Dave's Energy

Saturday, July 28, 2012

What the politicians and media call "Big Oil Subsidies"

I am so very tired of political misinformation. Mostly, I brush it off as easy to spot, figuring that the more enlightened citizens out there will recognize BS for what it is. But that doesn't seem to be the case when it comes to oil companies. And this rampant BS is especially prevalent in election years! People want to believe any lie that is thrown out there.

Case in point: My brother Jeff is as intelligent, educated, and logical as any man as you'll ever meet. Yet even he fell victim to the perpetual lie about oil company "subsidies". He recently said something to me like: "I really don't see why the big oil companies should get special tax breaks that others don't get". I realized then that the lies are so deeply ingrained in our collective minds that I may never change anyone's mind. Yet, I did manage to sway my brother once he was informed of the real facts. So while this may be an uphill climb, I will embark on an adventure here and try really hard to give the basic facts to help some of you realize that the big oil companies don't get huge "special breaks".

 First off, for the short cheat-sheet version of my story, I will point out two key items:

1) The "subsidies" many politicians and media types like to talk about are what every other industry calls deductions for "Cost of Goods Sold". Removing those so-called "subsidies" for the oil business is like saying that car companies can't deduct the cost of steel or labor.

2) The Oil Industry is the second largest taxpayer in the U.S., right after the financial institution sector (another hated industry!)

OK, more detail:

If you search the internet for "oil company tax subsidies", you will see the same type of data thrown out over and over "oil companies enjoy huge tax breaks and are big lobbyists". First off, those two statements are intentionally inflammatory and purposefully vague in their connection. But moving beyond that, you often see a few data items thrown about, such as: "$24 Billion dollars in tax breaks" that Senators were debating earlier in 2012. They also like to say things about the massive profits these companies make (they don't tell you, however,that those massive profits are in fact, AFTER taxes are paid).

For now, let's focus on these "tax breaks" that every media outlet quotes...where they tend to perpetuate each other's numbers and make them seem valid merely by virtue of repetition. Typical of the hyperbole is what you'll find on the website of Senator Robert Menendez (NJ).  The $24 BILLION dollars in "tax breaks" that Senator Menendez was railing against in his "Repeal Big Oil Tax Subsidies Act" are in fact the COSTs of drilling wells and the Depreciation (depletion) expense that is deducted when each unit of production is sold.

 For specific wording of what Sen. Menendez was trying to repeal, read the actual Act at the Library of Congress:

Where it says the intent of the law: "Limits or repeals certain tax benefits for major integrated oil companies 
(1) the foreign tax credit; 
(2) the tax deduction for income attributable to oil, natural gas, or primary products thereof; 
(3) the tax deduction for intangible drilling and development costs; 
(4) the percentage depletion allowance for oil and gas wells; 
(5) the tax deduction for qualified tertiary injectant expenses. 

Number one should be obvious. If you paid tax on income in another country, the IRS generally lets you deduct that as a business expense. Every industry gets this, so taking this away is not repealing a "special tax break". It's merely allowing for double taxation on the oil companies. Why? Because in the minds of the Bill's authors- they can afford it!

Number two, three and four are tax deductions for expenses incurred in developing and producing oil and gas. For example, "intangible drilling costs" include those items that do NOT get capitalized on the balance sheet as an asset when drilling a well. These are items that get expensed during the process, such as LABOR, MATERIALS, and ENGINEERING. Yeah, those are costs of doing business. Allowing for their deduction isn't a special break, it merely has a different name than the accounting books of a retailer, for example. Calling that a special break would imply that a deducting the labor costs for Starbucks' counter employees is a "special tax break" for Starbucks. In the case of the oil companies, these are the core expenses for producing oil and gas. "Percentage" depletion" is what other industries call "depreciation"  It is the loss of value by virtue of something being produced. In the case of an oil company, that depletion "expense" is the delayed recognition of the costs  that WERE capitalized on the balance sheet when drilling a well (apologies to non-accounting types, but when I say they were "capitalized", that means they were not taken as a deduction at that time, but instead were listed as an asset - there was no tax shield at the time they incurred those costs).  In other words, those were any costs that were not deducted at the time as "intangible".  The oil company is recognizing the costs that were spent to create the well, and taking that deduction on a per-unit basis as they produce each unit of oil or natural gas.  Bottom line: these are actual costs, nothing fancy.  They either deduct them at the time incurred or later when the units of oil are produced.

Number five is a special sub-category of the others - it sounds like some special deal, but "tertiary injectant" merely means the company is injecting something into the ground to cause more oil or gas to be produced. Tertiary is the stage of production after "primary" (when oil flows freely by virtue of its own pressure), "Secondary" (when things like pumps are used to bring the oil to the surface), then "tertiary" (when they use any esoteric means they can to get more oil out). Squeezing out the last of an already-discovered field is called being efficient, and the government should encourage doing so. Taking away a basic cost deduction would be folly and could encourage the abandonment of otherwise productive fields. Another subject, different day: I love how these politicians act as if taking away these "subsidies" would somehow make YOUR gasoline costs go down. Quite the opposite.

In the car industry, should we ignore the cost of labor to build the car, the cost of steel, and the depreciation on the capital equipment (the factory) that the company uses to build the cars? Of course not!! What you would end up with is essentially a "revenue tax", not an income tax.

Oil Company Taxes Paid 

 A few years ago, I wrote this blog post, entitled:
Energy companies pay the most taxes amongst the S&P500 

Where I presented this data (note that these numbers are in millions, so that number below is 90 Billion in cash taxes for the oil companies in 2008, fully 30% of all cash taxes paid by the S&P500 companies.):
The data has changed a bit, but all the relationships stay the same in 2009-2011. Energy companies pay some of the largest absolute amounts of taxes, and at a higher RATE, even after "deductions and subsidies" than almost any other industry.

So next time someone tells you that big oil companies get "special tax breaks", ask them which tax break they are referring to. Then ask them what industry in the U.S. pays MORE in taxes, either at higher rates or in absolute dollars, than the U.S. oil industry. Go ahead, ask.... the answer will be vague, they'll start talking about lobbyists and cronies. They won't have an answer because the fact is they are merely parroting the media hype. Don't be a parrot.

By the same token, don't listen to me either...do your own research and come to your own conclusion. The only way we have a good democracy is through an educated populace.

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