Oil “subsidy” and “tax breaks” nonsense

Oil “subsidy” and “tax breaks” nonsense
By Paul Driessen
5/21/2011

President Obama frequently says Americans "need to end our $4 billion in annual taxpayer subsidies to oil companies." The latest Democrat bill would have repealed some $2 billion of what Senator Charles Schumer (D-NY) and others call "subsidies" and "special tax breaks" for Big Oil.

That’s baloney – shameless demagoguery that will inflict further damage on our struggling economy.

Subsidies are cash payments from government to the private sector. Money is taken from the 51% of Americans who still pay income taxes – and transferred by legislators and bureaucrats to companies and activities that "deserve" or "require" these wealth transfers, because the recipients perform an important service and/or could not remain in business unless subsidized with other people’s money (OPM).

The petroleum industry does not receive "subsidies" to produce oil and natural gas. It doesn't even get "special tax breaks" or outright tax credits. What are falsely described in these terms are actually tax deductions for costs incurred by companies in the process of exploring, drilling, producing and refining the oil and natural gas that energize this nation's economy and living standards.

These tax deductions are equivalent or similar to deductions claimed by every US business, large and small, for things like facilities depreciation, equipment, utilities, payroll, and research and development. They are intended to ensure that businesses, like individuals, recover their costs and get taxed only on their net incomes. For oil companies those deductions include:

* Geological and geophysical costs, for exploration to assess prospects prior to drilling;

* Intangible drilling costs – equipment, labor, fuel and supplies associated with drilling expensive wells;

* Expensing "tertiary injectants," water and chemicals injected into older wells to keep them producing;

* Domestic manufacturer's deductions of up to 6% of income earned from extracting oil and gas (farmers, manufacturers and other producers can deduct up to 9% of earned income);

* Percentage depletion allowance, allowing for gradual recovery of up-front investments in a petroleum (or iron, gold, limestone, et cetera) deposit that is gradually extracted and depleted. The allowance is not available to "integrated" companies that produce, refine and market oil.

White House, congressional and eco-activist claims that repealing these deductions will generate "billions in new revenues" reflect an abysmal grasp of basic business, economic and behavioral principles.

Thankfully, more Americans are beginning to understand that repealing any or all of these deductions will increase oil companies' individual project and overall operating costs. That means future bonus bids will decline, wells won’t be drilled, fewer deposits will be profitable enough to develop, and wells and fields will be abandoned prematurely. Oil and gas will be left in the ground, crews will lose jobs, tax and royalty payments will dwindle, and the USA will send billions more overseas for imported oil.

Informed Americans also recognize that, in 2008, oil and natural gas provided 61% of the energy that powers America. Natural gas generates almost a quarter of our electricity. These fuels provided affordable energy 24/7/365, supported 9.2 million jobs, kept millions off welfare and food stamp rolls, and generated billions in revenue for federal, state and local governments.

Wind and solar combined accounted for barely 0.6% of total US energy, and 1.9% of electricity generation, in 2008 – providing expensive, intermittent, heavily subsidized energy 8/6/312 or less.

In subsidies per unit of energy actually produced, gas-fired electricity generation got 25 cents per megawatt-hour in 2007 subsidies; coal received 44 cents (mostly for clean technology research). By comparison, wind turbines got 23.4 dollars and photovoltaic solar received 24.3 dollars per MWh.

One project alone – the $2-billion Shepherds Flat wind farm in north-central Oregon will transfer $500 million in hard cash subsidies, plus a subsidized loan guarantee of $1.1 billion to White House friend Jeffrey Immelt, General Electric and their partners. These OPM subsidies equal 80% of the $2-billion in tax breaks that Senators Reid and Schumer are so exercised about. The contract was GE’s largest in FY 2009. (Ethanol got nearly $5 billion in 2010, more than double the senators’ target.)

Shepherds Flat will be the world’s largest wind farm: 338 gigantic 2.5 MW turbines, 97 miles of new roads and 167 miles of high voltage transmission lines sprawling across 32,000 to 83,000 acres (up to twice the size of Washington, DC) of the scenic Columbia River Gorge area. At best, the turbines may average one-third of the 2.5 MW stamped on their nameplates. At the whim of the winds, the farm will generate electricity at wild swings between zero and the turbines' combined rated capacity of 845 MW.

That’s about one-quarter to one-half of what a single modern coal, gas or nuclear power plant generates 90-95% of the time, day after day, all year long … from a tiny fraction of the wind farm’s land area.

As is the case with Pacific Northwest hydroelectric, Four Corners coal and Arizona nuclear power, Shepherds Flat will supply electricity for Southern California, so that state can maintain its lifestyle, meet its lofty renewable energy goals and be "green," by using energy generated in someone else’s backyard.

Building and installing the turbines will require some 1.5 million pounds of rare earth metals (from Mongolian areas devastated by mining and smelting the metals), plus at least 700,000,000 pounds of concrete, steel, copper and fiberglass … accompanied by the fossil fuel energy, pollution and CO2 associated with mining, smelting and manufacturing these materials. The turbines will impact scenery and wildlife habitats, and kill numerous bats, falcons, hawks, eagles, owls, egrets, herons, ducks and curlews.

However, environmentalists, legislators and regulators treat those impacts – as well as noise, human health, airspace, Defense Department and other concerns – very differently from the way they handle hydrocarbon projects. In their quest for “green” energy at any cost, they simply brush these issues aside.

Our taxpayer subsidies are financing all of this, and generating impressive profits for their recipients. GE, for instance, generated over $5 billion in US profits in 2010 – but paid no US income taxes.

Compare this to Big Oil companies, which likewise made big profits last year… but also paid big taxes. ExxonMobil, for example, earned $30.5 billion in profits in 2010, on revenues of $383 billion, and paid $1.6 billion in US income taxes. Its combined lease bonuses, rents, royalties, taxes and other payments to the US Treasury totaled almost $10 billion last year. The company also paid state and local levies.

Overall, a Tax Foundation analysis of Energy Information Agency data shows, the largest integrated oil companies paid $1.95 trillion in corporate income, severance, property, excise and sales taxes, between 1981 and 2008. During that time, those companies’ total combined profits (net of taxes and expenses, and after adjusting for inflation) were $1.4 trillion – or 40% less than they paid in total taxes.

The "green" agenda – to use mandates, subsidies, regulations and taxes to coerce a shift to "renewable" energy and “fundamentally transform” our energy, economic and social structure – is rationalized largely by fears of "dangerous manmade global warming." It is deceptive, costly, environmentally harmful, and devoid of genuine scientific evidence to support its alarmist claims.

Europe’s catchy "20-20-20" climate action plan (20% renewable energy, 20% reduction in overall energy consumption, 20% cut in greenhouse gas emissions, by 2020) carries a minimum price tag of OPM $300 billion. It may reduce average global temperatures by 0.1 degree F (0.05 Celsius) by 2100 … assuming climate change is actually driven by carbon dioxide, rather than by multiple, complex natural forces.

Only mad dogs, environmentalists, liberal Democrats and RINOs would buy into such nonsense.
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To read another article by Paul Driessen, click here.