Since 1913, the oil industry has feasted on a panoply of tax breaks including the oil depletion allowance and expensing of intangible drilling costs. Newer provisions, exempting oil and gas interests from the passive loss rules and tax credits for marginal wells or enhanced oil recovery, has meant huge tax breaks to the rich oil industry, not because they needed it, but because they had the political power to get it and keep it as brilliantly told in Robert Caro’s The Master of the Senate. The intent, in theory, was to encourage companies to exploit the oil that took billions of years to be created in as short a time as possible. From the end of World War II, until the oil shocks of 1973, about 27 years, we used and inefficiently wasted oil with uncommon abandoned. Since those shocks Americans are learning that our addiction to oil is expensive, threatens our national security and our environment.
There are few industries that have been as profitable and politically connected as railroads in the 19th Century or oil in the 20th. Now, in the 21st century, it is time to end the unnecessary subsidies to our most profitable industry. This quarter, the major oil companies profits were over $30 billion! How much is $30 billion a quarter? Hard to picture, I know. But the football lockout between the billionaire owners and the millionaire players is about divvying up $9 billion in annual revenues, not profits.
What are the oil companies doing with that money? More exploration? More research in cleaner fuels? Exxon-Mobil is spending $5 billion buying back its own stock, apparently because it’s more profitable than investing in our energy future.
We can use the tax code to encourage behavior. One tax advantage gives employers incentives to provide health insurance. Another encourages charitable contributions. Incentives to research and development and other forward-looking technologies has been a staple of sound federal policy. But continuing to hand out tax breaks to a mature, incredible profitable industry while our deficit is soaring makes no logical sense. Representative Tim Bishop (D-NY) today introduced a bill, H.R. 1689, the Big Oil Welfare Repeal Act, that targets some of these tax handouts. The Senate is expected to consider some version as early as the week of May 9. After 97 years, it is about time.
As many commentators as well as any student who took introduction to macro economics know, a price of a commodity is not determined by the tax or the cost of production but by the world supply and demand price. Texas crude is sold at the same price as Libyan oil if it costs $3, $30 or $300 to get it out of the ground. Nothing in the Bishop bill will affect the price at the pump. But making a more sensible tax system, stopping tax breaks on those who don’t need it--that is a step in the right direction.