Politicians playing games: Oil subsidies that are not subsidies

Let’s all say the words at the same time … business expenses. You know – expenses – the fixed and variable costs that companies incur as they spend money in an effort to put people to work and make a profit. Politicians are now in the habit of referring to “big oil subsidies” that are really business expenses. Liars…

I’ve been trying to find the time during the last couple of weeks to write about this subject, since I knew the federal government was not handing out cash to “big oil” in the form of corporate welfare. It’s just not the case, and if someone can find a federal program that actually takes money from individual taxpayers and writes a check to big oil to “subsidize” their business, please feel free to link to it in the comments section.

Let me be clear. Politicians and government bureaucrats who use phrases such as corporate welfare and energy subsidies do not think the money belongs to you, it belongs to them and they will decide how it should be handed out. Think about it. They told us they could not afford to give those of you who have a Health Savings Account a “tax break” on over-the-counter medication.

Tax break? That clearly pushes their agenda … the money does not belong to you … it belongs to the government first.

Hat tip to Jazz Shaw over at Hot Air and the American Petroleum Institute for doing the heavy lifting and getting me to finally write about this subject.

When President Obama pressures Congress and others to end oil company “taxpayer” subsides, he’s really suggesting limiting what those companies can write off as an expense. It’s as simple as that. This concept would be akin to telling a pharmaceutical company the expense write off they have for the research and development of a cure for cancer is a “taxpayer-paid” subsidy that should be taken away if your profits are deemed “unreasonable.”

Do you see how wrong that is? What would happen if a pharmaceutical company was not allowed to write off a portion – or all – their research and development efforts? What would happen to the cost of medications and cures?

Here is the PDF from the American Petroleum Institute. I’m guessing they won’t mind if I reproduce their entire two page white paper right here. My emphasis in bold.

Why Oil & Gas Tax Treatments Are Not Unique or “Subsidies”

Contrary to what some in politics and the media have said, the oil and natural gas industry currently enjoys no unique tax credits or deductions. Since its inception, the US tax code has allowed corporate tax payers the ability to recover costs and to be taxed only on net income. These cost recovery mechanisms, also known in policy circles as “tax expenditures”, should in no way be confused with “subsidies”, i.e., direct government spending.

Intangible Drilling Costs (IDCs)

  • The IDC deduction is a mechanism that allows for the accelerated deduction of drilling costs, such as labor costs, associated with exploration activities (approx 60-80% of the cost of the well).
  • Exploration and production companies can claim a deduction equal to 100% of these costs in the year spent. Integrated companies – “Big Oil” – can only deduct 70% with the remainder recovered over 5 years.
  • This is a deduction, not a credit or government spending outlay and is no different than the policy behind and treatment of R&D costs vis-à-vis the R&D deduction available for other industries.

Foreign Tax Credit – Dual Capacity Rules

  • The dual capacity regulations are not and never have been considered a tax expenditure or “subsidy” by the government.
  • They represent additional rules placed on oil and gas companies to prove that the credit used to offset payments to foreign countries are indeed income tax payments and nothing else.
  • Repeal of the rules generates revenue solely because it would impose double taxation on US based companies.

Domestic Manufacturer’s Deduction – Section 199

  • A deduction (not a credit) equal to 9% of income earned from manufacturing, producing, growing or extracting in the United States, is available to every single taxpayer who qualifies in the U.S.
  • The oil and gas industry, and only the oil and gas industry, is limited to a 6% deduction.

Percentage Depletion

  • The percentage depletion deduction is a cost recovery method that allows taxpayers to recover their lease investment in a mineral interest through a percentage of gross income from a well.
  • This depletion method is not available to companies that produce oil as well as refine and market it – “Big Oil”.
  • This is available to all extractive industries (gold, iron, clay, etc) in the US and is in no way unique to the oil and gas industry.

LIFO Repeal

  • Taxpayers that hold an inventory are required by law to track inventory costs – it is simply an accounting method and nothing else.
  • Repealing LIFO deems a sale of inventory to occur and generating a significant tax gain. Therefore there is an assumed tax bill without any corresponding cash gain being generated.

Expensing of Tertiary Injectants

  • Tertiary injectants refers to items injected into older reservoirs to help continue production.
  • The cost of the injectants are expensed similar to materials and supplies because they are generally used up in the production process.
  • Without this provision, it is unclear how such operating costs would be recovered. This could easily increase the costs of operating these older fields.

