WASHINGTON Jan 19, 2007 (AP) - The House rolled back billions of dollars in oil industry subsidies Thursday in what supporters hailed as a new direction in energy policy toward more renewable fuels. Critics said the action would reduce domestic oil production and increase reliance on imports.
Yes, it will. One of the fundamentals of economics is, "That which is subsidized, increases." Likewise, remove the subsidy and its beneficiary will fall. Without arguing here whether oil companies should even get industry-specific subsidies in the first place, if the whole Congress votes to remove them, and the president signs, the economic effect will be to reduce oil companies' financial incentive to explore and pump domestic oil. The reason is that the House's measure targets for deletion exactly the tax breaks that provide incentives for domestic production.
The legislation would impose a "conservation fee" on oil and gas taken from deep waters of the Gulf of Mexico; scrap nearly $6 billion worth of oil industry tax breaks enacted by Congress in recent years; and seek to recoup royalties lost to the government because of an Interior Department error in leases issued in the late 1990s.
What the House, or at least the Members who voted aye, seem not to understand is that the price of petroleum is completely internationalized because the market is, too. If US oil companies can produce oil wholesale cheaper than its retail, or spot market, price on the international market, then they will sell the oil on the market and make a profit. At least the oil company will sell internationally the oil it produces that is excess to its domestic-retail capacity.
But if the cost of producing domestic oil is greater than its price on the international market, then companies shut down domestic production (never entirely, of course, because the restart costs would be prohibitive when/if the world price rose again and companies need a retained production capacity to surge production in that case). Since federal taxes are a major part of overall production costs for the US oil industry, increasing those taxes by removing subsidies simply raises the costs of domestic production. That makes it more likely that the oil companies will simply cut domestic production and make up the difference in imports.
But let gets real, folks. This whole thing isn't about the money anyway, not really. It's about eeevvviiiillll oooiiilll. They are simply making too much money, many people think, and therefore must be punished. Well, any product that is consumed by 100 percent of the population is certainly going to return huge revenues to its producer. Just wait until agri-fuels become Big Agrifuel or hydrogen becomes Big Hydrogen and see what their revenues are. (Yes, every person in the country, without exception, uses petroleum products, including persons who don't own a car or use air conditioning and heat their homes only with wood.)
But wait, one may object, it's not the gross revenue that is the point about hitting Big Oil, it's the fact that their profits are so high.
Really? In October 2005 the Washington Post put oil company profits into context:[I]n 2004 Exxon Mobil earned more money -- $25.33 billion -- than any other company on the Fortune 500 list of largest corporations. But by another measure of profitability, gross profit margin, it ranked No. 127. ...
A $9.9 billion quarterly profit is mostly a function of Exxon Mobil's size. It had sales of $100 billion this quarter, more than any other U.S. company. ... Even so, many companies smaller than Exxon Mobil "earn" more, depending on what measure is used.
Most financial institutions, such as commercial banks, are routinely more profitable than Exxon Mobil was in its third quarter. For example, Exxon Mobil's gross margin of 9.8 cents of profit for every dollar of revenue pales in comparison to Citigroup Inc.'s 15.7 cents in 2004. By percentage of total revenue, banking is consistently the most profitable industry in America, followed closely by the drug industry.
Altria Group, the maker of Marlboro and other cigarettes, made 22 cents for every dollar of revenue in 2004, and pharmaceutical company Merck made 25.3 cents for every dollar of revenue in 2004.
By other measures, such as profit per employee, return on invested capital and free cash flow, Exxon Mobil is nowhere near a standout.
Let's compare oil to iPods:
Apple, Inc. on Wednesday reported record revenue of $7.1 billion and record net quarterly profit of $1.0 billion, or $1.14 per diluted share, for the quarter that ended Dec. 30 2006, the company's first fiscal quarter of 2007.
That's a profit of more than 14.3 percent, five points higher than Exxon Mobil's. Yet there's no bill in Congress to impose windfall-profit taxes on Big Computer - or Big Banking, either. Congress may also need to consider that it might be about to bite that hand that feeds it. Business & Media Institute:
The Tax Foundation's Scott Hodge and Jonathan Williams noted in an October 26 report that "in recent decades governments have collected far more revenue from gasoline taxes than the largest U.S. oil companies have collectively earned in domestic profits." In fact, "since 1977, there have been only three years (1980, 1981, and 1982) in which domestic oil industry profits exceeded government gas tax collections."
