I don't suppose any of you really believed our cover headline was possible, but if you did-gotcha! Just another blatant promotion for the upcoming book Take the Rich Off Welfare, by Mark Zepezauer and Arthur Naiman. God willing and the creek don't rise, Odonian Press will have it out on the streets in September.Of course, ten years ago, who would have believed the following things would be possible: that the Soviet Union would voluntarily choose to dissolve; that Nelson Mandela would be elected president of South Africa; that Israel and the Palestinians would sign a peace accord; or that Newt Gingrich would someday be Speaker of the House? One thing's certain: an end to corporate welfare scams will not come about voluntarily. If you want economic justice and a balanced budget, you have got to demand it from your elected representatives. You may say that it's never gonna happen, but remember: that's what they told the abolitionists and the women's suffrage movement, too.
And, now
Oil Subsidies
The last major politician who dared to oppose the oil depletion allowance was John F. Kennedy-and eventually he stopped doing so. This longstanding tax break allows those in the oil business to, in effect, write off all of their gambling losses. The ostensible reason for the depletion allowance is to encourage exploration of oil drilling sites, which, presumably, no one would do without such a tax break, it being so difficult to make a living in the oil business.Oil industry executives will tell you that other businesses are allowed to depreciate the costs of their manufacturing. But a garment manufacturer can only deduct the original cost of a sewing machine, whereas an oil well can produce tax deductions as long as it keeps producing oil-which can amount to many times the cost of the original drilling and exploration. The depletion allowance is currently set at 15 percent of gross income, but some smaller oil companies can increase that by one percentage point for every dollar the price of oil falls below $20 a barrel.
The current cost to the US Treasury for the depletion allowance is about $1 billion a year. This deduction can, in some cases, amount to 100 percent of the company's net income, which means that all profitability comes from government tax subsidies, provided by you.
But just in case there's anyone in the oil industry not enjoying sufficient profitability, Congress has come up with a number of other cushions against the risks of capitalism. Big Oil can immediately deduct 70 percent of the costs of setting up an operation-the so-called “intangible drilling cost” deduction. Other industries have to deduct such costs over the life of the operation, so this amounts to another interest-free loan from the Treasury. It also amounts to a double deduction, since the depletion allowance is supposed to compensate the poor oil producer for the costs of risking a dry well. Repealing this deduction would save $2.5 billion over the next five years.
Another tax subsidy encourages oil companies to go after oil reserves which are more difficult than usual to extract-such as those which have already been mostly depleted, or which contain especially viscous crude. This, of, course, is more expensive than normal oil drilling. Thus the “enhanced oil recovery” credit helps to subsidize those extra costs. The net effect of this is that we taxpayers are paying for domestic oil that costs almost twice as much as foreign supplies. If the price of oil eventually rises, due to scarcity or any other factor, it could become profitable to extract that oil without a subsidy. But that would mean just letting it sit there, which wouldn't make any money for anybody.
Of course, it might make more sense to encourage the oil companies to stop wasting so much of their oil during production. A combination of spills, emissions, evaporation, venting and flaring, waste generation, inefficient processing and storage tank and pipeline leaks causes an energy loss estimated as the equal of one thousand Exxon Valdez spills per year. Apparently, without a subsidy to help them increase their efficiency, the oil comapnies can't be bothered with all that extra fuel. Or perhaps the joy of getting so many breaks to cover their “risks” means they don't have to care.
These tax breaks not only encourage the use of fossil fuels at the expense of cleaner alternatives, they encourage drilling in otherwise marginal areas, which usually turn out to be environmentally sensitive regions like wetlands and estuaries. Favorable tax treatment for the oil industry also artificially attracts investments which could be used more productively in other areas of the economy. And the combined effect of the depletion allowance, the intangible drilling cost deduction, the enhanced oil recovery credit and other subsidies can sometimes exceed 100 percent of the value of the energy produced by that oil. This makes no economic sense at all-unless you're an oil company shareholder.