Fictions and facts about Big Oil

Lawrence J. McQuillan's picture

After oil companies released their first-quarter earnings figures — showing exceptionally high profits — Democratic leaders predictably called for an end to “subsidies.”

Lawmakers promptly hauled some top energy CEOs to Washington, accused them of greed, and introduced legislation to impose new taxes on oil and natural gas companies.

That bill was defeated, but some lawmakers continue to gin up public support for huge new taxes. Don’t be fooled. Much of the rhetoric surrounding oil taxes and profits is misleading.

Despite public perception, the industry has a relatively low profit margin and pays a much larger share of its revenues in taxes than most other industries. And stiff tax hikes will actually harm the economy, destroy jobs, and hamper innovation.

Let’s start with those “subsidies.” The truth is oil and natural gas don’t get a dime in direct government grants, unlike wind and other much-hyped “green” sectors that can’t compete on a level playing field and can’t meet our country’s energy demands.

What lawmakers call subsidies are actually tax deductions that allow companies to retain more of what they earn and use those earnings for exploration.

These deductions aren’t special favors. They’re essentially the same kind of deductions available to every other industry that enable companies to recoup operation costs and only get taxed on net income.

Take the Intangible Drilling and Development Costs (IDC) deduction, which lets companies exempt the expenses associated with finding and developing new oil fields. The Obama administration estimates its elimination would raise more than $12 billion for federal coffers over the next 10 years.

Exploration costs account for 60 to 80 percent of the total cost of the average well. And oil companies typically employ the IDC deduction for things like wages for researchers developing new drilling techniques to access hard-to-reach reserves.

There’s also the Tertiary Injectants Deduction, which totals about $92 million a year. This provision allows companies to write off some costs associated with reviving old wells and extending production.

Getting rid of these provisions would also hurt the economy. Today the oil industry supports 9.2 million American jobs. And while much of the economy was in a slump between 2007 and 2009, the oil industry grew.

Hitting oil companies with tax increases would leave them with less capital for new refineries and entice them to uproot domestic operations and relocate to more tax-friendly countries. This would reduce domestic energy production, cut jobs, and raise pump prices.

Indeed, Wood Mackenzie, a consultancy, shows that removing the standard slate of industry deductions would cause domestic oil production to drop 1 percent and cause a 5 percent drop in domestic natural gas production after just one year. Researchers also found that over the next decade, such a move would threaten 165,000 jobs.

Oil companies are currently paying their fair share of taxes. In 2009, according to the Compustat North American Database, oil and natural gas companies paid income taxes at an effective rate of 48.4 percent or 72 percent higher than the average effective rate of 28.1 percent paid by all other S&P industrial companies.

Oil companies earn large revenues in absolute terms, but their profit margins are actually quite low. From 2006 to 2010, the top oil and natural gas companies averaged an annual profit margin of 6.65 percent, below the U.S. manufacturing average.

In the first quarter of this year, ExxonMobil estimates that it made about 7 cents on every gallon of gasoline sold. Meanwhile, the government made 40-60 cents per gallon in state and federal taxes.

The relentless denunciations in Congress simply don’t square with the facts. If turned into policy, they’ll damage the still-fragile American economy, drive out jobs and investment, and increase gas prices.

[Lawrence J. McQuillan, Ph.D., is director of Business and Economic Studies at the Pacific Research Institute. Contact him at LMcQuillan@pacificresearch.org.]

JeffC
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Oil company shills

Beware of shills from the Pacific Research Institute writing about oil companies. Two of the Institutes largest funders are ChevronTexaco and Exxon Mobil.

Consider this statement: “In 2009, according to the Compustat North American Database, oil and natural gas companies paid income taxes at an effective rate of 48.4 percent or 72 percent higher than the average effective rate of 28.1 percent paid by all other S&P industrial companies.”

Those income taxes were paid to foreign governments, not the US government. The big oil companies generally do not pay US Federal income taxes. The industry average is less than 2%.

As to the tax subsidies being available to all other industries, if you own a corporation, feel free to utilize the Intangible Drilling and Development Costs and Tertiary Injectants Deductions next April 15th.

roundabout
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Jeff

Why does this newspaper purchase all of these weirdo "Institute" column writers and no liberal ones--none?

There must be some good in both types!

