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Gov't Subsidizes Deep-Water Drilling With Big Tax Breaks

Federal incentives for expanding deep-water drilling have cost taxpayers billions of dollars. But the tax breaks and other subsidies, which began when oil prices were low, have outlived their purpose.

By now there's little debate that the technology used to obtain oil in deeper waters was developed and rapidly put into use before safety technology could keep up. As we've noted, that's a development that regulators allowed, despite their concerns.

But the expansion of deep-water drilling wasn't solely a result of industry's rushing into deeper waters and toward greater profit. According to the Los Angeles Times, it was also encouraged by the federal government, which gave oil companies tens of billions in tax breaks, subsidies and royalty relief. Many of these incentives have outlasted their initial purpose, according to the Times:

The royalty waiver program was established by Congress in 1995, when oil was selling for about $18 a barrel and drilling in deep water was seen as unprofitable without a subsidy. Today, oil sells for about $70 a barrel, but the subsidy continues.

... Congress had originally intended to provide royalty relief only when oil prices were especially low. But an Interior Department error in the drafting of contracts in the 1990s led the industry to argue against pegging the relief to oil prices.

The oil industry argues that government subsidies and tax breaks for deep-water drilling have opened up domestic oil production and created jobs. This continued benefit to the industry, however, has long been flagged by watchdogs as a direct loss to taxpayers.

A March 2007 report [PDF] by the Government Accountability Office noted that "deep water regions are particularly costly to explore and develop," but "as production from these leases has grown, and as oil and gas prices have risen dramatically in recent years, serious questions have been raised about the extent to which royalty relief has been in the interest of taxpayers."

Senators have introduced a bill to close some of the tax loopholes enjoyed by the oil industry, according to the L.A. Times. Given that robust lobbying by industry has defeated previous efforts to curtail these incentives, it remains unclear whether the latest attempt will succeed.

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