Oil Company “Subsidies” Clarified

posted at 9:25 am on May 3, 2011 by Jazz Shaw

We’re still seeing a flood of calls from both sides of the aisle to cut subsidies as part of an overall strategy to reduce spending in Washington. While there is plenty available to cut, there has been a steady and disingenuous conflation being promoted by the White House which seeks to describe certain tax benefits received by companies in all manner of industries as “subsidies for big oil.” Just last week Tim Pawlenty was taking to the stump in an attempt to call out these warped descriptions.

MANCHESTER, N.H. – Former Minnesota Gov. Tim Pawlenty called a White House proposal to reduced tax breaks for oil companies “ludicrous” after a gathering of tea party activists.

“I think we should have a discussion about all subsidies,” Mr. Pawlenty told Washington Wire at a forum for 2012 GOP presidential hopefuls. “But the Obama proposal is ludicrous. I mean the worst thing we could do is raise the cost burden on costs on energy and oil… What he’s proposing is a tax increase on energy at a time when the gas is $4 a gallon. It’s preposterous.”

For those seeking to sort out the definitions of the terms being used, the American Petroleum Institute has published a new paper doing just that.

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.

Here are a few of the items which are being incorrectly identified as “subsidies” inside the beltway:

Intangible Drilling Costs – Companies which engage purely in energy exploration and discovery can recover their costs related to exploration at tax time at a rate of 100%. This lessens the burden on energy providers for the number of “dry holes” which may be found in the process. Integrated companies (i.e. “big oil”) can recover these exploration costs at 70%. Not a subsidy.

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 (i.e. “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.

There are more, so download the paper and read them for yourself. Then, when you hear your congressman talking about all of the “subsidies” for big oil, you can set them straight based on the facts.

To be clear, the federal government does engage in the handing out of a lot of actual subsidies, including those for ethanol and a variety of wasteful programs which are essentially failures on their own merit without feeding off the teat of Uncle Sam. And we should certainly be looking at those areas as way to address cost cutting. But trying to depict tax credits used by the energy industry – in the same fashion as every other industry – as some sort of special love festival for Big Oil is dishonest.


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blink on May 3, 2011 at 12:04 PM

I agree with you and have said so. Alt energy get much more favorable treatment than oil and gas, by creating nonexistent demand for ethanol, and for solar through consumer tax credits, credits for electric cars, etc. But a tax credit for a consumer to buy solar panels is not a subsidy. The libs giving money that silicoen valley solar panel company WAS a subsidy. Requiring a certain % of ethanol in the gas is not a subsidy. According to this very blog post. Again, it just seems sophomoric to argue with someone, oh it’s not a subsidy to give tax credits, etc, “because according to Webster a subsidy is defined as…”. The real issue is libtard have an unnatural hate for the oil and gas industry. Let’s defend that industry on its merits instead of using the same idiotic tactis of the left.

RW Wacko on May 3, 2011 at 12:10 PM

But a tax credit for a consumer to buy solar panels is not a subsidy.

Requiring a certain % of ethanol in the gas is not a subsidy.

Seriously, for your own good. Give it up.

MNHawk on May 3, 2011 at 12:16 PM

So does that mean that GE had even larger “subsidies” than the oil companies since they didn’t have to pay any taxes at all?

DrAllecon on May 3, 2011 at 9:36 AM

Some. But GE is heavily invested in “green” crap like wind turbines and solar panels. As a result, since the government has picked those industries as winners, not only they get some tax breaks for that but also and actual check from government. Those are the subsidies we need to eliminate. In other words, if a turbine or a solar panel cannot exist without a government subsidy then it is not a viable product. If the Chevy Volt is “so great” as then why are we subsidizing it for $7000 (which, btw, still makes the car very expensive)?

Let’s eliminate Ethanol subsidies as well which not only go to make a winner out of a failed (poor power output, corrosive, etc), expensive product (take a look at how many gallons of oil are used to produce a SINGLE gallon of ethanol), but it is also increases the price of food by making corn supplies go to its production or make farmers choose to produce corn to get the “green” subsidy instead of producing actual usable crops of other kinds for food.

ptcamn on May 3, 2011 at 12:18 PM

So even tax credits are not a subsidy. We are being loose with the language.

