Drilling our woes away for the third time

Earlier this month senate Democrats tried to push forward a bill that would end the billions of dollars in oil subsidies given to oil corporations. Their efforts of course did not get very far, the Republicans didn’t budge:

Senate Democrats pressed for a vote Thursday to end some $20 billion in federal subsidies to the largest oil and gas companies. The vote failed, as Democrats knew it would. The effort was a political gesture aimed at highlighting Republican support for the biggest oil companies at a time when some people are struggling to afford filling their gas tanks.

The bill gave Mr. Obama an opportunity to champion the measure from the White House Rose Garden earlier Thursday.

“Today, members of Congress have a simple choice to make: They can stand with the big oil companies, or they can stand with the American people,” he said. The industry, he said, doesn’t need taxpayer subsidies. “American oil is booming. The oil industry is doing just fine. With record profits and rising production, I’m not worried about the big oil companies,” he said.

Republicans criticized Democrats for trying to impose what they called a tax increase on oil companies at a time when pump prices are rapidly escalating.

http://online.wsj.com/article/SB10001424052702303404704577311872842454412.html

So what are the objections by Republicans and other conservatives over ending these subsidies? Well most conservatives have come out arguing that the elimination of some $20 billion worth of oil subsidies (mostly consisting of direct tax cuts) would be detrimental to the public, they argue that oil prices would increase significantly as the result. Simply put, if we increase taxs on oil companies, they will pass these taxes onto the consumer leading to higher prices. Alternatively if we continue to cut taxes, they’ll lower prices, its a rather simplistic theory (Reaganomics anybody?). Conservatives also argue that the Federal government already makes a motherload in taxes for every gallon of crude paid by the American consumer. They insist that the only viable solution to higher fuel costs would be in cutting those Federal taxes completely. Naturally if we cut out federal taxes this will ease the cost and burden on American consumers, I’ll examine this particular argument further down this article. A number of conservative posters I’ve come across have already made the charge that the prices of oil are in fact influenced by Federal monetary policy.

Let’s examine this case, just how essential are oil subsidies to the price of oil? What do we mean when we talk about oil subsidies? And is cutting taxes the only viable option to bringing down the cost of gas?

Oil subsidies

What are subsidies? Subsidies are tax cuts or tax exemptions, something that involves an action by the government to lower the cost of production for businesses or corporations by means of cutting taxation. Conservatives don’t believe that oil subsidies should really be referred to as ‘subsidies’ at all as they argue that tax cuts are a fundamental right to all businesses. They argue that the action of cutting taxes is merely an action by which the government does not take any further ‘hard earned money’ from employers, businesses. Regardless, subsidies do end up costing the government revenue or further revenue depending on your view. The point of the subsidies is that those savings to the business in the form of tax cuts will be given back to society. The oil and gas industry is by no means the only industry to receive subsidies. Farmers receive subsidies of the very same nature, farm subsidies average $5 billion annually (11). Subsidies are also given to alternative energy businesses, the coal industry and even the American auto industry, and they often number in their billions, although they are smaller in comparison to those exemptions oil and gas industry.

So the big question is, just how important and influencial are those oil subsidies to the price of gasoline? Have they made a difference over the years to ease the burden of cost on the consumer? Can we really fully attribute the price of gasoline to federal monetary policy? After an extensive search, I have come with an approximate number annually that the oil industry received in subsidies. These estimates are taken from articles between 2002 and 2012; they are not solidly accurate, however they do give us a good estimate of subsidies to the oil and gas industry at the time. I have also researched on other relevant data to this article such as the average cost crude by the barrel over the last 10 years, the rate of exports by domestic American crude producers, and the rate of crude production overall:

Oil subsidies by year        

2012: $4 billion predicted (2)

2011: $4 billion (2)

2010: $9 billion  (1)

2009: Data unattainable

2008: $6 billion (4)

2007: $6 billion (4)

2006: $6 billion (4)

2005: $7.1 billion (10)

2004: $7.1 billion (10)