Geological and Geophysical Costs

  • G&G costs are the expenses associated with exploring for oil and gas.
  • Currently, independent producers are allowed to recover domestic G&G costs over two years, and the proposal would increase that period to seven.
  • “Big Oil” is not impacted, as the largest integrated oil companies already recover the costs over 7 years.

EOR and Marginal Well Credits

  • These tax credits are designed to support continued domestic oil production when oil prices are so low that it may otherwise be un-economical. The credit phase out when the price of oil is above a certain amount
  • These credits have not been applicable for taxpayers in the oil and gas industry for years, and in order to be even the least bit useful, the price of a barrel of oil must be at $42 (EOR credit) or $27 (marginal well).

As you read through the above, you’ll find that in a few instances “big oil” is actually penalized already for being “big oil.” They are not treated equally when it comes to other industries. How is that in any way fair? How does that keep the cost of energy as low as possible?

How does Obama’s desire to eliminate “subsidies” for “big oil” keep the cost of energy low? Oh yeah, never mind … he’s totally cool with energy prices “necessarily” skyrocketing.

If you prefer to be serious about the situation, let’s put some effort forward to simplify the tax code.

What say you? Comments welcome below.

Note: I’ve realized our team here at RVO has used the term “subsidy” in the past when it comes to other subjects including ethanol, and personally I’ll commit to using the word more carefully in the future. That said, at some point a business expense really does become a taxpayer-funded subsidy, who can tell me when that is?

24 replies
  1. Dimsdale
    Dimsdale says:

    Hmmm, so business deductions are the new “unfair government subsidies” or the dreaded “corporate welfare”?
    ?
    This reminds me of politician’s reference to the “billions in profit” made by the oil companies, without considering costs, or the tax income on their products that dwarfs the oil companies true profit.? They always have to create a bogeyman, when the true bogeyman can be found in their own mirrors.
    ?
    Sounds to me like the oil companies are subsidizing a good portion of the government, not the other way around.

  2. mystery machine
    mystery machine says:

    We’re getting hung up on the semantics between subsidies and expenses.? Let’s call them tax breaks.? After clearing $10.7 Billion in the first quarter of this year alone, Exxon Mobil is able to continually offset it tax burden without any clever padding of their ‘expense’ reports?
    I’m tired of this all or nothing approach to taxing corporations in our country.? It seems whenever anyone suggests companies pay their fair share, it’s “But they’ll move their headquarters, or they’ll raises their prices…”.? I got news for you genius, they do that already.? Let’s stop falling for the threats of, “give us everything we want and don’t regulate us at all or the puppy get’s it”? and call them on their bluffs.? While we may not be paying out money directly to these companies, a portion of the $4 Billion in tax breaks these companies receive could go a long way to offset our budget problems.
    But instead, let’s take the American Petroleum Institute’s word for it.?? It’s not like they’re lobbyists for Big Oil or anything like that.

    • Steve M
      Steve M says:

      So in other words, you’ve got nothing right?

      ?

      “Padding” expense reports? Either they are valid expenses – as deemed by the IRS – or they are not. I’m not hung up on the difference – the left/progressive/statists who find “big oil” a convenient target use the wrong terminology to drive their base into a big corporation hate-fest.

      ?

      I’ve always said companies do not pay taxes. Those taxes – just like any other expense – are passed on. When taxes (expenses) go up, companies find a way to offset those expenses … by increasing prices, reducing dividends to shareholders (profits), and/or cutting expenses (R&D, payroll…). Who “wins” exactly? How is that good for the economy?

  3. brianh
    brianh says:

    “Dimsdale’s” a tough act to follow, but…
    Taxpayer funded subsidies result when corporations lose money/are rescued by the government.
    Are?all those land royalties paid to the government expensable?

  4. sammy22
    sammy22 says:

    I bet that the the IRS definition and determinations of “expensables” received plenty of nudges from the oil companies. I also would favor “simplifying the tax code”, but is just as probable that pigs will fly on their own.

    • Steve M
      Steve M says:

      No doubt the nudging happens, but assuming the document linked is accurate, how do you explain the five or more examples where big oil is penalized just for being big oil?

      ?

      My point here is to highlight the bull the politicians like President Obama are trying to push down our throats. They are lying through their teeth.

  5. TomL
    TomL says:

    I guess the business expenses I have with write offs such as lawyer fees, accounting fee’s, interest payments, repairs, capital improvements, office expenses and many others are considered by the?kid president?as subsidies.

