How oil companies recieve billions in tax breaks

President Obama proposed scrapping $4.5 billion in subsidies for oil companies in the State of the Union, suggesting the monies might be put to better use as incentives for clean energy. Presidents have been trying to do this for decades – even former oilman George W. Bush tried to shut off the spigot, but to no avail. “With $55 a gallon oil, we don’t need incentives for oil and gas companies to explore. There are plenty of incentives.”

With oil on its way back to ridiculous prices (last I checked, $92 a barrel for NYMEX Crude) oil companies are the last businesses worthy of subsidy. ExxonMobil announced profits of $9.7 billion in the fourth quarter of 2010 andChevron picked up $5.3 billion over the same time period. And these numbers are a continuation of a tremendously prosperous period for the petroleum sector: over the past decade, the top five American oil companies made nearly one trillion dollars in profits. Compared to those figures, a mere $4.5 billion dollars a year seems like a pittance. But the oil lobby is intent on fighting for every penny.

Here’s how it works: technically, the $4.5 billion isn’t a subsidy. It’s a clever accounting move that allows oil companies to disingenuously claim depreciation costs on bogus assets. On the Diane Rehm show today, oil industry lobbyist Jack Coleman argued that the tax credit oil companies receive is the same tax credit any other business can file for.

That’s partially true. The 1099 is a tax credit that any corporation can claim for depreciation of an asset. Under this provision, normal businesses are allowed to claim depreciation of equipment, property, machinery, or other business asset as the value of those assets falls with use.

The tax code allows oil companies to stretch the definition of “business asset” to include their oil wells. As they suck oil out of a well, the amount in the well decreases and depreciates the value of the well. Oil companies include this “depreciation,” or depletion, in their tax filings in order to save billions of dollars.

But what’s especially conniving is that the tax code allows them to fudge the numbers to maximize their deduction, well beyond its actual value. Say an oil well has 20 million barrels of recoverable oil. The oil company will estimate the value of the well using the the market price. According to Dan Weiss at CAP, they produce the barrel for around $10 and make a profit of $82. The tax law allows them to deduct the full market price on their taxes – imagine deducting $92 dollars on your taxes for something it took $10 to produce.

For a regular business that uses its assets to create products, the 1099 credit makes sense. But it doesn’t make a whit of sense for oil companies to receive tax deductions when asset depletion is the essential operation of their business. Why should they receive tax credits for it?

The reason the law is so stacked in favor of big oil is because it’s been on the books since 1913. The U.S. was headed to war and we needed all the oil we could get. Also, searching for oil back then was a very imprecise business – nothing like it is now. Prospectors would dig into the ground on a hunch and, more often than not, have nothing more than a really deep hole to show for it.

These days, oil exploration is nothing like the crapshoot it was in 1913. So call it a subsidy, call it a tax loophole, call it whatever you want. It’s wasteful and it needs to end. I’m certain the oilies will be fine without the help.

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