Who’s “we” sucker

MNHawk on May 3, 2011 at 12:21 PM

MNHawk on May 3, 2011 at 12:16 PM

Again, the whole point of this article is to point out that oil and gas do not receive subsidies b/c subsidies are only direct payments from the govt to an industry. That’s the whole point of the article. Yet we say alt energy only exists from subsidies, when we are not talking about subsidies for the most part. you are making the same mistake Jazz Shaw rips the libtards for. Tax credits are not subisidies according to Jazz Shaw, not me, take it up with him.

RW Wacko on May 3, 2011 at 12:21 PM

But a tax credit for a consumer to buy solar panels is not a subsidy.

Requiring a certain % of ethanol in the gas is not a subsidy.

Allowing a consumer to buy a product, that the government will then reimburse you for part of the purchase price IS, by definition, a subsidy.

Requiring a certain percentage of ethanol in gas is not a subsidy. The government reimbursing a company for the cost of putting that ethanol in the gas mixture, is.

Hootie on May 3, 2011 at 12:23 PM

Who’s “we” sucker

MNHawk on May 3, 2011 at 12:21 PM

We means you. You behave like the immature KosKids. Tax credits are not subsidies. According to Jazz Shaw and all the people ripping me. So yes, I think you are being loose with the language in your critique of me. Nothing personal.

RW Wacko on May 3, 2011 at 12:25 PM

blink on May 3, 2011 at 12:25 PM

I think ultimately we would like the same thing, get rid of any favorable treatment, let the market do its job. If wind is not market-sustainable, let it die. I appreciate the info on the tax accounting side. I’m not an expert on any one thing, more like generally knowledgeable about a lot of things. No need to get personal, I am fine with being told I don’t know what I am talking about, I am wrong etc. That’s how I learn. Thanks for the debate.

RW Wacko on May 3, 2011 at 12:28 PM

Tax credits are not subisidies according to Jazz Shaw, not me, take it up with him.

And the “TIMING of cost recovery deductions” (as BuckeyeSam put it) are NOT a tax credits. Thereby, “TIMING of cost recovery deductions” are NOT subsidies.

The $1,000+ I didn’t pay in taxes last year, that instead went into the pockets of Local Heating and Plumbing, for that new heater I bought, is a subsidy. Indirect subsidies from governent to me to business, but subsidies never the less. You can argue whether it’s a subsidy to me or a subsidy to the heating industry but subsidy never the less. I paid less last year. I am not going to pay more next year, and every year for the next 10 years because I paid $1,000 less this year.

That’s the difference between a “TIMING of cost recovery deductions” and a subsidy.

MNHawk on May 3, 2011 at 12:30 PM

RW Wacko on May 3, 2011 at 12:25 PM

Lighten up, Francis.

MNHawk on May 3, 2011 at 12:32 PM

As with all the sane Democrats ideas – eliminating tax loopholes for oil companies, raising taxes on the rich, cutting defense – all they have to do if they really want them is marry them to Republican spending cuts.

If the Dems really think these things are important, well, they represent a big chunk of the country too. Everyone’s sacred cows should be on the table. Just sit down with Boehner and negotiate numbers.

But they won’t, because it’s not really about balancing the budget, but demagoging for the election.

HitNRun on May 3, 2011 at 12:38 PM

So, according to my cost-benefit analysis, I vote to keep the tax code as is.

blink on May 3, 2011 at 12:39 PM

According to my leftist-luddite analysis, they aren’t going to let oil companies drill anyway, so why the hell are we here arguing. :-)

MNHawk on May 3, 2011 at 12:42 PM

blink on May 3, 2011 at 12:39 PM

I personally am okay with that. I’m okay with 0% tax on oil and gas. That’s the national discussion we need to have. Boost industry b/c it is in the national interests. Of course, the left argues the same thing with alt energy. I’d like to argue things on their merits (the investment is worthwhile) than we don’t get subsidized, you are really the ones who are subsidized, etc. Let’s figure out the smartest area to invest in , then, and go full-bore. Or don’t get involved at all. My two cents. I get what you are saying, and it makes a lot of sense.

RW Wacko on May 3, 2011 at 12:43 PM

Patchwork crap we have now sucks. Got to give a few bones to oil b/c TX is important, give a few bones to coal b/c WVa is important, oh boy primary season coming up, throw some bones to the ethanol crowd, plus the envirowacko lobby, oil and gas lobby, etc. It sucks. That’s why I kind of argue to blow the whole damn thing up and start over.

