Oil companies benefiting from tax subsusidies and record profits

Oil companies benefitting from tax subsidies and record profits

As was the case for much of the last decade, profits for major oil and gas companies continue to skyrocket. Exxon brought in over $14 billion in profits in the third quarter of 2008, increasing 58% over third quarter 2007 and setting a new record for quarterly earnings. Similarly, Shell’s third quarter profits increased more than 70% over third quarter 2007 and Chevron’s profits increased to $7.89 billion, more than double the $3.72 billion reported a year ago.

Last year three of the top five largest oil companies saw annual profits continue on their record-setting trajectory. Exxon lead the pack, posting $40.6 billion in profits — the largest annual profit number reported by any American company ever — breaking their previous record from 2006. Chevron also had a record-setting year with net income rising 9 percent.

Overall, most companies are experiencing the highest profits in industry history, all while receiving billions in taxpayer subsidies. The combined profits of 25 major oil and gas companies reached over $175 billion in 2007, an increase of nearly 19% from 2004. And that same year, the oil and gas industry received more than $2 billion dollars in government subsidies.

Figuring the exact number of tax subsidies is slippery and hard to quantify, given the myriad of programs that can be broadly characterized as subsidies when it comes to fossil fuels. For instance, the U.S. government has generally propped the industry up with:

Construction bonds at low interest rates or tax-free
Research-and-development programs at low or no cost
Assuming the legal risks of exploration and development in a company’s stead
Below-cost loans with lenient repayment conditions
Income tax breaks, especially featuring obscure provisions in tax laws designed to receive little congressional oversight when they expire
Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods
Giving money to international financial institutions (the U.S. has given tens of billions of dollars to the World Bank and U.S. Export-Import Bank to encourage oil production internationally, according to Friends of the Earth)
The U.S. Strategic Petroleum Reserve
Construction and protection of the nation’s highway system
Allowing the industry to pollute - what would oil cost if the industry had to pay to protect its shipments, and clean up its spills? If the environmental impact of burning petroleum were considered a cost? Or if it were held responsible for the particulate matter in people’s lungs, in liability similar to that being asserted in the tobacco industry?
Relaxing the amount of royalties to be paid (more below)

While it’s easy to get bent out of shape that the petroleum industry “probably has larger tax incentives relative to its size than any other industry in the country”, according to Donald Lubick, the U.S. Department of Treasury’s former Assistant Secretary for Tax Policy, remember that subsidies are important across all sectors of the energy industry.

For instance, nuclear power wouldn’t be viable without subsidies - most governments pay between 60 and 90 percent of the cost of construction of new plants. Solar wouldn’t be what it’s become without significant German, Californian, U.S. federal and other incentives. Ethanol and biodiesel in the U.S. enjoy large subsidies (details, if interested, here), but let’s resist getting into the rat-hole of agricultural industry subsidies.

Subsidies, per se, aren’t a bad thing.

How does the oil industry defend its substantial incentives?

Energy security - The fossil fuel industry has, rightfully, long pointed to the strategic nature of a company’s oil and gas supply. Theirs is an industry that can’t afford to go away, they argue.

Environmental compliance - Far from being big beneficiaries, some oil companies claim they are net victims. They point to gasoline taxes and environmental regulations, such as fuel-efficiency standards for new vehicles.

Bolsters domestic production - Supporters of drilling incentives say they make sense for a country that wants to reduce its dependence on foreign oil and whose biggest untapped reserves are in water just offshore, albeit thousands of feet deep.

Defense requirements - Some have suggested that the demands of defending Middle Eastern oil fields added (pre-Iraq war that is) between $10 billion and $20 billion a year in subsidies to the true cost of oil.

Which begs the question - even if America greatly reduced its imports of oil, would it necessarily reduce its military activity in the Gulf region?

