Monday, May 16, 2011

Government Subsidies to Big Oil Must Cease

Over the past few weeks, as Congress has continued to wrestle with the growing fiscal crisis, the subject of taxpayer subsidies to "Big Oil" companies has repeatedly come up. Senate Democrats recently roasted Big Oil CEOs over a grill regarding these subsidies and President Obama has come out strongly against them. On the Republican side, Speaker John Boehner said a few weeks ago that he was open to getting rid of them, then quickly flip-flopped and declared himself firmly in support of continuing paying the subsidies. Clearly, this is going to be a big issue in the coming weeks and months.

It is probably a considerable understatement to say that the gang of oil companies we regularly group together as "Big Oil" are not exactly the most popular people these days. Americans of all stripes constantly complain about the high price of gas and are occasionally forced to witness massive accidents like the Exxon Valdez oil spill or the BP Gulf oil spill. Better informed citizens often become enraged when they hear of the environmental damage Big Oil causes in distant places like Nigeria and Ecuador, or the manner in which Big Oil pays fraudulent researchers to write bogus papers that seem to cast doubt on the overwhelming scientific consensus regarding global climate change.

These facts by themselves would be enough to make the public angry with Big Oil, but their anger is magnified in view of the immense profits they earn every year. In 2010, ExxonMobil made a profit of $31.4 billion, Royal Dutch Shell made a profit of $20.5 billion, and Chevron made a profit of $19.1 billion. Indeed, over the last decade the five Big Oil companies have made a collective profit of around $900 billion. Consider the high prices Americans are paying at the gas pump, the fact that Big Oil itself continues to rack in such gargantuan amounts of money unsurprisingly makes the average American more than a little furious.

Granted, if the oil companies work hard and earn solid profits by selling valuable oil, that's all well and good. Indeed, that's how free market capitalism is supposed to work. What is definitively not all well and good - what, in fact, is quite bad - is that these Big Oil profits are only possible because Big Oil enjoys large taxpayer-funded subsidies from the federal government. These unfair tax breaks are an affront to the ideals of free market capitalism and essentially steal money from ordinary Americans in order to further enrich people who are already rich. Consequently, they should be abolished as soon as possible.

What exactly are these taxpayer-funded subsidies? As a first example, consider the percentage depletion allowance. Every year, the federal government allows oil companies to deduct from their taxes what they would otherwise have paid on around a quarter of their income. In other words, rather than paying corporate income taxes on 100% of their income, the oil companies pay taxes on around 75% of their income. The ostensible justification for this tax break is that the resources of an oil company (in this case, the oil in the oil fields) decline as production proceeds. If this logic were taken to its obvious conclusion, the federal government should give handouts to movie theater companies because more people are watching movies at home, or to record stores because more people are downloading music from the Internet. It is simply ridiculous.

Another example of government subsidization of Big Oil is allowing the oil companies to deduct from their corporate income taxes what are known as "intangible drilling costs". This means that the oil companies are allowed tax deductions for everything from fuel costs to wages paid to workers to repairs made on drilling equipment - anything that has anything to do with drilling oil, in fact. Similarly, the federal government allows the oil companies to amortize "geological and geophysical expenses", which basically means the costs involved in actually looking for oil.

The tax deductions granted to Big Oil for "intangible drilling costs" and "geological and geophysical expenses" basically mean that the already overstretched taxpayers of America are protecting Big Oil from the basic risks of being in the oil business. It undermines the basic tenants of free market capitalism, in which an entrepreneur has to be willing to shoulder risks in the search for profit, and would probably cause Adam Smith to spin in his grave faster than a proton in a particle accelerator.

Ironically, the political party which most strongly defends these taxpayer subsidies to Big Oil is the Republican Party. I say "ironically", because it is the Republicans, and not the Democrats, who have traditionally been the most supportive of free market capitalism in America and who have most strongly opposed government intervention in the workings of the economy. Even the libertarian Cato Institute, more fanatical in its support of free market capitalism than any other prominent think tank in the country, believes that the Democrats are right and the Republicans are wrong on the issue of oil company subsidies. If their Democratic foes on the other side of the aisle suggested massive tax breaks for, say, the film industry, the Republicans would raise a furious rancor and denounce the idea as sickening socialism. Why, then, do the Republicans betray their free market ideals when it comes to the oil industry?

The Republicans can issue as many talking points as they like, but the brutal fact is that they defend these tax breaks for Big Oil in violation of their free market principles because they depend on money from Big Oil lobbyists to finance their political campaigns. The numbers don't lie; oil and gas companies make vastly larger campaign contributions to Republicans than they do to Democrats. If you are a member of Congress and support these tax-funded giveaways to Big Oil, you'll get a big check from Big Oil to deposit in your campaign account; if you don't, you won't. If that's not bribery, I don't know what is. The simple answer to the question of why the Republicans defend Big Oil subsidies is that they have been paid to do so.

On one point, the Republicans are quite correct: abolishing taxpayer subsidies to Big Oil is unlikely to bring the price of gas at the pump down. But that's not the point. The price of gas at the pump is something that should be set by the mechanisms of the free market, rather than by government decree. High gas prices encourage people to adjust their habits in accord with the reality of oil scarcity, and presents real opportunities for entrepreneurs and innovators to explore alternatives to oil under genuine market conditions. This is how the real world works.

Besides which, the tax giveaways to Big Oil cost American taxpayers a great deal of money, making the fiscal crisis worse than it needs to be. Indeed, the Cato Institute calculates that eliminating the subsidies to Big Oil will result in $43.6 billion being recovered by the U.S. Treasury over a decade. This may not amount to all that much in terms of resolving the fiscal crisis, but every little bit helps. As a Chinese proverb goes, the journey of a thousand miles begins with a single step.

Government subsidies to Big Oil cost us billions of dollars every year, making our precarious fiscal situation even worse. They are a violation of the principles of free market capitalism that America is supposed to uphold. They effectively steal money from hardworking Americans and funnel it to already wealthy people. On every count, these subsidies are obscene, immoral, and not to be tolerated. They should be eliminated.

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