Should Big Oil give up tax breaks — or get cuts?

John W. Schoen Senior producer • Profile • E-mail

Readers this week weighed in on a long list of pressing issues facing President-elect Obama. Here are two: Should the oil industry get to keep tax breaks intended to spur more production? And why can’t the government just reset variable-rate mortgages back to the original rate that homeowners can afford?

We kept hearing from the presidential candidates about the taxes that the big oil companies pay. One side will give them more tax breaks and the other will increase their taxes one way or another.  With another round of record profits by Exxon and extremely high prices at the pump, why would the oil companies be getting a break on their taxes in the first place? 
— Phillip H., Tampa, Fla.

The bulk of the tax incentives in question were part of the Energy Policy Act of 2005, the comprehensive legislation Congress enacted after years of debate and two failed attempts to reach a consensus. This $14 billion package (seems like such a small number these days) included a long list of tax incentives for nuclear power, “clean” coal, ethanol and other renewable fuels. Also included were several billion dollars in tax breaks and “royalty relief” for oil producers to encourage more drilling on federal leases — especially in deep water drilling leases in the Gulf of Mexico. At the time, the Bush administration’s basic solution to the energy crisis was to produce more oil, gas and coal.

After years of debate, the bill passed largely because it seemed to spread the goodies around to all forms of energy production and development. The bill invested relatively little on energy conservation or to promote efficiency.

When the law was signed by President Bush in August 2005, the price of oil was about $63 a barrel — after a sizable run-up that had roughly doubled prices in two years. That run-up in the market price helped push oil industry profits to then-record levels; when the cost of producing the next barrel stays about the same and the price goes up, the difference is pure profit. The week before the bill was signed, Exxon Mobil reported quarterly profits were up 32 percent to $7.8 billion.

When the 2005 law was passed, proponents argued that that oil companies would take some of the billions in tax breaks and “royalty relief” and spend it on developing new supplies of oil. That in turn would increase supplies and lower oil prices.

But as oil industry profits rose, it turned out that money wasn’t the problem. The reason it’s hard for Western oil companies to find new places to drill is that most of the places where you might expect to find oil are in parts of the world where those leases are controlled by governments or nationalized oil companies that aren’t all that eager to do business with U.S. oil companies.

Fast-forward to 2007, when the 110^th Congress passed a new bill to revise the 2005 law, putting more focus on raising auto fuel efficiency and conserving energy, among other new provisions. Early versions included provisions to repeal the tax deductions and “royalty relief” for oil and gas producers, but those provisions didn’t make it to the final version approved by the House and Senate.

When President Bush signed that new bill, in December 2007, oil was at about $90 a barrel and headed for a peak of $147. That run-up continued to fuel big oil industry profits.

In the meantime, oil companies have had to look for someplace to stash all that cash. Many are buying up their own stock; in the past four years, Exxon Mobil has bought back roughly $100 billion of its own shares. That investment will help strengthen the company for the future. But it hasn’t produced a single new barrel of oil.

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