by kevin, on October 21st, 2009
With the election of Barack Obama there seems to be a great deal more discussion in the news about free market economics versus a government controlled and regulated one. Any time you hear a sustainability opponent broadcast the merits of the free market and suggest that going green is the same as socialism, what they’re really expressing is their desire to keep things as they are and a fear that their subsidized ride might be ending. Name any major industry in the United States and you’ll find tax incentives, direct government subsidies, indirect tax payer supported benefits, protection tariffs, and tax policy meant to drive certain consumer behavior. In this installment, let’s take a look at the oil and gas industry.
The oil industry is like none other. In the United States oil and gas industries might be the only ones that receive a triple subsidy – direct, indirect, and unique freedom. According to a 2007 report by the Energy Information Administration, gas and petroleum companies received a total of $2.149 billion in tax breaks. In other words, they were allowed more than two billion dollars in tax breaks – cost they could take off their books and government revenue not received. That same year, those companies had a windfall profit of more than $127.9 billion. What? That’s right, in a year when oil and gas netted record profit, government programs significantly reduced their tax liability.
Did the government do that for your industry, or your business? It didn’t do that for mine. At the same time, oil and gas receives indirect subsidies. These are not offered directly to the industry but are areas where government pays the tab while they benefit. How many times have you been riding on the highway and seen a gas tanker truck? Although we all benefit from the interstate highway system, oil and gas depend on those roads, bridges, and tunnels to move petroleum to the gas station. Taxes and tolls help pay for that use. Most citizens use the interstate highway system, state and county roads, and other surface streets for personal use, but corporations get the benefit of those same roads to generate revenue. American military presence in the middle east over the past two decades provides immeasurable benefit to big oil, especially when you consider that the largest consumer of oil is the U.S. military. It’s a triple prize. The military consumes the most oil while protecting that supply and generates huge profit for insulated private industry while doing so.
It’s been more than twenty years since the 1989 Exxon Valdez oil spill in Prince William Sound, Alaska, yet citizens impacted are still suffering and fighting ExxonMobil for restitution. The company appealed a case involving punitive damages all the way to the Supreme Court. Does that sound like the behavior of a company who promised the 30,000 affected citizens their lives would be made whole? Instead, it sounds like a corporation who said what it needed to get clear of correcting the damage done. In the end, they will pay pennies on the dollar for the damage. Not included in any monetary calculation of the damage is the stupendous impact on the regional ecosystem. Following the accident, Congress passed legislation that required oil companies operating vessels in Prince William Sound to file written clean up and remediation plans before those ships can enter the area. But filing a plan isn’t the same as fulfilling it when called to do so. There’s ample history of big oil failing to live up to environmental promises made. Self regulation on their part routinely falls short and they often are forced to meet environmental protection regulations. And they wonder why the public resists their desire to drill in protected wilderness areas or along the continental coastline. At least in the U.S. they are forced to pay some degree of restitution. In other parts of the world, big oil is allowed to poison and pollute to a level domestically unacceptable.
There’s no question how vital petroleum is to our standard of living. The variety of products available today derived from oil is staggering. There’s no way to go cold turkey, but continuing business as usual practices are a very dangerous kind of procrastination. Crude oil is a nonrenewable substance with limited and dwindling supply. There’s very little debate about that. The only dispute on the topic is when supply will expire, and even the most liberal estimates suggest it will be during this century. Sustainability opponents love to talk about the potential of shale oil, tar sands, and coal gasification as excellent options for transition fuels. All are as expensive to develop as more renewable energy sources, but potentially prolong the use of environmentally damaging nonrenewable fuels. Aggressive efforts to prolong our absolute dependence on fossil fuels only puts off an inevitable judgment day. Why not accept the eventual reality today and work toward better solutions that don’t trash the environment in the process and are based on endless supply?
