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Despite Rhetoric, Cutting Oil Subsidies Would Have Little Effect on Gas Prices

Congress is once again debating the pros and cons of cutting tax subsidies for oil and gas companies.

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KAREN Bleier/AFP/Getty Images

Democrats renewed their push to cut oil subsidies this week, saying high gasoline prices and big revenues for oil and gas companies make this as good a time as any to eliminate billions in annual tax incentives to the industry. Republicans countered that higher taxes on oil companies would only mean higher prices for consumers.

Most experts agree, however, that the tax incentives in question don’t have much effect on gasoline prices, one way or the other.

“The impact would be extremely small,” said Stephen Brown, a professor of economics at the University of Nevada, Las Vegas. Brown co-wrote a study in 2009 arguing that if the subsidies were cut, the average person would spend, at most, just over $2 more each year on petroleum products.

This isn’t the first time Congress has debated the pros and cons of cutting the tax subsidies. President Obama has proposed eliminating some $4 billion in subsidies in each of his annual budgets since entering office in 2009 (the liberal Center for American Progress has a good breakdown of the President’s proposal). Senate Democrats this week introduced an alternative plan that would cut a little more than half as much, by targeting only the largest oil companies.

From the beginning, the Treasury Department has said the President’s proposal would raise prices at the pump by less than a cent per gallon at most. Brown’s study, produced for the non-partisan think tank Resources for the Future, came up with similar results. Even the American Petroleum Institute, which opposes cutting the subsidies, said in a press release on Monday that eliminating them wouldn’t affect gas prices.

The argument offered by Senate Majority Leader Mitch McConnell and other Republicans who oppose cutting the incentives is that it would drive up costs for oil and gas companies and ultimately reduce production and supply, leading to higher prices. (Domestic production, incidentally, has increased 10 percent over the last two years, and more oil wells were drilled in the U.S. last year than in any since 1985.)

As the Treasury Department’s analysis showed, the numbers don’t support McConnell’s assertion. Treasury’s Alan B. Krueger told a congressional subcommittee in 2009 that cutting tax incentives to the oil industry would raise costs by less than 2 percent and lead to a reduction in output of only one half of one percent. The United States produces about 10 percent of the world’s oil supply and holds less than 2 percent of global reserves. Since oil is a globally-traded commodity, a small drop in U.S. production would have an even smaller effect on the global price of oil.

In its 2012 budget proposal, the Obama Administration said cutting a number of tax breaks for the oil and gas industry would save more than $43 billion over the next decade. Republicans have opposed attempts to pass those subsidy cuts, most recently by rejecting attempts to attach them to a series of Republican-sponsored bills that aim to expand domestic drilling. On Tuesday, Senate Democrats introduced a bill that would cut subsidies only for the five biggest oil and gas companies, a more targeted plan that sponsors say would save $21 billion over the next 10 years.

There are other reasons why people support or oppose cutting these subsidies, including their effect on the budget deficit, job creation, reliance on foreign oil and interference in the free market. The President’s proposal could also shift more production from smaller oil companies, which tend to operate less productive wells, to the big multinationals, said Brown, the University of Nevada economist. The National Journal hosted a blog forum last week that gets into many of those arguments. Today, the Senate Finance Committee will host CEOs from the big five oil companies to discuss the topic.

Gas prices also have been the rallying cause for another set of proposals in Congress that would speed permitting and expand offshore drilling. House Republicans passed two of those bills in the last couple of weeks. A number of studies and reports have argued that the biggest of those proposals, expanded offshore drilling, probably wouldn’t affect gasoline prices much either.

Go figure, the republicans are right. Stop the presses!

Why will people buy expensive hybrids if the cost of gas goes down.  Maybe we should be blaming Government Motors instead of the oil companies.  I’m sure the oil companies would love to sell more gas at a cheaper price than less gas for a few cents more.

I heard someone on the radio yesterday who said that the oil is a byproduct of petroleum distillation that is not the biggest money-maker for the industry. He claimed the biggest profits come from supplying plastics and other chemical manufacturers. Not that I believe he is correct, but someone should look into those claims that there are other factors driving up the cost of oil. Breaking down the components and how the oil companies profit from them would be a good start.

Thanks for all you do.