RW Wacko on May 3, 2011 at 12:45 PM

Drilling is for one product,in one location, which will have a known reserve.

RW Wacko on May 3, 2011 at 10:28 AM

Absolutely FALSE.

Exploratory wells (an expense) are drilled before knowing the actual reserves, hence the problem with “dry wells”. You can have all the fancy geological charts and data you want, but until you put a hole in the ground, you do NOT know whether it will produce.

Which all explains why there is an exploratory deduction, not tied to revenue production.

dominigan on May 3, 2011 at 12:52 PM

I would argue that such subsidy is a revenue subsidy. Because, in a sense, the exact amount of your reduced taxes was 100% revenue for the Local Heating and Plumbing guys. So, the government is creating a market for these guys.

Only helps the company on the incremental revenue they are receiving, since some of those people I(maybe the majority) would have bought heaters anyway. I could argue it is or isn’t a subsidy, and make total sense. Bottom line is someone benefits, whatever you call it, with deductions, direct subsidies, tax credits, etc.

RW Wacko on May 3, 2011 at 12:52 PM

dominigan on May 3, 2011 at 12:52 PM

Known reserve could be anywhere from zero to a crapload. My point is that at some time it becomes quantifiable.

RW Wacko on May 3, 2011 at 12:53 PM

Your reported GAAP income to Wall Street is = x

Your total owed taxes are = x times 20%, 30%, whatever

Done.

MNHawk on May 3, 2011 at 12:58 PM

Lighten up, Francis.

MNHawk on May 3, 2011 at 12:32 PM

Hah! Love that quote.

RW Wacko on May 3, 2011 at 12:58 PM

I’m still concerned that you don’t see the difference between the government providing an incentive to create a market for a business (thereby providing them with artificial revenue) and the government allowing a business to deduct certain expenses from the profit that they are making in a market that doesn’t need the government to prop it up.

blink on May 3, 2011 at 12:56 PM

Get what you are saying. But, let me argue a point. Providing favorable tax treatment to encourage drilling by reducing tax liability, etc results in more domestic oil coming to market than otherise would. Great, right? What happens? Price of oil drops. Great, right? Price at the pump drops. End result: lower tax revenue, lower consumer price. End this practice and you have higher tax revenue and higher prices at the pump. Similar to tax rebate on heaters. Yes, we don’t need to create a demand for gas. But, these tax breaks, deductions, whatever you want to call them results in artifically low prices at the pump, and artifically high profits for the oil and gas industry, with lower tax revenues. I’m fine with that. But is “smells” like subsidization to me, even if it isn’t. I agree creating demand for a product seems ridiculous, but the end result is similar in my mind. You are artifically reducing prices. I would say demand goes up as a result (people saving less gas, buying bigger vehicles, etc) but don’t want to start a firestorm.

RW Wacko on May 3, 2011 at 1:05 PM

I understand propping up an industry that wouldn’t exist otherwise is much more intrusive than giving a little help, if you will.

RW Wacko on May 3, 2011 at 1:08 PM

Known reserve could be anywhere from zero to a crapload. My point is that at some time it becomes quantifiable.

RW Wacko on May 3, 2011 at 12:53 PM

Umm no. A Known reserve is usually a reserve that already has multiple wells already drilled in it. It is also called a Oil Pool. Prudhoe Bay area is called both a KNOWN Reserve and a Pool.

You really do not know what you are talking about.

What you think is a “Known Reserve” is what they call a “Possible”. It is at the bottom for a reason. They have done studies on the geophysical area, seismic ect., but they haven’t drilled. Just because you have studies and have done research doesn’t mean that a trap is going to have oil or gas.

Please stop while you are ahead.

upinak on May 3, 2011 at 1:17 PM

Hah! Love that quote.

RW Wacko on May 3, 2011 at 12:58 PM

Dirty Harry isn’t a bad movie either.

Just sayin’

MNHawk on May 3, 2011 at 1:17 PM

upinak on May 3, 2011 at 1:17 PM

Holy F, I am not in the oil industry. I am trying to get at the idea of things being tangible when they are known and quantifiable, so usually not expensed. Never mind, not trying to get hung up on what the textbook definition of a “known” versus “proven” or “possible” reserve is or whatever. But thanks for the info. Anyway, not delving back into tax accounting b/c blink schooled me on that already.

