Monday, October 24, 2011

Greedy “Big Oil”

One way, or another,
I’m gonna find ya,
I’m gonna gitcha gitcha gitcha gitcha
—Blondie, One Way or Another

Here we are, some 60 days after the State Department issued its final report favoring approval of the Keystone XL Pipeline, and as predicted still no action from the White House.

You should pass it right away.

Meanwhile, the patently unconstitutional “super-committee” ostensibly charged with finding $1.5 billion in budget cuts continues to consider targeting “Big Oil” to achieve at least part of that goal.  So, at a time of chronic high unemployment/underemployment, a stagnant economy, and increasing dependence on imported petroleum, we’re going to punish the oil industry.  Bear in mind that this is an industry that employs literally hundreds of thousands of people, and has been begging the government to allow it to tap more of our vast reserves, which would not only increase employment but also increase domestic supply (thus reducing dependence on foreign imports and reducing costs to the consumer).  Never mind that the energy industry—and sorry, Greenies, but in 2011 that still means oil and gas—is the unquestioned driver of the economy both domestically and globally.

As the Guinness boys would say, “Brilliant!”

Big Oil makes for an easy target.  It’s a faceless, dehumanized collection of corporations—inherently evil in and of themselves, just ask any hippie-wannabe down on Wall Street.  With $3.50/gallon gasoline, the charges of “greed” gain ready traction with the media and public.  Witness USA Today last Friday running a story on how consumers are “unable to escape” the high cost of gasoline, and lamenting its impact on the middle class.  And, of course, anything associated with fossil fuels whips the Leftist base into a frenzy.

Driving this discussion is the idea that oil companies don’t pay sufficient taxes because of “subsidies” and “loopholes,” while at the same time they are making record profits by unfairly gouging consumers.  But let’s consider a few specifics.

First, those advocating targeting Big Oil like to make it sound as though oil companies don’t pay any taxes at all.  The truth is that oil companies pay more taxes than almost anyone.  Between 2005 and 2009, the U.S. producers paid over $98 billion in federal income taxes alone.  That’s nearly $86 million a day, more than virtually any other industry.  The effective global tax rate on the oil and gas industry is 40%, which is higher than both the federal rate of 35%, and the average rate for manufacturers of 26.5%.  And these companies are never going to receive Social Security benefits or food stamps.  All the while, these companies are also voluntarily giving back additional millions in charitable cash donations—as I reported here, the three largest domestic oil companies between them gave away over $412,000,000 in charitable donations in 2009 alone.

Second, the “subsidies” proponents of the get-the-oil-companies approach like to attack actually consist of tax deductions that are of a nature common to virtually all business taxes.  Corporations are taxed on profits, not revenue, which means they are taxed on income after deducting the costs of doing business.  The specific items at issue include things like the deduction of intangible drilling costs such as drillsite preparation and engineering (similar to the R&D costs deducted by pharmaceutical firms), and tax credits for foreign taxes that are designed to keep corporations with international operations from being double taxed (the same credit available to individuals). 

Further, plenty of other industries do receive actual federal subsidies.  A prime example is the ethanol industry—a sacred cow of the Green Energy Left and, regrettably, both Bush administrations—which for decades has actually been given a $0.40/gallon tax credit in order to make the product economically viable.  In the open market without that tax credit, ethanol is not economically competitive with other fuel additives  (of course, the irony is that “green” ethanol requires more energy to produce than it provides, is less efficient than other clean air additives, and its production consumes gigantic amounts of water and causes untold environmental impacts due to fertilizer runoff, etc., but that’s another discussion for another time).

Lost in the Leftist’s sleight-of-hand is the 100% certainty that if the tax treatment of oil companies is changed to eliminate deductions and credits—tax treatments that, as noted above, are identical or similar to those available to other businesses and individuals—that expense will be passed through to the final cost of a gallon of gasoline.  Proponents are telling a gullible public that they’re going to continue funding out-of-control government programs by increasing taxes on these evil oil companies, when in reality it’s the public itself that will ultimately bear that cost.

Also lost in the at least implicit suggestion that oil companies are profiting by unfairly gouging consumers at the pump is the fact that Big Oil doesn’t control the price of gasoline, or the price of crude (which is actually where the bulk of their profits are generated).  Nearly 70% of the price of a gallon of gasoline is the cost of crude oil, which is determined in the global commodities market, where emerging economies in China and India are skyrocketing demand.  Now, while those who want to demonize the oil companies like to talk about their size, the truth is the five companies that are commonly included within “Big Oil”—ExxonMobil, BP, Chevron, Shell, and ConocoPhillips—are relatively small players in the global market, which is actually dominated by the national oil companies in the Middle East and Venezuela.  To put it in perspective, according to the world’s largest oil company, Saudi Arabian Oil Company, had 2007 reserves of over 303 BILLION barrels of oil equivalent.  Of the five companies making up “Big Oil,” only ExxonMobil at #17—with 2007 reserves of just over 13 billion barrels, just 10% or less of the reserves of each of the top five, and less than 5% of the reserves of the top two—even cracks the top 20 globally.  COMBINED the five “Big Oil” companies have about 45 billion barrels, barely good enough for 10th globally.  The simple fact is “Big Oil” has essentially no control over the cost of crude oil or gasoline.

The really sick part of this whole debate is the fact that the one profiting on the price of gasoline is really the very government that is now pointing the finger of blame at the oil companies.  On a $3.50 gallon of gas, the government gets, on average (depending on where you live), about $0.46, or approximately 13%.  The oil company gets between $0.02 and around $0.15, and that’s before corporate income tax on its profit.  So once again, we have government regulation creating or contributing to a problem—in this case, drilling restrictions limiting domestic supply, thus increasing the cost of crude—and government bloating itself on tax revenues, then blaming the consumer impact on the very industry being regulated and taxed.

Flogging the golden goose may make good short-term politics, but how long can we continue like this?


Childhood friend of mine posted the newspaper clipping below on Facebook.  I have no reason to believe it's a mockup.  Discuss.

1 comment:

  1. You note that increased taxes on oil companies will be passed on to consumers in the form of higher prices at the pump. This of course is part of the plan. The really sick part of this debate is that those who "lament that consumers can't escape" high prices are the very same people who have a stated goal of increasing that price.