Ethanol backer bashes oil

Oct. 23, 2000
In a presidential election year, adults say preposterous things in pursuit of political goals.

In a presidential election year, adults say preposterous things in pursuit of political goals. Representatives of the fuel ethanol industry and their baggage handlers in Congress act that way all the time.

US Sen. Tom Harkin (D-Iowa) has taken the ethanol lobby's perpetual, self-serving assault on petroleum to a new level of absurdity. He commissioned a General Accounting Office study comparing costs to the federal government of tax incentives for petroleum with those for fuel ethanol. And in a Oct. 12 statement releasing the report, he proclaimed, "In the past 32 years, just the three largest special tax breaks for the petroleum industry amount to over 10 times the tax incentives for ethanol and alcohol fuels."

From this comparison, it is easy to conclude, as Harkin no doubt hopes people do, that the federal government favors petroleum over ethanol. The logic, however, doesn't hold up.

Wrong addition

As GAO points out, estimated costs of different tax incentives can't be added meaningfully. Harkin thus abuses the numbers from the very start by aggregating the three main petroleum tax provisions-the amounts by which percentage depletion charges exceed cost depletion, expensing of certain exploration and development (E&D) costs, and credits for production of nonconventional fuels.

And comparing those totals with ethanol incentives-again, mistakenly aggregated-makes no sense. The most important petroleum incentives, by far, are percentage vs. cost depletion and expensing of E&D costs for services and unsalvageable materials. They accommodate a complex challenge of tax accounting: providing full capital recovery to taxpayers who invest in a business that must explore for its assets and that depletes them to generate revenue.

The most important incentive for ethanol is an exemption worth 54¢/gal of the substance from the federal gasoline tax. It accommodates the inability of ethanol derived from grain to compete with other gasoline additives on the basis of cost. By important contrast, the government does not allow percentage depletion or expensing of E&D costs in order to create a market for petroleum that otherwise would not exist.

Distinctions of purpose aren't the only-or even the biggest-weakness in the comparison central to Harkin's bash of petroleum. The flawed oil total he cites as being 10 times ethanol-incentive costs covers 1968-2000. That it exceeds an ethanol incentive that didn't exist before 1979 is no grand insight. What's more important, the totals mean nothing except in relation to volumes of the substances to which they apply.

During 1968-99, production of crude oil and lease condensate in the US totaled 94.6 billion bbl. From the GAO study, Harkin uses $82 billion as the cost to government of the depletion incentive and $42.9 billion as the cost to government of expensing E&D costs, really a tax deferral. Those numbers work out to 2¢/gal for depletion and 1¢/gal for expensing of E&D costs. Other incentives in the GAO study are far smaller.

So the federal government forgoes 54¢/gal to create a market for grain-based ethanol. And it forgoes 2¢/gal of oil produced to accommodate capital-recovery peculiarities of high-risk mineral extraction and, perhaps, 1¢/gal, so investors in oil and gas wells don't pay taxes on goods and services for years after they're used up.

Which industry enjoys the greater incentive from US taxpayers?

In his statement, Harkin rails against "special favors and tax breaks for the petroleum industry." He apparently forgets the misnamed Windfall Profit Tax, which transferred $77 billion from oil producers to the national treasury during 1981-88. With addition of the $100 million/year that producers spent on administration of the tax, and with adjustment for inflation, the WPT about offsets the depletion cost in GAO's study.

Those "special favors" to petroleum look smaller all the time.

Customer relationships

As a demagogue in an election year, Harkin certainly doesn't perform solo. But his attack on petroleum is especially virulent and his argument flagrantly misinformed.

With prices of gasoline and heating oil elevated in a tight market and winter approaching, trash talk from a legislator can do more than normal damage to the industry's already strained relationships with its customers. Oil company officials need to spend more time than they do now in places like Des Moines and Waterloo, keeping the record straight.