When pump prices rose to record levels in the months after Hurricane Katrina, some states cut gas taxes to give consumers relief. Will imposing higher production costs through higher federal taxes put that pressure on state governments again? Back to the ABC News story:
Democrats said the legislation could produce as much as $15 billion in revenue. Most of that money would pay to promote renewable fuels such as solar and wind power, alternative fuels including ethanol and biodiesel and incentives for conservation.
Just where do the think that $15 billion will come from? Reduced oil company profits? Not a chance: company managers are ethically bound to maximize profits for their shareholders. CEOs who deliberately decline to do so get fired, and should be. No CEO of any kind of company would fail to pass on to the consumer the cost of increased corporate taxes as much as possible. This supposed $15 billion windfall (why is it okay for the feds to get a windfall but not private businesses?) will come from the only place all taxes can possibly come from in a free-market economy: the pockets of consumers, you and me. "Corporate taxes" is a myth, a piece of bookkeeping legerdemain . All taxes in America, of whatever nature or name, all always really paid by consumers. Why? Because that's where the money is.
Thanks, House - just at a time when pump prices are finally falling, you couldn't resist meddling. Way to look out for the little guy, the painters and plumbers and pizza drivers and salespersons who have to buy gas to make a living. Thank you also for smacking the aviation industry with higher fuel prices when they have just begun to return to profitablity.
What you have done, House, is effectually impose a highly regressive sales tax. And like all sales taxes, its marginal costs will be highest for the poor and low-income people of the country. Oh, how you cried that the minimum wage wasn't enough to support a family of four, but oh, how eager you are to gobsmack those min-wage workers with higher heating and transportation and food prices by raising the price of oil production! Well done, well done! You have, as usual, lived down to our ever-decreasing low expectations.
Crossposted at DonaldSensing.com
I haven't seen any serious person suggest a windfall profits tax on oil companies. What has been suggested is eliminating industry specific subsidies to energy companies, and correcting the error, if indeed it was an error, by Minerals Management in 1998/99 that allowed companies to extract Gulf oil without paying federal royalties.
In fact, I haven't even seen a push to force oil companies to renegotiate the 1998/99 flawed royalties contracts but rather a decision to not allow companies who refuse to renegotiate the contracts to bid on new leases in the Gulf.
Now, lets look at just a few of the special perks energy companies enjoy concerning federal taxes, and their cost to the Treasury.
The Percentage Depletion Allowance (up to 1 billion per year)
The Nonconventional Fuel Production Credit. (again, nearly a billion per year)
immediate expensing of exploration and development costs (up to a half billion a year)
The Enhanced Oil Recovery Credit (100 million per year or so)
Accelerated depreciation allowances (over a billion per year)
These are all special subsidies, or tax breaks depending on your ideology, that are directed specifically to energy companies and not allowed in any other industry. Many of them made sense when oil was trading at $15.00 a barrel, but no longer do in the current market.
The argument that elimination of these subsidies will cause a reduction in domestic exploration/production ignores the much larger transportation expense for foreign oil. There's a reason most of the oil produced in Alaska is sold in Japan, and it has nothing to do with tax burdens.
As someone who earns a living in the industry, I'm not anxious to diss big oil, but this is hardly the issue you make it out to be.
If you're going to get all economic on us, let's talk incentives for conservation, and reduction of dependence on Middle Eastern oil.
Higher gas & heating oil prices are good (maybe I'll finally get some insulation in my house). As a matter of national security we need to reduce oil consumption.
We should probably keep these incentives for domestic production, but offset them with higher taxes on imported oil. But this is not polically feasible. Take the tax increase where you can.
I believe a strong argument can be made that we should be encouraging oil imports at this time and discouraging domestic production.
It's a finite resource that will only increase in price over time. Why not burn Venezuelan, Angolan, Nigerian etc. oil now, and hold on to domestic reserves for when the prices is inevitably much higher?
The leading cause of land loss in Louisiana are the canals and pipelines built by the oil and gas industry along the coastal zone. These were initially built to access coastal oil and gas, but more were built as oil and gas drilling moved into the Gulf, even though over-marsh vehicles were available. The canals have been eroding, eliminating more coast-land and bringing in more salt water to kill off fresh water vegetation. Its clear to me that there really is no use in salvaging New Orleans and Southern Louisiana unless you deal with this issue. And I'm not sure that many of the oil and gas pipelines coming in from the Gulf will be safe if the coast-land disappears around them. Nor will the coastal refineries.
