April 29, 2011
The elimination of the tax subsidies for big oil companies has come into focus as a hot button political issue as retail gas prices climb close to a national average of $4 per gallon and oil company profits soar.
On Thursday House Minority Leader Nancy Pelosi, D-Calif., denounced ExxonMobil’s first quarter earnings of nearly $11 billion, up 69 percent from the first quarter of 2010, and urged Republicans to vote to eliminate oil-tax subsidies next week when Congress returns from recess. “There is no reason American taxpayers should subsidize big oil's profits,” she said in a statement. “It’s time to turn off the spigot of public funds flowing to big oil.”
Pelosi is the latest to join the chorus of Democrats and the Obama administration in targeting the tax breaks, which industry experts estimate amount to $4 billion per year. Pelosi called on House Speaker John Boehner, R-Ohio., to make good on his comments earlier in the week when he said on ABC News that he was open to repealing the tax breaks.“It's certainly something we should be looking at. We're in a time when the federal government is short on revenues. They ought to be paying their fair share,” Boehner said.
However, despite a letter from 28 House Democrats urging Boehner to hold an up-or-down vote on the issue, a spokesperson for Boehner signaled he would do no such thing: “The Speaker wants to increase the supply of American energy to lower gas prices and create millions of American jobs,” said Michael Steel, Boehner’s spokesperson. “Raising taxes will increase gas prices and make it harder to create jobs.”
White House Press Secretary Jay Carney said on Tuesday that “while we are certainly glad to see companies making a profit, we do not believe that given the size of those profits, record profits in some cases, that they need to be subsidized by the American taxpayer, especially in these times of constrained budgets.”
The U.S. tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process. However, eliminating the tax subsidies has many ramifications, according to those who follow the industry closely.
“It would help to alleviate the budget deficit but wouldn’t help consumers,” said Michael Scialla, oil and gas analyst with Stifel Nicolaus. “The political rhetoric might be good with some voters who are naive in the energy space but it could have negative longer term ramifications for the economy.”
If the tax breaks were eliminated it would lead to a fall off in U.S. oil production in the next year or two, said Charles Ebinger, director of the energy security initiative at the Brookings Institution. Smaller oil companies that perform the majority of oil exploration and drilling operate on low cash flow volumes and wouldn’t have the money to finance drilling, he said. Thus, the U.S. would have to offset lower production levels with higher import levels, Ebinger added.
The American Petroleum Institute (API), a trade organization, warns that a cut to tax subsidies would be the equivalent of cutting production by 600,000 barrels per day, and 165,000 jobs over a 10-year period. Officials estimate the U.S. oil industry employs nearly 9.2 million workers. “Raising taxes on the industry is not going to decrease gas prices,” said Brian Johnson, senior tax adviser, at API. “If the government is serious about bringing in money to the economy the last thing is to increase taxes.”
ExxonMobil’s first quarter was its best since the third quarter of 2008. Royal Dutch Shell reported first quarter profit up 60 percent to $8.8 billion. BP and ConocoPhilips released their first quarter earnings on Wednesday. BP’s net income rose to $7.1. billion from $6.1 billion and ConocoPhilips’ first quarter profits rose 43 percent to $3 billion.
Meanwhile, gas pump prices rose for the 37th straight day.
Amid Huge Exxon Profits, Democrats Link GOP to Big Oil (CBS News)
Obama’s Faulty Gauge on Energy Policy (The Fiscal Times)
Exxon’s Profits Hit $10.65 Billion (Wall Street Journal)