May 17, 2011
There are a couple of basic truths about oil and gas companies today--they are highly profitable, heavily subsidized, and well-connected in Washington. While this scenario makes for a very lucrative business model, it has and continues to needlessly cost taxpayers billions. Now that the deficit and debt limit are pressing our budget to its limit, these outdated and unnecessary giveaways must end.
Oil prices are predicted to remain high, all but locking in the high profitability of the industry. Just this spring the average price per barrel has been on the rise. In February the average price per barrel was $89, in March $103, and in April it reached $110. For the next two years the average price per barrel is projected to remain over $100. Natural gas prices are also predicted to increase in 2012. These high prices spell a good financial situation for oil and gas companies and provide marked incentive for production.
With these prices in mind, it seems reasonable that these companies don’t need to be heavily subsidized, but the oil and gas industry’s Congressional ties run deep. Because of these ties they have been able to maintain their special deals for nearly a century.
Not surprisingly, oil and gas companies have spent hundreds of millions of dollars over the past decade in an effort to lock in the preferential treatment they receive from Washington. Since the start of the 2002 election cycle, the oil and gas industry has donated $138.7 million to the campaigns of elected officials in Washington, according to the Center for Responsive Politics. Compared to other industries in the energy and natural resources sector, oil and gas is the biggest player by far in terms of campaign contributions and lobbying. By comparison, the mining industry, which also enjoys government subsidies in different forms, spent $32.3 million in campaign contributions during the same period. During just the 111th Congress (2009-2010), oil and gas companies spent an additional $321.3 million on lobbying expenses – approximately $440,000 a day – and employed at least 798 lobbyists, more than one lobbyist per member of Congress. In the first quarter of 2011, the industry spent $39.6 million on lobbying, more than almost every other industry.
For a long time the oil and gas industry has had the system working to their advantage. But it is the job of Congress to protect the taxpayer, not the special deals of the oil and gas industry.
Subsidies, Subsidies, Subsidies
During World War I, U.S. taxpayers provided the oil and gas industry with its first federal tax break. Over the decades, more lucrative tax breaks have been added. The latest major installment came with the passage of the 2005 Energy Policy Act, which included another $2.6 billion in subsidies for oil & gas companies. But it hasn’t stopped there. As recently as December of 2011, oil and gas companies received more subsidies. Each year the oil and gas industry takes advantage of tax breaks and other subsidies worth billions of dollars. In all, oil and gas companies are expected to receive more than $78 billion in industry specific and general business subsidies over the next five years.
The first of the federal subsidies provided to the industry came with the establishment of the intangible drilling costs tax credit in 1918; other tax breaks including the geological and geophysical tax break were enacted as recently as the Energy Policy Act of 2005 (EPACT05). Other recent subsidies came in the Emergency Economic Stabilization Act of 2008 and the volumetric ethanol excise tax was just extended in a tax package passed last December.
The subsidies included in the table above cover a range of tax breaks and other government support for the oil and gas industry and their estimated benefits to the oil and gas industry over the next five years. This analysis includes tax breaks and subsidies that are industry specific as well as those that disproportionately benefit the oil and gas industry. The general business tax breaks for oil and gas are listed above in Table 2 and include the section 199 manufacturing deduction enacted in 2004 and last in, first out accounting method (see: general business reform). These subsidies should be repealed across the board and in this analysis we include the amount of these breaks that benefit the oil and gas industry. We also include the Foreign Tax Credit which should be reformed to only enable credit for true income taxes paid to foreign government and not taxes that were in exchange for an economic benefit.
The subsidy calculations come from the Joint Committee on Taxation, a non-partisan congressional committee that tracks and assists in the legislative tax process, the Office of Management and Budget, and industry sources. For more detailed information on the subsidies included please see Appendix One.
Profits, Profits, Profits
Over the last 130 years the oil and gas industry has established itself as a mature financial powerhouse both domestically and internationally. It has made a significant portion of its wealth by extracting billions in profits from oil and gas removed from taxpayer-owned federal lands and waters.
In the last ten years oil companies have been particularly lucrative for the industry, with the top five companies garnering more than $850 billion in profits (see table below).
The oil and gas industry has also shown itself to be more than resilient in the face of what would have easily put other industries out of business. While the economy took a downward spiral for just about everyone in 2008, profits continued to come in for oil and gas companies.
The largest oil spill ever, in the Gulf of Mexico, also appears to have little impact on the profitability of oil giant BP. In the face of what for most companies would spell economic ruin, BP quickly emerged from the red with two straight quarters of profits amounting to more than $6 billion. BP was able to write-off billions of the costs related to its oil spill clean-up in 2010, significantly decreasing their tax burden. The company lowered its taxes by $13 billion because of costs related to the oil spill. This effectively means that taxpayers subsidized BP and its clean up of the oil spill that it caused.
Other oil companies have consistently done well over the last decade. In 2010, net profits for the largest oil and gas companies (Shell, Exxon, Total SA, BP, Chevron) were $76.8 billion – a $12.4 billion increase from 2009 profits and a 49.7% increase from just a decade earlier.
With the price per barrel of oil having eclipsed the $100 mark again this year and predicted to stay there, Big Oil will rake in billions of dollars more in profits these next few years. In 2008 with high oil prices: Exxon posted the largest annual corporate profit in U.S. history, Chevron became the second most profitable company in the U.S, and the five companies listed above hauled in nearly $150 billion.
Clearly these companies do not need taxpayer subsidies.
