Wednesday, July 30, 2008

Oil's Slippery Logic

Bush, as usual, is blaming his incompetence on Congress, alleging gas prices are their fault. Congress is actually doing the American people a favor by not allowing such misguided policies to continue, and finally doing what Jimmy Carter recommend we do during the oil crisis of the 1970s – trying to get off oil!

The oil companies have millions of acres of land already, federal land leased to oil/energy companies, which they are choosing not to explore nor drill for oil. The latest claim that they must be given more land and allowed to drill in ANWR is ridiculous .

As Harry Reid, the Senate Majority leader, details: 33.5 million outer continental shelf acres are not being drilled; 34.2 million onshore acres under lease are not being drilled; there are 7,740 active leases in the outer continental shelf and only 1,655 in production; there are over 41,000,000 acres in the outer continental shelf that have been leased for drilling, yet only 8,123,000 acres are in production.

The answer isn’t more tax breaks for oil companies based on the lame excuse that they need such for competitive reasons or because they need such for exploratory purposes, nor is it spending more money drilling every possible piece of land on the planet. The answer, sorry to say, is a lifestyle change for much of the planet (walking more, driving less, consuming locally, etc.) and investment in alternative energies. Jeff Rubin informs, “For the past half century, America has spent the bulk of its infrastructure money on building highways.” This has led to us sprawling outward and driving more, subsidized by cheap gas. Part of the solution to our problem is denser living and public transportation.

Jeff Hooke and Steve Wamhoff declare, “Among the largest five oil companies, less than 8 percent of profit goes to exploration for new oil fields. In the top five oil companies, managers have actually directed most of their excess cash to dividends and stock repurchases, both of which drive up the companies’ share prices and the executives’ stock option values.” And, the claim by the oil industry of an interest in alternative energy – from 2000 to 2005 the industry spent $1.2 billion on alternatives to fossil fuels; the industry earned $383 billion over this same period.

Subsidized (regarding oil companies) implies that gasoline prices paid by consumers do no reflect the full economic cost to society. Some direct and indirect public subsidies are reduced corporate income taxes, lower than average sales taxes on gasoline, government funding of programs that primarily benefit the oil industry or motorists, and hidden environmental costs caused by motor vehicles. As Doug Koplow asserts, “Tax subsidies are the result of selective tax legislation that benefit particular groups of people or industries in the economy.”

States using combined reporting are capturing more of their fair share of taxes from oil companies. Otherwise, companies shift costs and profits between subsidiaries in different states to avoid taxation or lower their rate as much as possible.

A Union of Concerned Scientist's report lists a battery of oil industry subsidies:

  • Oil industry taxed at 11 percent ($2 billion per year benefit)
  • Low state and local sales tax rates on gasoline, indirect subsidy exceeding $4 billion per year
  • Direct government funding of oil and motor vehicle infrastructure and services costing $45 billion a year
  • Oil-related health and environmental damage, roughly $232 billion annually

Douglas Koplow and Aaron Martin of Industrial Economics found:

  • Maintaining the Strategic Petroleum Reserve costs $5.4 billion
  • Tax break for domestic oil exploration and production $2.3 billion
  • Support for oil-related exports and foreign production $1.6 billion

The Alliance to Save Energy detail that state and local governments taxed gasoline at about half the rate as other goods resulting in an estimated $2.7 billion revenue loss from gasoline sales.

Mark Zepezauer and Arthur Naiman explain how oil companies are also allowed to deduct 15 percent of the gross income they derive from oil and gas wells from their taxable incomes (the oil depletion allowance), and continue to do that for as long as those wells are still producing. Other shameful tax allowances include the enhanced oil recovery credit and the percentage depletion allowance, among many other tax breaks.

Citizens for Tax Justic further note, “Oil companies can write-off so-called intangible drilling costs, that is, much of their investments in finding and developing domestic oil and gas wells, immediately, even for successful wells.” Another gimmick is passive income limitations, whereby, “the working interest holder who manages on behalf of himself and all other owners the development of wells and incurs all the costs of their operation, may use oil and gas losses to shelter income from other sources.”

The Institute on Taxation and Economic Policy observe that the oil and gas sector is the nation’s lowest-taxed industry, paying an effective income tax rate of only 5.7 percent.

And, comparatively speaking, the U.S. still has some of the cheapest gas on the planet. Of 155 countries surveyed for a CNN Money article, U.S. gas prices were the 45th cheapest. Most of Europe has prices hovering around $8 a gallon. Our cheap gas prices are primarily responsible for our love affair with SUVs, our oversized McMansions, and our unnecessarily long commutes. The U.S. federal tax on gas is 18 cents per gallon, low by global standards. Since 1980, oil use in the UK has stayed flat, in France its dropped 17 percent, but in the U.S. it’s gone up 21 percent.

For Further Reading:
Oil Slickers: How Petroleum Benefits at the Taxpayers Expense.

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