It’s not really that much money - A few years ago, Ronald Sutherland, an energy economist affiliated with the Cato Institute, a think-tank in Washington, used statistics from the Department of Energy to argue that oil actually gets rather little at the end of the day. All told, after subtracting this and allowing for that, he suggested oil receives less than a billion dollars in subsidies, in all.

Critics of oil subsidies in America, however, maintain that:

Subsidies don’t increase domestic production - A few weeks ago, a U.S. Interior Department report obtained by the New York Times suggested that the billions of dollars American oil companies stand to benefit from as incentives for drilling in the Gulf of Mexico (royalties they wouldn’t otherwise have to pay the government) wouldn’t add appreciably to any increase in production. Says an analyst who worked on the report, “if they took that money, they could buy a whole lot more oil with it on the open market.”

The U.S. gives far too much away - Industry analysts who compare oil policies around the world say the United States is much more generous to oil companies than most other countries, demanding a smaller share of revenues than others that let private companies drill on public lands and in public waters.

In the U.S., the government’s take - royalties as well as corporate taxes - works out to be about 40 percent of revenue from oil and gas produced on federal property, according to Van Meurs Associates, an industry consulting firm that compares the taxes of all oil-producing countries. By contrast, according to Van Meurs, the worldwide average government take is about 60 to 65 percent.

The United States has even increased some of its incentives in recent years, while dozens of other countries demanded a bigger share of their oil producers’ revenue. This is the low hanging fruit Democratic lawmakers are eying.

In 2004, the then-Republican Congress passed a manufacturing tax cut that critics said gave unnecessary incentives to the oil industry. Democratic leaders this week said they want this rolled back, and want to capture lost royalties from companies drilling in the gulf coast. They’re also considering rolling back the Energy Policy Act of 2005, according to the Washington Post, an act supported by many Democrats.

While the Democratic U.S. Congress says it wants to change the historic ratio of the flow of subsidies for fossil fuels vs. that of renewables, don’t expect government floodgates to open immediately for greentech/cleantech companies.

There’s no clear consensus even among Democrats as to how the new funds should be used. Some lawmakers want public hearings to figure out how the money should be divided. It will likely be set aside in the short term while the government determines how to put it to use.

Recent annual profits in billions of dollars:

Company	2005	2006	2007
Exxon	36.1	39.5	40.6
Shell	25.3	25.4	31.3
BP	22.4	22.3	21.2
Chevron	14.1	17.1	18.7
Conoco	13.5	15.6	11.9
Total	111.4	119.3	123

This industry, which includes multinational and independent oil and gas producers and refiners, natural gas pipeline companies, gasoline service stations and fuel oil dealers, has long enjoyed a history of strong influence in Washington, thanks to the more than $182 million it has contributed to candidates and parties since the 1990 election cycle, 75 percent of which has gone to Republicans. With former oilmen George Bush and Dick Cheney in the White House and Republican majorities in Congress, the industry has enjoyed good times indeed.

One of Bush’s central agenda items has been to reverse Clinton-era restrictions on commercial uses of federal lands – including nature preserves, national forests, and national monuments. To the oil and gas industry’s delight, he got one step closer in March 2005 when Senate Republicans passed a budget resolution containing a filibuster-proof provision to allow for drilling in the Arctic National Wildlife Refuge. Which I have no problem with drilling in these areas. If we got the resources, lets use them. Don’t get me wrong though, I’m all for alternative energy too and my thinking is if we open up all these areas for oil and we put a full court press on alternative energy, do you have any idea the number of jobs that would be created? Anyways, the industry also supports a White House energy bill that is aimed at reducing the country’s dependence on foreign oil by a million barrels per day. The proposal has drawn the ire of environmental groups and some Democrats who say the plan does not go far enough and contains large tax breaks for energy companies. Other items on the industry’s agenda include repealing (or reducing, at least) the 4.3 cent federal gasoline tax, doing away with bans on offshore oil drilling and making current programs to curb industrial pollution voluntary rather than compulsory.

Information was obtained from Taxpayers for Common Sense and the Center for Responsive Politics.

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