RW Wacko on May 3, 2011 at 1:21 PM

RW Wacko on May 3, 2011 at 1:21 PM

I am in the industry. I have been explaining some of the process and yet you seem to only respond now? Not just about taxes but the whole process. I know the costs, I know what they have to do the paperwork, the freaking migraines. You don’t seem to get the whole burrito.

I am saying give it a rest.

upinak on May 3, 2011 at 1:26 PM

upinak on May 3, 2011 at 1:26 PM

I hear you. I was interested in favorable tax treatment, and what I felt was selective indignation over helping some industries versus others. And staying on message, on point, which is that alt energy isn’t worth the add’l investment, but oil is. B/c it is already here, and plentiful, and cheaper. Same with nat gas. I get what you’re saying. I don’t normally give things a “rest”, prefer to talk about crap so that I can learn from others, such as yourself. So thanks for that.

RW Wacko on May 3, 2011 at 1:29 PM

RW Wacko on May 3, 2011 at 1:29 PM

Just a little bit more info. Most of these “incentives” are usually for the little independent guys, not the huge producers.

And most of the little independents are usually the ones who drill the Discovery Wells and then sell it to the larger producers.

upinak on May 3, 2011 at 1:33 PM

upinak on May 3, 2011 at 1:33 PM

So the little guys do most of the actual exploration and then hand it over to the big guns to handle the actual production/distribution, etc? Interesting. The Left tends to think of “Big Oil” as one giant shadowy entity sucking the life-force out of Gaia, so they prob don’t really care, but it’s good to know so I can bring that point up.

RW Wacko on May 3, 2011 at 1:37 PM

RW Wacko on May 3, 2011 at 1:37 PM

Yes, they are also one of the few who started fracturing… and the large producers gave it a try… and one of the few things Lefties and the EPA have no clue about. Directional Drilling, Injection wells, production wells with gas lifts, I could go on and on. The Left doesn’t have a clue. But God help them if you take away THEIR gasoline! I won’t even go there concerning metering and what is/can be checked on that horizon.

There is so much more than most people realize. Especially the left. I enjoy making them squirm. Environemtnalists especially.

upinak on May 3, 2011 at 1:50 PM

A known reserve that could be zero, is kinda the same thing as a Possible.

blink on May 3, 2011 at 1:49 PM

Only if it has been depleted. And usually if you deplete it and the P&A the wells in that reserve, you can always go back and double check it.

upinak on May 3, 2011 at 1:51 PM

Yeah, I have no doubt upinak is right on the oil and gas terminology, and I am not. Wanted to let upinak know I was not trying to pose as some oil and gas expert, wasn’t using known reserve as the textbook oil and gas term but in a general sense on the accounting side. I’m an operationally-driven financial analyst, not a CPA, who has supported Sales and Operations in high-tech manufacturing and retail environments. So that is my expertise, only. I also lived on the streets for 2 years, and am a recovering drug addict. So I have expertise with some of those issues, too. Unfortunately, lol. That’s the breadth of my expertise. Well, and have a masters in Political Science from UGA, and taught high school for a while.

RW Wacko on May 3, 2011 at 1:56 PM

Slightly o/t: this paper is a slightly technical read, but most people should be able to get the drift. The money quote:

Furthermore, we show with the general circulation model simulations that some climatic effects at maximum wind power extraction are similar in magnitude to those associated with a doubling of atmospheric CO2.

Wind power gets blown away in a single gust. The AGW shills can now a) admit that the general circulation models that they worship and that predict AGW are wrong or b) admit that wind power probably isn’t a viable way to save Mother Gaia.

Ha ha ha ha ha hahaaahaa ha ha haaa!

mr.blacksheep on May 3, 2011 at 1:56 PM

When the government grants a lease for a particular oil/gas property for $2.2B, then turns around and says that you can’t do anything with it, that sounds a whole lot more like “fraud” than “subsidy”.

cthulhu on May 3, 2011 at 2:00 PM

Would you argue that the software industry’s two year deduction of intangibles artificially keeps software prices low? – because that argument would seem silly to me.

blink on May 3, 2011 at 1:58 PM

Not really, b/c it does not affect supply of a commodity. But encouraging domestic oil exploration does affect supply. Oil prices are based upon spot price, I believe. Just because we import less does not mean prices stay stable; prices decline with increase in global production. Regardless of whether the US consumes more.

