Oil Industry Wins Subsidy Game, Again

Little more than a year after the Gulf of Mexico oil spill, 4 dollar-a-gallon gas has prompted a bout of political amnesia. Despite various moratoriums on offshore drilling, the House of Representatives passed three separate bills last week that would hasten and expand domestic oil production. Then a Senate bill that had gained considerable momentum from the BP disaster  fell 8 votes short. The bill, which would have cut oil tax breaks in half to pay off 20 billion dollars of the federal deficit over the next decade, was unlikely to pass the drill-happy House of Representatives. But Senate Democrats, including the bill's sponsor, Robert Menendez of New Jersey, say they’re not done trying. Following the vote, New York Senator Chuck Schumer said he'd be using the proposal to eliminate oil tax breaks as leverage in the debt ceiling debate.

Even before the oil spill, Menendez had begun work with the Obama administration to craft his bill, but the disaster lent him sizable support – and coverage. In July 2010, he told the New York Times, "The flow of revenue to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant." The measure he proposed would have cut tax deductions on manufacturing, intangible drilling, and other operational costs, while also repealing a royalty-relief program that allows companies to wait on making royalty payments until they’ve earned back their initial investments.

Apparently, axing subsidies is one part of the President's larger plan -- the other part encourages companies to develop on federally controlled territory. Last week,  Obama announced a boon for new drilling, which had slowed after the blowout last April. He promised to extend leases that had stalled in the Arctic Ocean and Gulf of Mexico. He would hold auctions for new oil and gas leases on a 23-million-acre tract on Alaska’s North Slope. And his administration, he said, would speed its review of drilling’s environmental impact on the Atlantic Seaboard – the same place where he had extended an existing moratorium on drilling until at least 2018 – and possibly allow for oil exploration there.

In a hearing before the Senate Finance Committee on May 12, executives for five of the largest oil companies defended the subsidies. The bulk of their argument, of course, focused on jobs. Raising taxes on industry, they said, would take its toll on oil and gas development, resulting in lost jobs, a decline in production, and, in the end, fewer taxes and royalties to recoup the federal deficit. Prior to the hearing, ConocoPhillips's James Mulva wrote in a letter that the bill was, "un-American," prompting the New York Times to reply in an editorial, "How absurd are their claims? Utterly absurd."

Two years ago, an economist from the Treasury Department released a study showing that oil prices and potential profits were so high that cutting tax breaks for companies would reduce domestic oil production by less than a half of one percent. Others since have also suggested that the potential profit losses on the part of oil companies are pittance – certainly not enough to cause a significant drop in production.

But the economic argument for axing subsidies seemed to have little sway over Republicans. Nor did it work when the Democrats' tried to appeal to the oilmen's sensitive sides. "In the last few months, the biggest oil companies made about 4 billion dollars in profits each week. And yet they get 4 billion in taxpayer subsidies each year," said Obama in an address last week. "Four billion dollars at a time when Americans can barely fill up their tanks. Four billion dollars at a time when we’re trying to reduce our deficit."

In the May 12 hearing, Senator Jay Rockefeller of West Virginia chided the panel of CEO’s: "I really do believe that you're out of touch. You've never lost. You've always prevailed in the halls of Congress … I yearn for one of you to see what average people are going through. Do any of you think about the things you could give up as a way of helping?"

To that, Mulva replied, "We feel we’re in a noble industry that has provided the energy that has developed this country. But we have shackles on us. We're ready to do far more. Give us access to the lands. Let us start drilling."

Sierra Crane-Murdoch is an HCN intern.

Photo courtesy Flickr user calwest.