To hear some US politicians tell the story, “Big Oil” soaks up much of the national wealth through “subsidies.” In a period of wildly elevated oil and gas prices and consequently high profits of major oil companies, the story sounds scandalous indeed. This scandal, though, doesn’t bear up to facts.
Oil companies in the US do receive federal benefits that qualify as subsidies. But they’re not as large as they’re reputed to be. Most such help goes to small producers, not the integrated companies connoted by the expression “Big Oil.” And oil subsidies, as a new analysis by the Energy Information Administration makes clear, are smaller than those available for energy forms yielding much less supply.
The nonsubsidy subsidy
In current discussions, the phrase “oil subsidies” frequently attaches without a time reference to the number “$18 billion” to imply an annual benefit unique to oil. In fact, the number represents the sum of the estimated value over 10 years of two general tax breaks that a bill passed by the House would deny large oil companies.
The larger of the two, the “Section 199” tax credit passed in 2005, encourages investment by all US manufacturers while tax rates on non-US competitors are falling. Denial of the Section 199 would cost oil companies $14 billion over a decade and hamper their ability to compete with companies in other industries for capital. The other provision, relating to treatment of foreign tax payments, also would deny oil companies a benefit available to others. Neither of these provisions, because of their general applicability, can be called an oil subsidy.
According to EIA, federal provisions more properly considered oil and gas subsidies amounted in 2007 to $2.149 billion. Energy categories receiving larger subsidy totals last year were renewables, $4.875 billion; end uses, $2.828 billion; and refined, or chemically enhanced, coal, $2.37 billion. Each of the categories with greater subsidies represents a fraction of the total energy supplied by oil and gas. Receiving less total subsidies than oil and gas last year were coal, $932 million; nuclear, $1.267 billion; electricity unrelated to fuel, $1.235 billion; and conservation, $926 million.
Of the 2007 oil and gas subsidies, nearly all, $2.09 billion, took the form of tax measures. The small remainder was research and development funding and federal electricity support.
Two oil and gas tax measures dominated: expensing of exploration and development costs (E&D; mostly intangible drilling costs, or IDCs) and the excess of percentage over cost depletion. Both are tax deferrals, as opposed to credits or deductions, which are much more valuable subsidies.
The recent history of IDC expensing shows why the “deferral” distinction is important. The alternative to expensing is writing down costs from a capital account year by year. With expensing, the producer can deduct costs for tax purposes in the year they’re incurred. Then, however, no write- down is available for that property in later years. The advantage is timing of the tax payment rather than escape from the liability.
EIA points out that in most years during the drilling slump of 1987-99 the government’s revenue losses were negative. “The negative values imply a payment to the federal government of funds that it had loaned (tax deferrals), mostly to oil companies, in earlier periods,” it explains. No one then complained about subsidies.
Distorting discourse
EIA estimates the value of IDC expensing last year at $860 million. Integrated companies can charge only 70% of their IDCs to expense and must write down the remainder over 5 years. The benefit of percentage vs. cost depletion, worth a total of $790 billion last year, is available only to small independent producers and is limited even to them. The next largest subsidy in the oil and gas category, and the only nondeferral type, is $260 million and doesn’t go to oil and gas companies. It’s a package of credits and deductions for clean-fuel vehicles.
The perspective available from EIA’s report won’t stop politicians from braying about oil subsidies, of course. It does, however, show how opportunistic falsehood distorts energy discourse in an election year.