Hey troops at Pro publica:  Here’s an assignment.  Talk to some relatively independent oil economics experts and do a story on exactly what does drive the price of gas at the pump.
Do a Cliff Notes version.

The reason to cut energy company subsidies isn’t to lower gas prices. It’s because they don’t need taxpayer subsidies to make profits or stay in business. Any more than Big Pharma, Big Agra or Big Finance which also receive huge direct and indirect subsidies while “offshoring” not only jobs but profits. It’s hilarious to hear politicians who decry “socialism” when government funds programs and policies which benefit working middle class taxpayers but have no problem shoveling money to their owners…their campaign contributors and lobbyists.

Companies that post $11B quarterly PROFITS should not be receiving government subsidies PERIOD!

The subsidies have nothing to do with the price of gasoline, they’re payola for campaign contributions.  And they do nothing but add to the bottom lines of the companies receiving them.

I don’t care what industry it is, if a company is making the record profits that the oil companies are, they should not be receiving government subsidies.  And especially not from a government that is having to BORROW $189M EVERY HOUR to operate.

It is too bad we can’t have a serious discussion about gas prices.  We need to admit that we are addicts.  We need to admit that we are funding both sides of the war on terrorism.  We need to admit that our addiction is destroying our country.

Thank you RB Shea.

The author pulled a bait & switch.  No one says cutting the subsidies will lower the cost of gas.  As RB points out, taking the subsidies away from oil will (in theory) decrease the deficit.  Decreasing the deficit has become the big goal, especially for the politicians since Reagan who have done everything they could think of to explode the deficit.

FIRST:
These items are expenses for tax purposes.  The oil exploration companies do not receive any money from the government, as would be the case of a subsidy.  Furthermore, the tax deduction cannot be taken until expenditures are made by the oil explorers for the discovery and development of an oil and/or natural gas field.  Such expenditures provide considerable investments in the local economies where the exploration is being conducted. 

SECOND: 
These tax exemptions could be repealed, revoked or limited.  The additional expense of such revocations will simply be passed on to the US consumer.  Are people “retarded” enough to assume that revocation of these tax expenses will not be passed on to the consumers, i.e, the taxpayers. 

THIRD:  BRAZILIAN OIL
Just a few weeks ago, Obama pledged 100’s of millions of dollars to help PETROBRAS, the Brazilian(one of the most financially stable governments in the world)governmental corporation responsible for oil development, develop Brazil’s drilling and exploration.  Now’s, ain’t that a kick in the Johnston?  In true fashion, our government finds the ways, the means, and the resources to “export” billions of dollars to a foreign country to help develop an industry competing with an established US industry.  The Obama administration predicts deficits of 2 to 3 trillion dollars, however, they can find the money and the time to make free payments to a foreign governments corporation.  While at the same time, our Congressional officials want to do anything and everything to cut the throat of the oil and gas industry in this country.

My/My, the more things change, the more they stay the same.

Regards
Greg Foreman

Cutting subsidies can’t do it alone, but we need to cut them if not stop them completely and then go after the commodities.

rationalrevolution

May 12, 2011, 4:42 p.m.

The real issue is, even if it did result in higher fuel prices it shouldn’t matter. The same argument can be made about anything. If we give ice cream makers a tax exemption then it could lower the cost of ice cream. So what?

By this logic, we should eliminate all taxes, but if you do that you have to eliminate all spending, and good luck with that, welcome to Somalia, and guess what the economy would be a total disaster.

What the oil guys are saying is that they should be able to free load, despite the fact that they already are among the richest individuals and corporations in the world.

The notion that removing subsidies would result in the tax cost being passed on to consumers is a reason to continue subsidizing is absurd.

In that case you are subsidizing consumers, but everyone isn’t an equal consumer, so you then are subsidizing high consumers of petroleum products with the taxes levied on low consumers of petroleum products, essentially people who chose to bike or ride the train to work and drive hybrids are forced through their income tax to buy fuel for SUV drivers, and really more directly, to buy fuel for heavy fuel consuming companies, like FedEx or airlines.

If I don’t fly on airplanes, why am I forced to subsidize airline operating expenses through tax subsidies to oil companies?

And never-mind the fact that we are running huge effing deficits! The whole discussion might make a little sense if we were debt free, but when we are in a massive debt hole and some billionaire claims that the company he heads shouldn’t have to pay taxes, FU!

rationalrevolution

May 12, 2011, 4:55 p.m.

