One of the big applause lines in President Obama’s recent Georgetown “climate action plan” pitch declaring an all-out EPA war on coal and it’s fossil cousins said: “And because billions of your tax dollars continue to still subsidize some of the most profitable corporations in the history of the world, my budget once again calls for Congress to end the tax breaks for big oil companies, and invest in the clean-energy companies that will fuel our future.”
This is hardly a new strategy theme. The familiar take-away line is that even more regulation is essential to bludgeon energy producers and consumers to abandon climate-ravaging fossil fuels in favor of heavily taxpayer-subsidized “alternatives”… and eliminate that Big Oil tax break subsidy advantage.
White House climate aide Heather Zichal has said that the Obama Administration can accomplish these objectives through policies that “don’t require any new laws or any new technologies.” In addition to using a global warming ruse to unleash a regulatory onslaught under the claimed auspices of EPA’s Clean Air Act, Politico notes that Obama will also pursue “improved energy efficiency for homes and businesses, more investments by the Interior Department and other investments in clean energy research and production, and a phase-out of fossil fuel subsidies”.
Oh, the unfairness of it all!
U.S. oil exports last December hit a record 3.6 million barrels per day, and natural gas production last year saw a 33% increase over 2005 levels. As these successes have been occurring, “Green energy” paybacks are turning decidedly brown. Joseph Dear, investment chief for the California Public Employees Retirement System, recently commented, investing in clean energy has to be more than just “a noble way to lose money.”
Speaking at the Nashua Community College in New Hampshire on March 1, 2012, as gas prices approaching $4 a gallon had become a major re-election campaign issue, President Obama said: “[Over] the long term, an all-of-the-above strategy requires the right incentives. And here’s one of the best examples. Right now, $4 billion of your tax dollars—$4 billion—subsidizes the oil industry every year.” He continued: “Four billion dollars. Now, these companies are making record profits right now—tens of billions of dollars a year. Every time you go to the gas tank or fill up your gas tank, they’re making money. Every time. Now, does anyone really think that Congress should give them another $4 billion this year?”
When the crowd yelled “no,” Obama said: “Of course not — it’s outrageous.”
But wait a minute…what subsidies? And how did he arrive at that $4 billion figure?
Using a very broad definition applied by Oil Change International, the term “subsidies” refers to: “any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers, or lowers the price paid by consumers.” So based upon the first of these criteria, let’s assume that the President is referring to three types of oil and gas company tax “loopholes”: (1) an oil depletion allowance; (2) expensing drilling costs; and (3) a credit for taxes paid to foreign nations during foreign operations (a foreign tax credit). Yet in one form or another, these same advantages are extended to other industries as well, and often with more generous benefits.
Oil depletion allowances, the first category, principally apply to small independent producers, with similar benefits available for all mineral extraction, timber industries, etc., allowing them to pass the depletion on to individual investors. Large integrated corporations haven’t been eligible for these since the mid-1970s. Expensing indirect drilling costs involves writing off expenses in the year incurred rather than capitalizing them and writing them off over several years. Closing this “loophole” would only change the timing of taking he expense, not the total amounts of the so-called “subsidy.” The third category, a tax credit for taxes paid to foreign nations, is available for all international companies. This provides an offset to foreign taxes, often paid as royalties, so that the companies aren’t taxed twice on the same income.
The oil and gas extraction and refining has already been singled out to receive even fewer tax breaks than other industries. Whereas Section 199 of the “American Job Creation Act of 2004” provides a 9% deduction from net income for businesses engaged in “qualified production activities,” oil and gas was penalized and limited to a 6% deduction. Passed with strong bipartisan congressional support, the intent was to provide a competitive advantage to domestic companies engaged in product manufacturing, sales, leasing or licensing, and production-related software activities.
Many manufacturing industries, including farm equipment, appliances and pharmaceuticals take advantage of the full Section 199 deduction. Even highly profitable companies like Microsoft and Apple get those breaks, as do some foreign companies that operate factories in the U.S.
Revisiting that so-called $4 billion subsidy for greedy oil companies, let’s review the real breakdown. As reported by fellow Forbes contributor Robert Rapier, according to oil-related subsidy data published in a 2010 joint OECD-IEA report titled “Fossil Fuel Subsidies and Other Support,” the single largest expenditure was just over $1 billion for the Strategic Petroleum Reserve which is provided to protect the U.S. from oil shortages.
The next largest was just under $1 billion in tax exemptions for farm fuel. The justification for this exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the exemption is technically not supposed to be using the roads.
The third largest category provides $570 million for the Low-Income Energy Assistance Program (LIHEAP). It is classified as a petroleum subsidy because it artificially reduces the price of fuel, which theoretically helps oil companies sell more. Combined, these three programs account for $2.5 billion per year in “oil subsidies.”