    • Steve M
      Steve M says:

      As are stuff like your home mortgage interest, student loan deductions, charity deductions … it’s all their money you see. You have to jump through all of their hoops if you want a piece of it back.

      • Lynn
        Lynn says:

        Steve you have done it again. You made this issue of business expenses for oil co. crystal clear for me.? The give and take explanations to individual questioners further clears the issue.? Semantics are important, anyone with any knowledge of business can understand there is nothing wrong with taking allowed business expenses. The next step is just making the IRS simpler. KISS

  6. David R
    David R says:

    I’d congratulate O man if he can get these multi-national oil companies to pay up. The biggest subsidy we give them is called the defense budget, which makes the world safe enough for them to do business (e.g. Iraq and the rest of the middle east) .? Why not insist oil companies do what the rest of us do…support our troops. They are one of a hand full of really, really powerful industries that control American politics; so much so that doing anything that affects their bottom line is unlikely to succeed. I expect people in O man’s own party will be telling him to back off.

  7. sammy22
    sammy22 says:

    Picking on Pres. Obama on an issue like this is truly pathetic. These issues and these rules have been around for decades. Suddenly news are made out of NON-NEWS. And enough of this it’s “our money”/”their money”. It’s the same issue no matter which party is in power and it will not change no matter how much ink is devoted to it.

    • Steve M
      Steve M says:

      I’m not “picking on Obama” in any friggin’ way. I won’t accept that illegitimate premise. We’re talking about his known energy policies here.

      ?

      Maybe Obama should stop going to events demanding we stop the “free government hand-outs” to the big, bad, oil companies. He’s actively out there calling for end the “subsides” to oil and gas companies … and you’re telling us we can’t react?

  8. sammy22
    sammy22 says:

    Have a good time reacting to what Pres. Obama may say about the oil companies. It still amounts to a lot of NON-NEWS. DavidR made some points, and Congress will still leave things as they are because it’s good for re-election contributions.

    • Dimsdale
      Dimsdale says:

      Then why are you commenting?? It would only be non-news if ?bama wasn’t thinking of putting further upward pressure on the price of fuel by taking away these deductions.

  9. BruceJ
    BruceJ says:

    Can’t believe anyone would be defending “big oil” or seriously taking a PR piece by the American Petroleum Institute as an authoratative source.? I’m not going to feel bad for an industry continually making record breaking profits while showing a complete disregard for the environment, its own workers safety and the needs of the American people. The oil industry is hardly a victim.

    • Steve M
      Steve M says:

      So in other words … you too have nothing to refute the tax structure that is currently set up by the IRS, and nothing to refute my point that Obama is twisting words to make his supporters and people like you think the federal government is handing out cash subsidies to “big oil.”

      ?

      Thanks for confirming my point.

  10. sammy22
    sammy22 says:

    So you don’t like the word “subsidy” when it comes to Big Oil. Favorable deductible expenses works for me (some more favorable than others). And nobody has been saying that the Federal Government is handing out cash subsidies to Big Oil. This blog surely does not need lessons on twisting words from the political arena.

    • Steve M
      Steve M says:

      I’ve actually spoken to three different people on two different occasions with in the last few days. They are acquaintances, and the subject of gas prices came up. All three were under the direct impression the federal government gave funds to oil companies to help the oil companies “find the oil and gas.”

      ?

      When I explained about oil companies writing off expenses as compared to the references to “subsidies” in the media, they felt – if my explanation was correct – the media was misrepresenting the topic. Obama never came up in the conversations.

      By the way, please provide a link or information showing the oil industry are getting “more favorable” deductions than other industries.

  11. Dimsdale
    Dimsdale says:

    Deductions are not subsidies.? Taking a business’ or person’s money, then giving it back to them (after taking a cut, of course) with strings attached is no subsidy.
    ?
    But subsidy, to liberals, is like the word “fair” or “equal”: they are manipulated and misshapen to give an impression and get a reaction, not tell the truth.

  12. RobertJBaldwin
    RobertJBaldwin says:

    Great article!! As a petroleum engineer, I have always complained about way big oil was portrayed. People always complain about the profits that they make but most people don’t realize that the amount they pay in taxes is usually much higher than their profits. Plus, they turn around and use those profits to find more oil and gas (if they can get the permits) and produce more jobs.

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