Also, just to show how weak the entire “don’t cut tax subsidies cause it will hurt consumers” argument is, if that were really a concern, all we would have to do is take the money gained from ending the subsidy and use it to directly subsidize gas at the pump. This could be done as simply as cutting the gas tax that is applied at the pump by the amount of the subsidy given to the corporations. The difference would be that 100% of that subsidy would go to consumers.

Now I don’t condone that either, because we actually have cheap fuel in America anyway and need to actually be raising the gas tax not cutting it, but ti just shows how utterly idiotic the claim is that we have to give the tax subsidies to the corporations in order to support lower fuel prices.

Clearly that’s total nonsense. If you believe in manipulating the market to artificially lower the price of fuel through government intervention, then in fact removing the subsidy from the corporation and applying it directly to the commodity makes more sense.

The only reason to support the subsidy to the corporation is if you actually KNOW that the corporation aren’t actually passing it on to consumers, and they are using it to increase profits and executive pay, and you support tax payer inflated profits and executive pay.

That is THE ONLY reason to support keeping this subsidy, because you know that it make s rich people richer and you want to keep it that way, there is possible other reason to support it.

The fundamentals of supply and demand normally drive prices.  But there are other forces at work keeping prices higher than they should be. 
It’s important that you know what’s happening and what we can do about it together.

What is Going on?

In the lst three months of 2010, crude oil prices increased by more than 18%.  You’ve seen that increase reflected in prices for gasoline, hearting oil, propane, diesel fuel and other energy costs.  But why are crude prices rising when:

1.  Supply is strong - Crude oil inventories are above their 5-years average. 
  Strong supply typically means lower oil prices.

2.  Demand is weak - Demand is only up 1% from last year’s weak economic numbers and the economy is still struggling.
  Weak demand typically means lower oil prices.

3.  the U.S. dollar, while still weak, has strengthened against other currencies during the same time period. 
  A stronger dollar typically means lower oil prices.


It Doesn’t Add Up

All the fundamentals say that prices should be lower.  But in this equation, “one plus one” does not equal two.

The reason?  For starters, the excessive speculation by huge banks and hedge funds, who can make giant profits by driving up the price of oil and increasing price swings. They do this by exploiting loopholes in the way that crude oil trades are regulated.

What We Need to Do:

Last year, the industry helped pass new legislation that would make it harder for excessive speculation to occur.  But the regulations enforcing the new law are still being fought over. 

Wall Street is doing everything it can to water them down.  You can keep the pressure on by keeping the energy loophole closed and contacting the Commodity Futures Trading Commission (CFTC) and urging them to do the same.  Visit cftc.gov or you can call them at 202-418-5000.

Writing your senators and congressmen and urging them to keep the energy speculation loophole closed.  Visit usa.gov/contact.shtml to find your representative.

It is estimated that as much as 20 times more crude oil is traded everyday than is actually consumed worldwide!

Over the long run, energy prices will also be helped by increasing domestic production, improving conservation and strengthening the U.S.dollar.

of course the reductions won’t change the prices.  corporations DON’T lose money.  they will merely raise the prices of fuel to compensate even if the congress actually CUT money being sucked out of the american pocket.  congress is paid by these people.

Let me try again.  How fast can we get gas at the pump to $10 a gallon.  Will it be fast enough that we will be able to keep some tax revenue for the betterment of society, or will we deny our addiction until all of the $10 a gallon price we will be paying by the end of this decade anyway goes to finance Middle East Terrorists?  Then we will not have the not petrol technologies and life styles that would employ millions in the mean time.

OK. How about reversing all the mergers that where allowed in last 20 or so years? Across the board not only the oil companies, the insurance companies as well. Competition is supposed to be good thing, right?

Its not about gas prices.
 
Its about budget cutting & stopping handouts for people who don’t need them, like the super rich oil companies.
 
Hello, the deficit? Debt ceiling?
 
If you want to bring gas prices back under control, overturn the GOP legislation that deregulated the oil derivatives market that the oil companies use to set their own price.

Another great article. I want the Oil Companies to pay taxes just like I do. Since I am not given any tax breaks for my consuming of oil, in fact I pay hefty taxes at the gas pump, then the Oil Companies should pay the same percentage of tax that I pay.

