Why Big Oil should give up its tax breaks

The impact on the bottom line would be minimal and the oil companies might even earn some good will from policymakers and the public.

By MSN Money Partner Mar 30, 2012 9:59AM

By Rick Newman


There's some kind of help you don't really want.


The big oil companies have some stalwart protectors on Capitol Hill who make sure their longstanding tax breaks aren't threatened. Just recently, they helped kill a vote to eliminate subsidies that add up to a little more than $2 billion per year for five big oil companies. Given rising gas prices and the growing need to tackle the national debt, that's a powerful display of legislative muscle.


But Big Oil might be better off giving up these perennially unpopular tax breaks. The impact on the bottom line would be minimal, and the oil companies might earn some credit for a policy shift that's in the public interest -- and probably inevitable anyway.


These tax breaks were mostly established decades ago to stimulate oil drilling and production on U.S. shores. The five firms that qualify for the breaks are now among the most well-established and profitable companies in the world. Two of them--BP and Royal Dutch Shell--aren't even American companies. Along with the other three--Exxon Mobil, Chevron and ConocoPhillips--the five companies combined earned $116 billion in profits in 2011. If the tax breaks were eliminated and the whole tally came straight out of the bottom line, with no offsetting savings, the total decline in profits would be a paltry 1.8 percent.


Most economists disagree with Republicans such as Senate Minority Leader Mitch McConnell, who says that killing the tax breaks would raise pump prices for motorists. With oil selling well over $100 per barrel, oil companies are making a profit on virtually all the oil they pull from the ground. So there would be no reason to cut back on supply because of a small change in their tax status. Oil and gasoline prices are set by global supply and demand—not by tax policies in any one country—so American drivers would probably feel none of the impact from a slightly higher tax rate on oil companies.


Besides, the tax breaks will probably be killed over the next couple of years no matter what happens to oil prices. Republicans and Democrats are converging toward the view that with Washington in so much debt, corporate giveaways that once went largely unnoticed can no longer continue. One key Republican, House Budget Committee Chairman Paul Ryan, says the oil subsidies should go, and he's likely to gain adherents if he presses the case.


But nobody in Washington gives something up without trying to get something in return. That means the tax breaks will probably be a bargaining chip in a big battle over corporate tax reform, which could come as early as next year. Many people of both parties think the U.S corporate tax rate of 35 percent—one of the highest among developed countries—needs to come down. Even President Obama has said he'd consider a lower corporate tax rate if reforms included fewer loopholes and subsidies. So getting rid of the Big Oil tax breaks might be part of a tradeoff that includes lower overall rates.


The CEOs of Exxon, Chevron and the other oil giants certainly know all this, and they could get on the right side of public opinion by asking Congress to kindly eliminate these favorable and controversial tax treatments. CEOs have a fiduciary obligation to shareholders to protect profits and maximize the value of their stock, but they could easily argue that without favored treatment from Congress, the ritual of vilifying the oil companies every time the tax breaks come up for a vote would finally end. That would seemingly improve their long-term prospects, and Americans might even be grateful for a break in the hostilities.


Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.


Related articles from U.S. News:

Why high gas prices may help Obama

How a war with Iran could cause $7 gas

A collection of political cartoons on energy policy


Apr 1, 2012 8:24AM
One of the biggest economic problems America has is the ownership of congress by vested interest groups. If these vested interests were put on the free market, productivity in our economy would explode!!!!
Apr 1, 2012 9:57PM

IDK , when the Supreme Court ruled that money is free speech and corporations are people like you and I , the lobbyist took control of the US congress who spends all the money in this country! You elect them in November and the lobbyist OWN them the rest of their terms. Now i have read the US constitution and never seen that in there . But then the constitution says what is says ! And don't say what it don't say ! Too bad 5 out of nine are bought off . So much for the integrity of the SCOTUS .

Mar 30, 2012 3:35PM
If this is true capitalism. Then they don't desere any breaks. Unfortunately it's fascism.
Mar 30, 2012 10:25PM
 Tugrad05 , We are not talking a tax break , we are talking a subsidies to oil companies ! If it costs $1.20 thats called capitalism . They do not need a government corporate welfare handout! Thats called socialism last time i checked! Republicans have no problem with big government as long as it goes to oil companies and wall street and the so called too big to fail mantra. The consumer will decide the prices Like consumers decide the type of cars we drive! This a consumer driven economy !
Mar 30, 2012 5:47PM
@saph500 no that is called the price of doing business. As an example If it cost me $1.00 to make the item with the tax break and $1.20 to make it without the tax break then when my lowest price to sell to you jumps from $1.00 to $1.20.
Mar 30, 2012 4:25PM
LOL And republicans are stopping this because thay say it will raise prices? Well if it does thats called  GOUGING and thats a crime ! I guess big government is ok with the republican party as long as we bailout wall street and pay subsidies to big oil ! Lets see the US tax payer gets screwed again ! Seems like the US treasury and the Feds have no problem with big government with the GOP They love it ! And they are not the only ones on the corporate welfare roll The list is long and backed by the republican party. We have socialized wall street . banks , and companies . If they wanted to stop it they can ! But as you see it starts with big oil . And it ends their because of the GOP in congress! Only in the USA .. The best congress money can buy blessed by the US Supreme Court ! Remember money is free speech and corporations are people like me and you !!! LOL
Apr 3, 2012 12:42PM
i am assuming that the article is dealing with intangible drilling costs and depletion. neither would dramatically change what big oil does. the problem is little oil. smaller companies are much more sensitive to these two items. statutory depletion was diminished in the 70's and intangible drilling costs became a tax preference. after the rug was pulled out from under little oil, we had the bust of the 80's. as in many industries, all of the spoils have gone to the huge companies (exxon, chevron, oxy and so on) which puts smaller businesses at a disadvantage. policy, whatever it is, should not beat on smaller enterprises. the most recent crisis saw the government bail out merrill, citi, b of a, general motors and the like. smaller business were left to fend for themselves. even playing field, please.
Apr 3, 2012 9:16AM
Apr 3, 2012 8:32PM
As a petroleum engineer with an extensive production and economic background I wish someone would explain to the public exactly what the government  subsidies are that the major oil companies receive. The oil industry is the most heavily taxed entity in the country now and the aim I guess is to tax it some more. Lets compare the taxes the oil industry pays with say that of the financial institutions, the hi-tech industry companies, the defense industry companies, the television and newsprint industries, the transportation industry companies, etc. and lets find out who's paying their fair share of taxes.
Apr 3, 2012 6:09PM
Nick333: If what you said were true the conclusion would be also. Tax revenues are no where near what they were in the summer of 2008 when the collapse which wiped out 11 trillion of our economy and added 10's of millions to the unemployment rolls. Even the most conservative economists know you cant get us back on track with cuts in social programs alone all the while giving billions in tax breaks to special interests and special rates of 15% to hedge fund managers for normal income.
Mar 30, 2012 3:21PM
Another dumb article.  If the benefits are so small, then why the big fuss over them?  What are the benefits and how do they work? Is railing on one or two things in the tax code that just insight mob anger (and thoughtlessness and selfishness) an honest approach to our tax system ills?
If left is fighting right on the tax reform approach, is it leadership in the President to harp on the things his POLITICAL PARTY wants and not offer an even handed approach?  Is our problem even really taxes when the tax take is projected to remain what it has been in percent of the economy while expenditures have been growing in double digits?

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