US House takes on Big Oil

By , Staff writer of The Christian Science Monitor

The House of Representatives is poised Thursday to play Robin Hood with energy policy.

It aims to cut $14 billion in federal oil and gas tax breaks and other benefits over the next 10 years and give them instead to renewable-energy programs.

Such a change would represent a noticeable trim in government support for the oil and gas industry at a time when it is trying to boost domestic production. It would provide a huge boost to renewable energy industries as they try to replace fossil fuels with cleaner energy that's also domestically produced.

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Nevertheless, the proposed cuts go only so far. Even if the House's new clean-energy legislation becomes law, the oil and gas industry will remain by far the largest recipient of federal energy largesse, receiving by some estimates four times the money of the next largest recipient: the nuclear industry.

That prospect has many renewable-energy advocates and budget hawks pushing for more cuts even as conventional-energy experts warn of the fallout from the current round of proposed rollbacks.

"What the Democrats have cut is a big number," says Steve Ellis, a spokesman for Taxpayers for Common Sense, a Washington watchdog group. But "if you look at the whole universe of federal oil and gas breaks, it's a much larger number than this legislation cuts."

"If Congress imposes these additional costs on the companies, it just makes them more likely to look overseas," responds Mark Kibbe, senior tax-policy analyst for the American Petroleum Institute, a lobbying arm of the oil industry in Washington. "If you make these changes, you decrease US production, US jobs, and increase US reliance on imported oil."

Congress envisions slashing $14 billion – an average of $1.4 billion a year – over the next 10 years. This includes cutting $7.7 billion in tax incentives and toughening royalty-payment rules to bring in $6.3 billion that otherwise would flow to oil and gas companies.

The proposed cuts, when adjusted for inflation, would total per year roughly a third of the $3.6 billion in tax incentives the oil and gas industry got in 2005, the Government Accountability Office reported in September.

Left untouched would be one of the industry's most important federal tax breaks – the oil and gas percentage depletion allowance, created in 1916. Between 2006 and 2010 that break will cost taxpayers nearly $1 billion a year by allowing smaller, independent oil companies to deduct 15 percent of sales revenue to reflect the declining value of their investment, according to the Joint Committee on Taxation (JCT), which reports to Congress on the costs of federal tax legislation.

Another surviving tax break permits big oil companies to immediately deduct 70 percent of their "intangible drilling costs," such as the cost of wages, supplies, and site preparation. Smaller companies are permitted to deduct all of those costs. That break will be worth a little over $1 billion a year through 2010, the JCT found.

Industry officials deem such breaks as critical to US domestic oil production that they say would otherwise dwindle, since it costs far more to produce oil domestically than import it.

That claim is overblown, some analysts say. Even if such subsidies were triple their current level, they would have practically no effect on reducing oil prices and boost domestic production by only 0.2 percent, writes Gilbert Metcalf, a Tufts University economist in a recent study.

The industry receives federal largesse beyond tax breaks and relief from royalty payments. Add in research and development subsidies and accounting breaks and the total looks more like $6 billion a year for the next five years, according to a Friends of the Earth tally of JCT data.

Other economists say the industry's federal subsidies are far higher. They average about $39 billion annually if items such as defense of oil lanes in the Persian Gulf, guarding domestic infrastructure like the Alaska Pipeline, and paying to maintain the nation's Strategic Petroleum Reserve are also included, says Doug Koplow, founder of Earth Track, a Boston consulting firm that analyzes natural-resource subsidies.

"There probably is a public interest in government involvement in maintaining security of supply and reducing price, but those costs should be borne by oil markets and not by taxpayers," he argues.

The strategic reserve, for instance, stores about a two-month supply of oil for the nation in salt domes in Louisiana and Texas. Maintaining it costs the nation an average $2 billion or so a year, Mr. Koplow says. Guarding Middle East oil lanes averages about $19 billion a year, he found, which doesn't include the recent surge in spending because of the Iraq war.

If Congress were to cut $1.4 billion a year in subsidies, as House Democrats urge, the industry would still get more than $37 billion a year from government coffers, according to this analysis, four times the amount spent on the nuclear industry and six times the amount spent on ethanol.

Others dispute such analyses.

"It just depends on how you want to define a subsidy," says Jerry Taylor, a senior fellow at the Cato Institute, a conservative Washington think tank. "A lot of these oil companies pay more in taxes to the government than they pay to stockholders. The argument they're being given preferential tax treatment is a myth."

Mr. Kibbe, the oil industry official, says Koplow's analysis raises the question of "where you draw a line. Does that mean every mile of road we put in is a benefit to the car companies?"

Of course, renewable-energy industries also get government help, with ethanol receiving half the subsidies, Koplow estimates. Roughly half of that largesse comes in the form of a tax credit worth 51 cents per gallon to ethanol producers. Overall, ethanol subsidies in 2006 were about $6 billion a year using Koplow's broader definition, which includes federal tariffs, renewable fuel standards, and other factors.

Here, too, energy subsidies distort markets and are a negative for taxpayers and the economy, he argues.

"Right now Congress is giving billions to ethanol, biodiesel, and the nuclear industry," Koplow says. "There may end up being a positive impact on climate change from these. But it may not be the quickest, or the cheapest, way to deal with the problem."

Leading Democrats in the House want to use the $14 billion from the oil and gas industry to create a strategic energy- efficiency and renewables reserve to accelerate the use of renewable energy. They also want to promote the use of energy-efficient products and boost research and development for renewable fuels.

"What the Democrats are doing is a great down payment, shifting these oil and gas giveaways over to renewable energy and conservation," says Erich Pica, domestic program director for Friends of the Earth. "But there's still more to be done."

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