As for that LIHEAP tax benefit attributed to Big Oil, consider the reaction by other prominent Democrats when Republicans, as well as President Obama, attempted to reduce funding. Senator Chuck Schumer (D-NY) called that proposal an “extreme idea” that would “set the country backwards.” Senator Jeanne Shaheen (D-NH) said “The president’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact upon New Hampshire’s most vulnerable citizens and I strongly oppose it.” Then-Senator John Kerry (D-Mass) wrote a letter to Obama stating, in part: “We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend upon these monies to heat their homes and survive the season.”
Incidentally, wasn’t all that global warming that Kerry has been alarmed about supposed to remove that brutal winter peril?
And by the way, oil industry companies took three slots in USA Today’s top-10 list of companies that paid the highest 2012 U.S. income taxes. ExxonMobil ($31 billion) was number one; Chevron ($20 billion) came in second; and ConocoPhillips ($8 billion) was the sixth largest.
And what about that tax money blowing in the wind and chasing sunbeams?
Since 2009 we have shelled out $14 billion in cash payments to solar, wind and other renewable energy project developers. This includes $9.2 billion to 748 small and large wind projects, and $2.7 billion to more than 44,000 solar projects, which will add just 48 terawatt hours of electricity. Yet according to EIA figures, wind accounted for 3.4 percent of electricity in 2012, while solar accounted for only 0.11 percent.
Despite the Obama Administration’s hysterical sequestration hype, the Department of Energy has awarded more than $1.2 billion in charity for 435 new renewable energy projects since January 1. They include 381 solar awards. In addition, DOE is pressing ahead with plans to throw in $150 million more for renewable projects which was left over from a separate 48C tax credit stimulus program.
At least one Green energy developer recognizes that these stimulus subsidy programs have a record of doing more harm than good, and he isn’t reluctant to say why. Patrick Jenevein, CEO of the Dallas-based Tang Energy Group, posted a Wall Street Journal article arguing that” the sequester offers Washington a rare opportunity to roll back misguided subsidies and maybe help reverse wind power’s stalling momentum.”
Jenevein noted that since 2009, wind farm developers like his company have been able to get a cash grant or tax credit covering up to 30% of their capital investment in a new project, and that through May 2012 Washington had spent $8.4 billion on cash grants. He welcomes the fact that the cash-grant program will be cut back 8.7% between March 1 and September 30. Viewing this as a positive policy change, he wrote: “Government subsidies to new wind farms have only made the industry less focused on reducing costs. In turn, the industry produces a product that isn’t as efficient or cheap as it might be if we focused less on working the political system and more on research and development.”
Jenevein points out that: “After the 2009 subsidy became available, wind farms were increasingly built in less-windy locations… The average wind-power project built in 2011 was located in an area with wind conditions 16% worse than those of the average… Meanwhile, wind-power prices have increased to an average $54 per megawatt-hour, compared with $37 in 2005.” He continued, “If our communities can’t reasonably afford to purchase and rely upon the wind power we sell, it is difficult to make a moral case for our business, let alone an economic one… Yet as long as these subsidies and tax credits exist, clean-energy executives will likely spend most of their time pursuing advanced legal and accounting methods rather than investing in studies, innovation, new transmission technology and turbine development.”
Yes, let’s eliminate energy subsidies…all of them.
But before focusing exclusively upon oil and gas tax credits, consider some broader implications. Even if there are certain types of tax deductions that benefit these industries more than others, isn’t this true of most all tax credits? If these “breaks” or “loopholes” are subsidies, what about property owners who take advantage of mortgage interest deductions? If the argument is that Big Oil is so rich they don’t need them, then what about Apple and other deep pocket companies? If there is no compelling financial advantage to invest in domestic infrastructure and operations, won’t many companies be more inclined to transfer business resources, tax payments and jobs overseas?
On the other hand, however, our current renewable energy subsidy path (including tax credits, grants, mandated purchases and government loan guarantees) has proven to be unsustainable for a variety of reasons. It has diverted private investments from viable to uncompetitive enterprises; created a welfare program for politically favored industries; distorted and disrupted proven free market structures; rewarded repetitive failures; imposed unwarranted and involuntary cost burdens upon all energy consumers and taxpayers; and has extended unprecedented government regulatory intrusions into our businesses and private lives.
During a September 2009 G-20 speech, President Obama called for elimination of government subsidies for greenhouse gas emitting fossil fuels, stating “I will work with my colleagues at the G-20 to phase out fossil fuel subsidies so that we can better address climate change”. Let’s go him one better. Let’s change the climate in Washington where government picks the winners, while taxpayers and energy consumers hold the losing hand.
A version of this article appeared in Forbes Online, beginning on July 7, 2013.