Subsidies Must End
After more than a century to establish itself, the oil and gas energy sector should clearly be able to stand on its own two feet without taxpayer handouts. Congress must act to end the siphoning of taxpayer dollars to powerful energy companies. Taxpayers cannot continue to perpetuate an endless cycle of subsidies.
If we continue on with business as usual taxpayers will be on the hook for an additional $80 billion in subsidies over the next five years. It’s time to stop rubber stamping age old policies and enact meaningful reforms.
The 112th Congress came into office promising to reduce our deficits and debt and to reroute our current fiscal course to a sustainable one. To do this, Congress needs to target inefficient, ineffective, and wasteful programs that deplete the nation’s treasury and cause a fiscal nightmare for taxpayers.
For more information, please contact Autumn Hanna at (202) 546-8500 x112
or autumn [at] taxpayer.net
or autumn [at] taxpayer.net
Appendix One: Oil and Gas Subsidies Summary
The numbers in Table 1 project future costs for selected oil and gas subsidies for fiscal years 2011-2015. These values and projections are based on reports from government agencies including the Joint Committee on Taxation (JCT), the Office of Management and Budget, and industry data from the American Petroleum Industry Association. In general, government data on federal spending for subsidies and tax incentives to the oil and gas industry is highly decentralized. Government tracking and reporting of these subsidies is spread across multiple agencies that do not observe a standard methodology for calculating costs.
Volumetric Ethanol Excise Tax Credit
In 2004, the American Jobs Creation Act implemented the VEETC to replace these two historical subsidies as a combined excise tax exemption and tax credit. The tax credit is worth 45 cents per gallon of ethanol blended with gasoline. Under the recently enacted Renewable Fuels Standard, the U.S. is required to blend up to 15 billion gallons conventional corn ethanol with gasoline by 2015. Assuming ethanol production reaches the mandated cap every year, it will cost $31.05 billion from 2011-2015.
In 2004, the American Jobs Creation Act implemented the VEETC to replace these two historical subsidies as a combined excise tax exemption and tax credit. The tax credit is worth 45 cents per gallon of ethanol blended with gasoline. Under the recently enacted Renewable Fuels Standard, the U.S. is required to blend up to 15 billion gallons conventional corn ethanol with gasoline by 2015. Assuming ethanol production reaches the mandated cap every year, it will cost $31.05 billion from 2011-2015.
Intangible Drilling Costs (Expensing of exploration and development costs)
Created in 1918, intangible drilling costs (IDCs) include all expenditures made for wages, fuel, repairs, hauling, supplies, etc that are incidental to the drilling of wells and the preparation of wells for the production of oil and gas. While most costs that bring future benefits must be capitalized according to the Internal Revenue Code (IRC), IDCs are an exception that can be expensed in the period the costs are incurred. Special rules are provided for intangible drilling and development costs so that these costs can either be expensed (current deduction) or capitalized (current law). When the decision is made to “expense” the IDCs, the taxpayer deducts the amount of the IDCs as an expense in the taxable year the cost is paid or incurred. If the IDCs are capitalized, they are generally recovered through either depreciation or depletion. The President has proposed eliminating this tax break and the JCT estimates this would save $8.963 billion from 2011-2015.
Created in 1918, intangible drilling costs (IDCs) include all expenditures made for wages, fuel, repairs, hauling, supplies, etc that are incidental to the drilling of wells and the preparation of wells for the production of oil and gas. While most costs that bring future benefits must be capitalized according to the Internal Revenue Code (IRC), IDCs are an exception that can be expensed in the period the costs are incurred. Special rules are provided for intangible drilling and development costs so that these costs can either be expensed (current deduction) or capitalized (current law). When the decision is made to “expense” the IDCs, the taxpayer deducts the amount of the IDCs as an expense in the taxable year the cost is paid or incurred. If the IDCs are capitalized, they are generally recovered through either depreciation or depletion. The President has proposed eliminating this tax break and the JCT estimates this would save $8.963 billion from 2011-2015.
Royalty Relief
Oil and gas companies that drill on public lands or off-shore pay for the oil and gas they remove in the form of royalties. Because of out-dated energy policy, oil and gas companies often pay little or no royalties to the owners of the resources. Additional royalty relief was enacted with the Deepwater Royalty Relief Act of 1995. Most of the leases granted under this act contained price thresholds such that when the price of oil was above the threshold, royalty relief would not apply. However, the contract language for 1998-1999 failed to contain price thresholds, leading to a huge windfall for those leases. Annual reports of the Minerals Management Service (MMS) from 1998-2009 report $2.14459 billion in “royalty free” oil and gas production and estimate the royalty free production for 2011-2015 will total $4.365 billion for oil, $159.867 million for gas (deep gas) and $2.384 billion in gas (deep water).
Oil and gas companies that drill on public lands or off-shore pay for the oil and gas they remove in the form of royalties. Because of out-dated energy policy, oil and gas companies often pay little or no royalties to the owners of the resources. Additional royalty relief was enacted with the Deepwater Royalty Relief Act of 1995. Most of the leases granted under this act contained price thresholds such that when the price of oil was above the threshold, royalty relief would not apply. However, the contract language for 1998-1999 failed to contain price thresholds, leading to a huge windfall for those leases. Annual reports of the Minerals Management Service (MMS) from 1998-2009 report $2.14459 billion in “royalty free” oil and gas production and estimate the royalty free production for 2011-2015 will total $4.365 billion for oil, $159.867 million for gas (deep gas) and $2.384 billion in gas (deep water).
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