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Oil and Subsidies is as American as Apple Pie: Truly Homemade and Here to Stay

August 24, 2010

For those of you who follow my blog, please forgive me for partially repeating this discussion.It’s not a question of climate change or global warming. It’s a question of national security, stopping the avalanche of dollars offshore,  economic development, creating jobs and getting America back to a respected position within the global landscape. The message needs to be said again, again and again until our government acts in a meaningful way.

The fact that the oil industry is the most heavily subsides industry in the U.S. is all too   important to be swept under the rug. The American public must be brought up to speed on how the oil industry is treated in Washington. Our administration and policy makers have mastered the art of double talk; possibly to the point they actually believe the bull they are saying. Most of us are not that delusional. Actions speak louder than words.

Sure there is rhetoric along Pennsylvania Avenue on eliminating some of these elaborate subsidies. What really matters is not the discussions, but what non-watered down version gets passed that can affect real change. Why is this so important? Because for the most part, the price of oil is the yardstick by which most energy sources are measured. As long as the price of oil remains depressed, its practically impossible to make a good business case and secure investment for alternate energy. The 3% to 4% makeup of renewable energy in the U.S. today is a disgrace.

Many, but not all renewables, are more expensive than oil. Should oil’s tangible (see below) and intangible costs (DoD to protect our overseas oil supply lines, cost of national debt, etc.) be taken into consideration, the price differential may be somewhat smaller. Therefore, If judged on an apples-to-apples basis, renewables may make financial sense, leading to increased usage. Nevertheless, displacement of oil in our society, seems to be a political no no, especially when election time comes around the corner.

An article that ran last month in The New York Times, “Oil Companies Reap Billions From Subsidies,” by  David Kocieniewski, says it all, see

It’s for you to determine what’s truly real and what’s a smoke screen. The article points out:

“……….. an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.”

” According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.”

“And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies’ returns on those investments are often higher after taxes than before.”

“Efforts to curtail the tax breaks are likely to face fierce opposition in Congress; the oil and natural gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.”

“We’re giving tax breaks to highly profitable companies to do what they would be doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American Progress, a liberal research organization. “That’s not an incentive; that’s a giveaway.”

“Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes. Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.”

“Other tax breaks were born of international politics. In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers. Saudi Arabia and others began to treat some of the royalties as taxes, which entitled the companies to subtract those payments from their American tax bills. Despite repeated attempts to forbid this accounting practice, companies continue to deduct the payments. The Treasury Department estimates that it will cost $8.2 billion over the next decade.”

“Over the last 10 years, oil companies have also been aggressive in using foreign tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations. American producers have also aggressively exploited the tax code by opening small offices in low-tax countries. A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999.”

“Transocean — which has approximately 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, the study found.”

“Despite the public anger at the gulf spill, it is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted even President George W. Bush — a former Texas oilman himself — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.”

The End

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