2003: $7.1 billion (10)

2002: $7.1 billion (10)

Further information, Time and Politico reports that the United States collectively loses $10 billion annually in the form of tax cuts and tax revenues to the petroleum industry. (13)

Oil production 

2011: 2,065,366,000 (15)

2010: 1,998,137,000 (14)

2009: 1,956,596,000 (14)

2008: 1,811,817,000 (14)

2007: 1,848,450,000 (14)

2006: 1,862,259,000 (14)

2005: 1,890,106,000 (14)

2004: 1,983,302,000 (14)

Crude oil cost per barrel

2012: Data yet to be gathered

2011: $87.04

2010: $71.21

2009: $53.48

2008: $91.48

2007: $64.20

2006: $58.30

2005: $50.04

2004: $37.66

2003: $27.69

2002: $22.81

Sourced: http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp

Export of domestic crude (barrels)

2012: Data yet to be gathered

2011: 562,000

2010: 501,000

2009: 524,000

2008: 344,000

2007: 329,000

2006: 294,000

2005: 380,000

2004: 322,000

2003: 150,000

2002: 108,000

Sourced: http://205.254.135.7/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCREXUS2&f=M

What does this data say?

Well the data above does give us a clue into just what effect those subsidies have had on the cost of crude and America’s energy independence. To me the data indicates that the amount of tax incentives, exemptions or subsidies the oil industry has received over the years has had a minimal effect on the cost of gasoline or the number of barrels sold to the domestic market. For example, at average oil corporations received a third more in subsidies or tax exemptions under the Bush administration than they did under the Obama administration in 2010 and 2011 respectively. Yet it was under the Bush administration that domestic crude oil producers tripled the number of domestic barrels they exported abroad, barrels that could have instead been put towards American cars and in theory help with curbing foreign dependence, at a time where the cost of crude per barrel was high. Crude oil by the barrel cost the American public $91.48 by 2008, one of the highest on record. Despite all this, oil corporations received an approximate $7.1 billion in subsidies (or tax exemptions) that year.  As of 2011, the oil industry had made a record profit, more so than during the years where they received more in subsidies (16), yet they are now exporting more barrels of domestic crude than ever before, and they are charging more per barrel than all the years but 2008.  So it is evident that subsidies offer little to nothing towards softening the burden of cost of crude to American public. The rise in exports of America crude and the rise in cost despite increased subsidies are evident of this.

The effect of ending oil subsidies

There is no doubt that the oil industry receives plenty in tax breaks, and they certainly are not receiving it because they struggling financially, as demonstrated by the industry’s record profits in 2011 alone (16). That being said, ending oil subsidies will not influence much in the way of America’s public debt or economic troubles. What is $4 billion to $4 trillion in deficits? It’s a start, but it means very little, and it is evident that many politicians are calling for the end of these subsidies for their own political ambitions (Obama’s re-election). I also agree that ending subsidies will not solve the cost of crude at all, but at the same time keeping them in place will not make a difference to the price of crude either. Unless restrictions or conditions are made in regards to subsidies toward oil corporations, they will only serve to maximize profit, they will not do anything, as they have, to ease the financial pain the middle and lower classes experience at the pump.

Fuel taxes

There is a common argument coming out from those especially on the rightwing claiming that fuel taxes are mostly to blame for the cost of gasoline. Conservatives are now arguing that if the Federal government was serious about bringing down the price of gasoline, they would cut down the Federal fuel tax out completely. I’ve come across claims that at average 50 cents in taxes are added to the cost of every gallon of gasoline purchased. Is there any truth to these sorts of claims floating around?

There is a Federal fuel tax in place, however it is not anywhere close to 50 cents to the gallon, the Federal fuel tax amounts to 18.4 cents (17). There also exists State fuel taxes and in the vast majority of States, the majority of that tax has been set by the States themselves. In the State of Texas for example, 20 cents in State fuel taxes are charged to the gallon (18). Conneticut has the highest State fuel tax in the country, 51.1 cents per gallon. Add the federal fuel tax on top of that and you will find yourself paying 69.5 cents to the gallon in fuel taxes in Connecticut. So if you are complaining about fuel taxes, you’d have to look at both the State and Federal governments.