I appreciate the un-biased reporting. I am knew to this site and will be donating as well as placing these articles in my tweets and facebook and other social media. I am tired of corporate and government corruption.

reverse mergers?  same thing applies.  further reversing the merger would take an act of god, and the current president isn’t about to unhorse his owners.  oh, i voted for obama.  just didn’t think he was a turncoat

No one in their right mind would consider paying more at the pump, and certainly not ten bucks a gallon.  second, we buy little if ANY oil from the middle east.  third, the US HAS THE OLYMPIC TERRORIST GOLD MEDAL!  all you do by increasing taxes on gas is feed the pig more.  jesus f. christ.  you people think this government gives one good damn about any of you.  THEY DON’T.  the are owned by the corporations.  someone mentioned plastics being made from petroleum.  yes it is, many other products.  the source of fuel is hydrogen, always was, always will be.  Einstein once said something to the effect, “the two most common things in the universe are hydrogen, and stupidity.”  the LATTER is the problem.

It is about gas prices.  It is about addiction.  Period.  Full stop!  It does not matter that little of our oil comes from the Middle East.  Demand for oil is going to go up no matter what as nations like China and India try to imitate our waste and addiction.We waste oil and our entire society is based on wasting oil.  We can no longer afford to live like this. 
Thing is we are to addicted to admit this.  It won’t be long before we are buying the green technology from other countries because we were to blind to do something now.

addiction? well we all let it happen.  so one more of the innumerable problems this “country” faces traces it’s roots to the fact that most americans are uninformed tree stumps.  people aren’t “addicted” to petroleum.  that’s all there is all things considered to run internal combustion engines.  now wiser people know that hydrogen is the ULTIMATE inexhaustible clean fuel.  but since americans absolutely will not stand up to the Corporations that own the government, oil will continue to be the fuel of choice.  there currently is no shortage.  The Majors shut down 50 refineries during the 1990’s.  that in simple terms means the number of “spigots” what cut massively.  The Majors whine about middle eastern unrest, which the US is soley responsible for along with Israel, as being the reason for this wild vacillation in prices.  well that is clearly and abjectly a lie.  The Corporate investment banks own most of the oil after paying a huge sum for it.  these banks are run by thieves.  this has been well established unequivocally.  many useful fuel savings technologies have been aquired by hook or crook to keep petroleum as the main source of motor fuel and plastics because they are invested up to their bald heads ONLY in petroleum.  american’s are such ignorant folk.

everyone is concerned with the profit of the oil corporations; however, has anyone ever taken in to account that the profit that is made of the selling of gas by the oil corporations themselves pales in comparison to the profit that the government makes on the taxes that are imposed on petroleum products!

There should be no conversation on reducing gas prices with ending subsidies.  Gas prices should not be in the equation; it is reducing the deficit.

No one was claiming eliminating windfall corporate welfare tax breaks for Big Oil would lower gasoline prices.  These subsidies became a political football when Republicans made the annual debt service load their latest Chicken Little crusade to distract gullible voters from their own culpubility in cratering the economy.  They want one last Weekend with Miltie (Friedman) to fleece what remains of the middle class.  Gasoline prices are rising not because of demand or because of Libya (which supplies only 2% of the world’s oil), but because they can be raised by a small small number of mega-corporations.  That is a totally separate issue, allegedly under federal investigation.

the last I heard the next election is 2012 and Mitch McConnell is still the Senate Minority Leader

AM Hecht

you can try again forever.  but until your understanding of this crisis evolves, you’ll keep missing the point. ten dollars a gallon would seal this country’s economic fate.  inflation such as the world has never seen. 

Middle eastern terrorism?  how about AMERICAN AND ISRAELI TERRORISM.  before oil, no one was interested in millions of square miles of desert.  these to farcical wars are about oil and pipelines.  the US has no intention of leaving Iraq or Afghanistan.  Further, gas prices without US GOVERNMENT TAXES would be substantially reduced.  The government depends on people like you who keep squalling “TERRORISM.”  they love it as to the major oil companies.  this nation’s economy would tank with gasoline and other fuels at these expensive prices.  you can sell in volume or in paucity.  either way with crooks at the helm, WE lose.  american tree stumps.