I can't think that most of the ad buyers even know who these people are nor read these columns!

TinCan
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Balance (ok, I'm sticking my nose in here)

You want balance with the Citizen, buy the AJC. You always nail Fox, so go to MSNBC or any one of the major networks to even that one out. I have to admit that O'Reilly is beginning to get on my nerves trying to convince all his guests of his point of view. I guess you may be familiar with those who are experts on all subjects.

Spyglass
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Corporate Taxes

in the US are paid by the people who utilize the services of US corporations.

That said, I think we need more oil sources...more alternative energy sources..more nuclear power....wind etc....too many special interests stand in the way of most anything.

JeffC
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Well that's true Spy

But so what? That is true everywhere.

According to their 10-K for 2009, Exxon claimed a total income tax bill of over $31 billion dollars, $15,830 billion non-US and $14,992 in US income taxes. They credited their foreign taxes against their US bill and the US ended up owing them $838 million. They then applied $650 million they had deferred, deducted $110 million they paid in State income taxes and their total US income tax was a $46 million dollar refund. In 2009, Exxon was the world's most profitable company.

Chevron made $10 billion in profits in 2009 and got a $19 million dollar US refund. ConocoPhillips made $16 billion in profits in 2008-2009 and got a $451 million dollar US refund.

My point is that it is disingenuous for oil companies to pay 45% in taxes to foreign countries, deduct those taxes from their US income tax bill so that they do not pay income tax in the US or just a negligible amount. Then they buy shills like McQuillan who work for foundations they fund to write articles claiming that they pay too much in taxes and need special tax breaks from the US.

I don't care what they pay in foreign taxes. Why should the US subsidize their foreign tax bills?

Revoke their tax breaks and make them pay US taxes.

Spyglass
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We'll pay either way..

if they don't have tax breaks here, we'll pay more for the services they provide.

Don't you get it, we are screwed either way. Dems or Repubs...all they know how to do is tax and spend.

roundabout
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PRI: Pacific Research Institute.........

........another of those set-ups dealing with allowing corporations to rob, steal, and mistreat human beings!

Oil companies ought to have the drilling tax deductions whether or not it produces oil---they say. (a yearly write-off). In other words capital expenses can be written off the same year as bought.

They are believers in using more and more petro products because states get huge revenue from gasoline taxes per gallon!

Even something wrong is OK if it provides revenue and jobs!

BHH
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The ethanol in our fuel now has lowered miles per gallon,

thereby increasing number of gallons sold as the price per gallon has risen dramatically. This in itself accounts for the higher profits seen by the oil companies and the local gas stations. Not to mention the increase in taxes it has produced for the government on all levels.

The ethanol has also destroyed the fuel tanks, fuel pumps and carburetors in millions of cars, motorcycles and all small engines including lawn mower, chain saws & generators and continues to do so. This is creating a boon in the repair industry and sales of new vehicles and equipment that has yet to be fully realized. Also draining money from everyone who owns them.

The oil changing companies recently announced that vehicles could easily go 7500 miles between oil changes instead of the 3000 miles they have been recommending. This is probably true with a fuel of pure gasoline but I believe they will eventually reverse this opinion once the facts of burning ethanol become better know.

I believe that ethanol has increased the petroleum use in this country and decreased the durability of our vehicles and equipment. This is one way our democratic government tries to create jobs while also creating a smoke screen around the real problems and creating more problems for the average persons finances.

AtHomeGym
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Ethanol

And history shows that ethanol can gum up and destroy 2 stroke engines of all kinds--gotta use an additive or use no-ethanol gas.

R. Butler
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Ethanol gums up more than just engines...

As reflected in yesterday's vote on the $5 billion annually in ethanol subsidy in the U.S. Senate, ethanol can also really gum up the works with respect to tea-party politics. Twelve GOP Senators are now attempting to explain how saving five billion dollars really won't help lower the Federal deficit. Or how existing subsidies to convert corn to fuel don't distort food prices.

Save the starving lobbyists...

BHH
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Butler, everyone is making fortunes off ethanol except

the consumers.

It's has the same effect as planned obsolescence on the automotive and small engine industries too.

If the economy were not in such sad shape it would probably have a beneficial effect on it by generating more commerce.

As it is, it will likely just help to turn this recession into a depression more quickly.