If we take it to an extreme and say “hey, all drilling costs, anywhere, are now paid for by the federal govt”, supply would of course increase and prices would come down. If the current tax “breaks” for oil that the left whine about does not affect the amount of oil on the market, and therefore the price, then why are we bothering?

RW Wacko on May 3, 2011 at 2:18 PM

I see it very simply.
Hubby drives independently commercial trucking grain , fertilizer, cattle, etc in our local area.
Let’s say he gets $1000/day.
But after fuel, maintenance, etc. he actually makes $500/day.
Are some of you saying he should be taxed at $1000/day & not be allowed to deduct his expenses?
Bcs that is insane.
He is not really making $1000/day.
He is only making $500/day after expenses.
It really is simple.
The govt is full of greedy insane people.
They must be stopped.

Badger40 on May 3, 2011 at 3:48 PM

The economic definition of subsidy is “a financial aid supplied by a government, as to industry, for reasons of public welfare, the balance of payments, etc.”

http://www.thefreedictionary.com/subsidy

The implication of this defition is “financial aid”. Further from the dictionary, financial aid is defined as “money to support a worthy person or cause”.

From these definitions, a subsidy is granted money. If you wish to imply that Oil is given a subsidy, you must also imply every individual in the United States, including every billionaire that files taxes is given a subsidy. But deductions, from the above definitions, are not, and can’t be construed to be subsidies, under the interpretations of these definitions.

When exploration is done, complanies put their own money on the table. It doesn’t do it from money given as a grant from the government, like direct subsidies to wind power. They take risks with monies given to them by stakeholders, from big-monied investors to employees with their 401K’s.

The administration is playing fast and loose with the facts to further demonize the part of the energy industry that doesn’t meet their list of approved sources. Oil provides 9 millions jobs in the United States and 7.5% of the US GDP, coal employs around 173,000. In a dry hole or a failed mine, industry still has to pay employees to perform jobs in the finding oil or coal. To ask that they be able to write off losses is to give them no special concessions.

itsspideyman on May 3, 2011 at 4:20 PM

Just another typical socialist lie.

“The word you are using no longer means what you think it does. We just redefined it. You Lose.”

Caststeel on May 3, 2011 at 4:30 PM

blink on May 3, 2011 at 4:01 PM

Ugh, of course there is a difference. And of course deductions are fine; I was talking about the timing of them for certain industries. Which is a benefit. Everyone gets some benefit from the tax code, whether it is thru timing of deductions, tax credits, etc. I have agreed that alt energy gets the better deal, blink, but oil gets theirs, too. Whatev, you can chalk up any perceived know-nothingness to the effects of cocaine abuse, and not my Ga Tech education.

RW Wacko on May 3, 2011 at 4:55 PM

RW Wacko on May 3, 2011 at 2:18 PM

Well put. We do know for a fact that encourage domestic production does affect the spot price. When Bush 43 removed the restriction on offshore oil drilling, it contributed to a major reduction in the price of a barrel.

I love how now the story is that there’s no way for us to change the price of a barrel, that OPEC controls the flow no matter what. Sure is a different story with a (D) at the end of the president’s name.

itsspideyman on May 3, 2011 at 5:03 PM

Some are failing to see that the “subsidy” that your husband gets is any different than the “subsidy” that alternative energy companies get.

I’m not sure how they fail to see the fundamental difference but they (he – the Georgia Tech MBA) do.

He fails to see the fundamental difference between: i) allowing your husband to deduct the cost of his fuel, maintenance, etc.; and ii) offering your husband’s customers a full tax deduction on 100% of what they pay your husband (all $1,000). Again, I’m not sure how the difference isn’t obvious.

blink on May 3, 2011 at 4:01 PM

IDK either. I’m at a loss with people who think that getting to keep money you earn, minus expenses, is somehow a bad thing.
And Spidey is right. A subsidy is a GRANT of money.
That is not what we’re talking about here.
Notice farmers get subsidies: direct grants of $$ from the fed govt for planting or not planting crops that they are going to make $$$ off of anyway.
I certainly don’t get paid for raising or not raising calves by the govt.
If they live & I sell them, I make $$, which is then taxed after all my expenses into the critter are taken into account.
I am seriously confused how people cannot understand this.

Badger40 on May 3, 2011 at 6:05 PM

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