Will Ending Tax Breaks for Big Oil Make a Difference?

Facing public resentment, Big Oil tax breaks may soon end.

Will Ending Tax Breaks for Big Oil Make a Difference? By STEVE AUSTIN for OIL-PRICE.NET, 2011/06/01

The controversial bill proposed by the Democrats to end the substantial tax breaks extended to the major oil companies known as 'Big Oil' did not make it. Big Oil commonly refers to the five industry giants - Exxon, Shell, BP America, Chevron, and ConocoPhilips. It is estimated that these companies have garnered profits of about $900 billion in the past decade alone! The rise in prices of gas and crude oil has fetched them over $30 billion in the first quarter of this year. Despite this, over the years, the federal government has been providing them with various types of subsidies through tax codes.

Since direct grants would put the focus on the government's preferential treatment of Big Oil, they extend benefits in the form of deductions, credits or exemptions; in short, tax breaks. Now, the Democrats have come up with a proposal which suggests doing away with some of these tax loopholes for the oil companies. Known as the 'Close Big Oil Tax Loopholes Act', Democrats claim that this will help rake in up to $21 billion over a period of ten years and thus, help bring down the budget deficit.

There are suggestions that the savings will be better utilized if diverted to promotion of clean energy programs. Solar and wind are the energy options of the future and developing these is likely to be high on the priority list of the federal government for quite some time to come. Though stopping these tax benefits has been on President Obama's agenda for long, it has taken him three years to propose any action on the matter. His detractors see this as a ploy to curry favor ahead of an election year.

The Politics of the Issue

With gas prices touching $4 per gallon this summer, the move to eliminate tax breaks is being seen more as political rhetoric than anything else by analysts. In reality this move will not impact much on the federal deficit or even the prices at the pump. At best this move may somehwat appease consumers (as well as earn votes) and only serve as a kind of vengeful retribution and will not actually translate into any benefits for the government or public. It will also have a negligible adverse impact on profits for the oil companies.

The public views Big Oil with resentment mainly because of the clout they wield and the money that they rake in. The common man sees the price of gasoline at the pump and an increase of even 10 cents produces outrage against these oil conglomerates. Hence, any kind of action that hints at reduction of benefits to Big Oil is welcomed and appeals to the emotions of the layman.

Big Oil Executives' Defensive Statements:

Though the figures and analysts say otherwise, the honchos of Big Oil did not hesitate to term the proposal detrimental to the American economy, when they appeared at the Senate hearing. They claimed that doing away with the tax breaks will lead to job cuts and investors' exit from oil. This is in contradiction to earlier claims by Big Oil saying that they do not need incentives or subsidiaries from the government for oil exploration purposes. Also, Big Oil executives claimed that it was unfair to target them alone while many other industries are also sharing these tax breaks. They also urged the administration to encourage drilling if it really wanted to keep gas prices in the country down.

The PR departments of Big Oil have also been successful in propagating the myth that ending subsidies for them will lead to significant increase in taxes for the rest of the population.

Republican Stand

Republicans are protesting against the move and claim that the measures will have no impact on existing gas prices. The matter will be voted on later this week and it seems highly unlikely that the Democrats will win the vote in the Senate and the House of Representatives.

At least two earlier attempts to scale down on tax breaks for oil companies have failed in the Senate. Even if they don't win, Republicans sure will have gained sufficient political mileage from it which will stand them in good stead in the elections next year. In an attempt to garner support for their proposal, the Democrats have embarked on an online campaign. They are planning to use grassroots-level activists to target Republican senators on their support for Big Oil.

The Republicans have also come up with a bill 'Offshore Production and Safety Act of 2011' which favors American exploration and offshore drilling ventures. This addresses matters such as lease sales in the Gulf of Mexico and in Virginia as well as setting of a timeline for reviewing pending offshore applications.

What Happens to the Profits?

Big Oil executives have been found to be using the profits to boost their personal wealth and enriching their shareholders. Reports say that the profits have been used by executives to increase their stock holdings and to pay out generous dividends over the past five years.

A Real Solution?

Opponents of Big Oil and supporters of energy independence claim that even if the tax breaks are stopped, this will not resolve the bigger issue of price manipulation. They suggest that Wall Street oil speculators be controlled and prevented from raising the prices of oil artificially. It has also been recommended that OPEC members be stopped from manipulating prices, and tax incentives for foreign oil be stopped.

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