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By Robert Rapier on Apr 2, 2008 with no responses

Attempting the Impossible

I ran across the following today:

Our view on gasoline prices: With crude at $100 a barrel, Big Oil needs no tax breaks

It’s difficult — make that impossible — to justify taxpayer subsidies for an industry whose top five companies made $123 billion in profits last year. Oil at $100 a barrel ought to be plenty of incentive to drill without extra encouragement from taxpayers.

OK, sounds like a challenge. I will accept. First off, does it matter how much capital is being invested to make those returns? What if the required investments are 10 times that $123 billion? What if another industry – like say Hollywood studios – makes much higher profit margins, yet qualifies for exactly the same tax deduction? Does that make a difference? No? Is it just because $123 billion is a big number? How big should it be? What should the allowed return be to justify the cost and risk of building a floating city in the ocean? And what is the justification for denying the tax deduction to the largest companies of a single industry?

Is it really fair to exempt Citgo, after Hugo Chavez has already seized investments of U.S. companies? Believe it or not, these same companies whose investments Chavez has seized (COP and XOM) are being singled out for more punitive measures by a pandering Congress, while a Venezuelan oil company operating in the U.S. would continue to receive the tax deduction.

Further, with oil at $100 a barrel, understand that all costs associated with drilling have rapidly increased. Should that matter? Or does is still just boil down to $123 billion is so gosh-darned big? Well, get your mind wrapped around the capital expenditures. They also dwarf those of other industries. Should it matter that these projects take many years to bring to fruition, and yet politicians attempt to change the rules every year? If you are an oil company CEO, is it more likely or less likely that you will make marginal investments in the U.S. – given the uncertainty that the law will remain constant?

I have to agree with the OMB:

“The administration must strongly oppose” the legislation, the Office of Management and Budget said Tuesday, “because the bill would use the tax code to target tax increases on a specific industry in a way that will lead to higher energy costs to U.S. consumers and businesses.”

But here’s the political spin:

Rep. Rahm Emmanuel (D-Ill.) said “Americans are being asked to pay twice” — once at the gasoline pump and then through tax subsidies to the oil companies.

Are they really being asked to pay twice? Don’t oil companies pay far, far more in tax revenues than this little tax break? Sounds to me like oil companies are being asked to pay twice. And I guess that you also forgot that if your argument is true, Americans are paying three times. The government take from gasoline sales is huge – so you apparently forgot that payment. But I am sure politicians aren’t eager to highlight that point.

And if it is really this simple:

Supporters of the measure noted that rescinded tax breaks would amount to less than 2 percent of the profits of the five biggest oil companies. Even if the companies were to pass along that entire cost to gasoline consumers, it would amount to about a penny a gallon.

- then I have an idea. Raise gas taxes by a penny a gallon. My guess is that this would have much less opposition. But this isn’t really about the money. This is just politicians playing games and pandering for the public.