I think oil and gas should pay for the cleanup. Its my understanding that Senator Landrieu has proposed increasing the dedication of offshore royalties for this purpose. OTOH, I don't think the Senator from Oil and Gas can be trusted not to encourage more canals (in fact, I think she's done this) while holding her other hand out for more money. The revenue stream should be dedicated to its intended purpose and expire with its completion.
Davebo, #1
I am certainly not going to try to go toe to toe with someone who works inside the industry. I did say at the beginning of the post that I wasn't going to address the issue of whether the oil industry should have special tax breaks at all. (But it is certainly not the only industry that has industry-specific breaks - say, real estate, for one other example).
The House sponsors say that the House's measure will increase government tax income by $15B per year. I must respectfully disagree that this is not really a big issue. As Sam Ervin said, a billion here, a billion there, and before long you're talking about a lot of money.
It may very well be true that tax breaks passed when oil was $15/bbl no longer make sense. I have no objection to the Congress relooking at them. My points in the post are that:
(1) Big Oil is a special target of the Dems in a way that no other industry is (well, except maybe Big Tobacco), and for ideological reasons that have little to do with economics and everything to do with their perception of the "fairness" of oil companies' revenue and profits.
(2) The sponsors, as far as I can tell from media reports, considered nothing but increasing tax revenues from oil companies but did not consider what effect those raised taxes would have for the consumer, especially people of lower incomes who always suffer the worst effects of raised prices.
Regardless of whether certain, or all, tax breaks the oil industry gets are any longer justified, the fact is that they presently comprise the zero state for any changes. And those changes will have effects that ripple, often quite strongly, through the economy at large and not just the oil companies' bottom line. It would be nice to see Congress think those issues through rather than just grandstand.
Mr. Sensing,
Not all of the tax breaks were passed when oil was at $15.00 a barrel. We had a round of subsidies enacted in 2005 as well.
Certainly congress should carefully consider the impact both economic and otherwise of repealing the subsidies. I'd like to think that our representatives do this with all legislation but I'm not that naive.
Additionally, the industry itself has gone through some pretty dramatic changes since the 1980's when many of these subsidies were enacted with new technologies allowing for drilling in much deeper water as well as directional drilling techniques allowing us to exploit offshore reserves utilizing land based rigs.
I just can't buy the idea that eliminating some of these subsidies would have a dramatic effect on domestic exploration/production. Beyond the transportation costs I mentioned above there are other considerations such as hefty logistics costs, personnel costs include rotational travel expenses, etc.
Any responsible business faced with an option to explore for oil in Oklahoma or Chad, assuming the geophysics are similarly promising, is probably going to choose Oklahama. (Or both).
Davebo is making a lot of sense to me right now. That disturbs me a little bit ;)
As long as we are wishing for our bought and paid for government to do some things they are never going to do- my vote is to repeal all import tariffs on ethanol, kill the agricultural subsidies insanely favoring corn as an ethanol producer (heck, kill all ag subsidies), and start turning the federal vehicle fleet ethanol based and encourging states and townships to do the same in order to create an automatic market. Ethanol technology is finally there and if we can start turning switch grass into fuel everybody wins. Except Big Corn and Big Oil who are the only ones winning under the current idiot system.
Davebo, I'd be happy to post a guest post by you, under your name, of course, on my own blog, about this topic. Would you consider?
I don't claim that every tax break the industry gets would put the economy into a tailspin if canceled. I'm saying that it would be nice to see evidence that the Congress, esp. the Dems, has done an unbiased assessment of what the changes in the code would mean.
But that's the key word, "unbiased," and like you I'm not that naive.
Mr. Sensing,
That's a generous offer but I'm afraid that while I feel comfortable commenting, I don't really feel qualified to act as a knowledgable expert on this subject. But thank you anyway.
To me, the clause to try to force companies to renegotiate the 1989/90 lease contracts is a no brainer. And should companies refuse, which is not only their right but obviously in their interest, I have no problem refusing them the opportunity to bid on new Gulf leases.
I also think the accelerated depreciation and immediate expensing of E & D costs should go (but man, I'd love to have that in my business!).
Mark, I'm with you on the idiocy of corn based ethanol. But if we ever want to see some sanity brought to this subject we've got to figure a way for both parties to push Iowa's caucus date way way back.
If it weren't for politicians descending on Iowa ever 4 years I truly believe this situation never would have occurred.