So just how much of an effect would eliminating the federal gasoline tax have on the price of gasoline overall? Well let’s take an example of the shifting price of gasoline in Gulf states (Louisiana, Texas, Alabama) for example. In January 2012, the average price of gasoline amounted to $3.29 per gallon (19). By April 2012 the price per gallon amounted to $3.80 for those States alone. There was a different of 51 cents in a change of cost. Had we of removed federal fuel taxes completely, all18.4 cents, this would not have made much of a difference in the way of the rising costs of gasoline. While I don’t necessarily object to the idea of eliminating federal fuel taxes, or at least giving American citizens fuel tax holidays, this will not by a long shot change rising cost of crude.

So what have we concluded?

It is apparent that the cost of crude is primarily influenced by that of global demand, so anything State and Federal governments do will only help ease costs, it will not solve the larger issue concerning the energy needs of the country. Oil corporations have the core goal of maximizing profit of their shareholders, this is a fact. They will more than often sell to the highest bidder, and offering them subsidies or tax exemptions (with no or vague condition)  will only help them maximize profit further. Over the last 10 years the exporting of domestic crude has more than quadrupled while billions of dollar of subsidies continue to be given to these very same corporations, with production at a high again. It is false to claim the Federal policy the key cause of the cost of crude, it clearly isn’t. Eliminating oil subsidies will not solve the cost of crude, but setting new conditions will help in maximizing domestic crude to domestic consumers, not those of foreign. As to America’s energy dependence long term? It is evident that cutting Federal taxes will have a very minimal effect to solving this problem, neither will allowing more drilling permit. The only other viable option to to invest more in alternatives, because the drill baby drill crowd offer little substance to their solutions.

Reference:

(1) http://www.americanprogress.org/issues/2010/05/oil_company_subsidies.html

(2) http://articles.businessinsider.com/2012-03-13/markets/31158815_1_oil-prices-oil-companies-peak-oil-theory

(3) http://www.triplepundit.com/2010/02/obama-call-for-end-of-oil-subsidies-in-2011-budget/

(4) http://www.citizen.org/cmep/article_redirect.cfm?ID=13980

(5) http://www.triplepundit.com/2008/05/u-s-oil-subsidies-need-to-go/

(6) http://www.nytimes.com/2007/01/18/washington/18cnd-royalty.html

(7) http://www.multinationalmonitor.org/mm2007/092007/kretzmann.html

(8) http://www.citizen.org/cmep/article_redirect.cfm?ID=13980

(9) http://environment.about.com/od/environmentallawpolicy/a/end_oil_subsidy.htm

(10) http://domesticfuel.com/2009/09/18/report-finds-oil-subsidies-higher-than-ethanol/

(11) http://www.reuters.com/article/2011/10/13/us-usa-agriculture-idUSTRE79C70L20111013

(12) http://www.fas.org/sgp/crs/misc/RL33578.pdf

(13) http://ecocentric.blogs.time.com/2012/01/03/petrol-politics-why-nigerians-are-enraged-over-cuts-in-oil-subsidies/

(14) http://www.politifact.com/truth-o-meter/statements/2012/jan/24/barack-obama/barack-obama-says-us-oil-production-eight-year-hig/

(15) http://www.eia.gov/dnav/pet/PET_CRD_CRPDN_ADC_MBBL_A.htm

(16) http://www.nj.com/hudson/voices/index.ssf/2012/03/daily_poll_should_subsidies_to.html

(17)   http://www.api.org/Oil-and-Natural-Gas-Overview/Industry-Economics/~/media/Files/Statistics/gasoline-diesel-summary.ashx

(18) http://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States#cite_note-api-2

(19) http://www.eia.gov/petroleum/gasdiesel/

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One Response to Drilling our woes away for the third time

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