backyard” and to hell with fairness and sharing the burden with all Americans during this period of budget deficits. Someday soon, if the U.S. economy does not return to health, maybe Gerard and API will reflect on my reformulation of the Pogo comic strip’s admonition, “we have met the enemy and he is us,” to “the U.S. economy and the environment has met the enemy and it was, in part, the favored tax and other public sector ground rules governing oil.” (I shared Mr. Gerard’s presentation with a colleague. He asked immediately to be excluded from all personal tax increases because he is very productive and believes he is serving the interests of the nation.)
Paraphrasing NPR, Gerard’s tax statements border on “all rant and lots of slant.” Gerard argues that the oil industry is taxed like every other business, particularly manufacturing, and that its tax breaks are not subsidies. Really!
At the present time, the oil industry – both large companies and independent producers – secure benefits from a variety of federal tax credits, deductions, exemptions and regulations. Some are primarily germane to the oil industry (e.g., enhanced oil recovery credit, expensing intangible drilling costs, geological and geophysical amortization period, passive loss exceptions, tertiary injections deduction, percentage depletion allowances, expensing of intangible drilling costs, marginal wells credit and more.) Others, because oil companies take advantage of general provisions in the tax code, are classified, in some cases, as manufacturers.
Gerard and his API colleagues argue that the percentage depletion allowance and tax deduction benefits place oil on an even playing field with manufacturing industries. But if one looks closely at both the depletion allowance and tax deduction statutes and regulations, the concepts, definitions and regulations suggest that similarities to manufacturing and other non-oil businesses are often a stretch and end quickly after his luncheon speech and tax course 101.
I believe depletion allowances are now limited primarily to independent oil companies, 1,000 barrels per day and 65 percent of a producer’s net income. Although I understand the reasoning, it’s a bit of a stretch to easily equate oil in the ground with capital equipment in the plant or field. Even if the argument can be made, the depreciation rules are different among sectors acknowledging their dissimilar characteristics. Significantly, despite the arguments of Gerard about the need for the depletion allowance to stimulate the industry, the Congressional Research Service notes that the zeroing out of the tax break for big companies did not reduce their enthusiasm for drilling oil.
The manufacturing tax deduction was initiated in 2004 to help stimulate employment. Once again, oil companies were classified as part of the manufacturing sector and eligible for a tax deduction of up to 9 percent on net income, with upper limits related to the company’s payroll. Oil companies eventually secured a 6 percent break. API, as well as Gerard, has claimed that the difference is discriminatory. I suggest that the difference is related to the fact that there is only a weak link between oil production and increases in jobs as well as output and the likely minimal effect of the tax break on production decisions. Clearly, the price of oil per barrel and the cost of drilling are among the key factors, perhaps the key factors, in company decision making.
Both of these “subsidies,” or imputed tax expenditures, should be at least considered for elimination or reduction by Congress after detailed independent analysis of the trade-offs concerning public benefits and costs (economic, environmental, security, etc.), as well as the need to create an even playing field with respect to alternative transitional fuels. In this context, it would be appropriate to think about the possibility of exempting some smaller independent oil companies who do not have the same flexibility concerning taxes, costs and prices of larger multinational firms.
Additional subsidies now in place should also be granted a thorough nonpartisan, independent review. If they escape the budget ax, it should be because their opportunity costs significantly favor the public interest. They include: the enhanced oil recovery credit, the credit for marginal wells and the ability to expense intangible drilling costs. Continued high costs of gasoline would, according to the Congressional Research Service, mute any significant impact on drilling and production. Keeping marginal wells going with subsidies does not make sense, particularly if less expensive, cleaner alternative transitional fuels are available. The review again should look at the effect of ending these subsidies on smaller independent oil firms and their ability to withstand termination of subsidies during the present slow growth economy. They may not have the staying power of larger companies.
Because of the tax code, the structure of the oil industry, the roller coaster rise and fall of oil and gas prices, and the increased costs of drilling for tight oil, estimating the taxes and profits made by oil companies-both up and down stream, as well as the percentage of taxes paid compared to gross or net revenues is difficult. But the industry as a whole is not going hungry! In recent years, total profits appeared to be roughly close to 25 cents of every dollar spent for gasoline. Between 2001 and 2010, profits of the big five companies exceeded $900 billion.
John Hofmeister, former head of Shell, had it right when he indicated, “large oil companies don’t need tax subsidies when oil prices are high…particularly when costs are higher than $70 a barrel.” Oil costs now are over $100 a barrel.+