Let’s stop pretending that oil and gas industries are anything other than government protected monopolies. Instead, let’s acknowledge that it’s fantasy to imagine they’re operating in anything resembling a free market economy. To be fair, renewable energy receives more tax subsidies than oil and gas – $4 billion in 2007. So momentum may be swinging away from fuels with diminishing supply in favor of promoting less toxic alternatives. But let’s not pretend that free market economics are at work.
Follow Up: Above I mention that renewable energy receives more tax subsidies than oil and gas, but that’s just 2007 EIA data. According to a new study produced by the Environmental Law Institute, over a six year period from 2002 to 2008, fossil fuels received the majority of all energy subsidies during that period – $72.5 billion compared to $29 billion for renewable fuels.
I also forgot to mention the US Strategic Petroleum Reserve. It is the world’s largest crude oil reserve currently able to hold 727 billion barrels in four strategic locations. With an oil price of $65 per barrel it has a market value of $85.5 billion. The government purchased the current stock for $20.1 billion. Of course this reserve was created primarily for national security reasons stemming from the 1973 OPEC oil embargo. It was decided that the US would never again be held hostage for such a vital resource. So it plays an important role and isn’t intended as back stock for the oil industry. But over the past decade oil from the reserve has been loaned to petroleum companies twelve times to offset supply and delivery difficulties. Does the government have your back like it does for the oil industry? If I can’t make a deadline on a project because of issues out of my control, the government doesn’t step in and lend me a hand. They don’t lend me labor to meet my commitments. How about you?
Well, the roads are actually a public good (which means if the government can supply it for one person, it can supply it for all its citizens without denying them anything). But they should pay their fair share.
PS
“…gas and petroleum companies received a total of $2.149 billion in tax expenditures…
…That same year, those companies had a windfall profit of more than $127.9 billion…”
How can you get more taxbreaks than profits?
Hi Carlos,
Thanks so much for the comment. You are correct. The national highway system, state, county, and local surface roads are a public good that we all benefit from. I raise the point because it’s likely that large trucks do more damage and require more maintenance to road ways. Companies who derive financial benefit from their use don’t pay an amount compared to use or impact. I also use road ways for business. To get to a client office or a job site often requires road travel. But an oil company uses those same roads to move their product to the retail location – it’s vital to their business model. The delivery and distribution of their product is disproportionately dependent upon tax supported infrastructure. My use is not vital to my business model, it’s tertiary. I believe that represents an indirect subsidy for any company that needs the roads to operate.
Tax expenditure is the phrase EIA uses to describe a tax break. I used their word, but did use the wrong word – profit. The $127.9 billion was gross revenue. The 35% corporate tax rate would mean a $44.765 billion tax liability. That amount is then reduced by the $2.149 billion tax break – a 5% reduction. In my business, I feel pretty good if I can achieve 5% profit. I would be overjoyed if I was able to reduce my tax liability and double my profit.
Thanks for reading my post and chiming in. BTW, I deleted your duplicated comment – hope that’s OK.
Sorry Carlos,
I have to make a change. Just after I sent my previous reply I decided I needed to recheck my facts. My original mention of $127.9 billion was profit. Net income for ExxonMobil was $40.6 billion, for Chevron was $18.7 billion, for ConocoPhillips was $11.9 billion, for Valero was $5.2 billion, and for Marathon Oil was $4.0 billion. So the tax break is far less than 5%, but still, why does an industry making more net revenue than any other in history need a tax break? By the way, net revenue for the industry was $82.9 billion in 2006. Profit grew by 50% in one year. Does anyone believe that there was greater efficiency or dramatically increased consumer demand that would create such a large year over year jump? I’m not a fan of windfall profit taxes, but I think there’s incredible industry opacity which leads to a system that’s far from a free market and likely hides questionable behavior.
Thanks again for the comment.
Thanks! Very useful!
Thank you. I’m glad you enjoyed it.
[...] my free market 2 by kevin, on November 6th, 2009 In my last post on this issue I wrote about the oil and gas industries. With this post I’ll cover their [...]