Tax Breaks for Oil Companies

The Chicago Sun Times is not happy about welfare payments to oil companies:

Now's a curious time to be dishing out oil welfare, Editorial, Chicago Sun Times: The U.S. government over the next five years will give a windfall of $7 billion to oil companies -- yes, the same oil companies that reported record profits last year. But wait, it gets worse: If one oil company that is suing the government succeeds, that windfall could hit nearly $35 billion. Oh, and one more thing: There appears to be little anyone can do about it. Think about that the next time you pay a small fortune to fill your tank.

There is nothing illegal about the program... In fact, some folks might argue its goals were laudable 10 years ago, when the federal government with bipartisan support tried to encourage oil companies to drill in the deep waters of the Gulf of Mexico by promising to forgo the normal 12 percent or 16 percent royalty payments on leases there. Oil and gas prices were relatively low at the time, and it was deemed too financially risky for oil companies to invest in deep water drilling without the incentive. But isn't taking risks in hopes of gaining future profits what the market is all about? This was a bad idea from the start. ...

Many companies stopped claiming relief when oil and gas prices rose above certain trigger points built into the leases -- about $35 per barrel for oil. But those price triggers were waived in leases signed in 1998 and 1999 because companies still weren't investing ... and those leases will account for most of the $7 billion windfall. And several companies are challenging whether the Interior Department had the authority to include those price triggers in the first place. ...

While some lawmakers said they will try to undo the terms of leases that are in some cases 10 years old, they will probably fail. ... While we don't favor a new tax on the oil companies' record profits, those firms aren't doing themselves any favors by refusing to pay royalties while they're rolling in the dough. They might find it hard to win incentives the next time their industry is in a slump. We can hope so. The oil industry can make plenty of money without the benefit of corporate welfare.

I don't know much about the challenges to the price triggers, but on the $7 billion I am not quite as shrill. This isn't what I think of as welfare, this was an attempt to use incentives to encourage more investment by oil companies. The debate on whether incentives should be offered in the first place aside, if profits are dangled in front of firms as an incentive to encourage investment or other behavior, then it undermines the policy the next time you try to use it if you take the profits away from the firms that act on the incentive because they are excessive by some definition. If excess profits are a worry, then write the policy to cap or limit profits up front (or in this case leave them in place) so that firms know the true reward for investment, don't take the profits away or use the profits as political weapons after the fact.

Comments

[anne]

http://www.nytimes.com/2005/08/16/business/16fuel.html?ex=1281844800&en=2d06f1360e161046&ei=5090&partner=rssuserland&emc=rss

August 16, 2005

Fuel Rule Change for Big S.U.V.'s Seen as Unlikely
By DANNY HAKIM

DETROIT - The Bush administration is expected to abandon a proposal to extend fuel economy regulations to include Hummer H2's and other huge sport utility vehicles, auto industry and other officials say.

The proposal was among a number of potential strategies outlined by the administration in 2003 to overhaul mileage requirements for light trucks - sport utility vehicles, pickup trucks and minivans. It had been seen by industry officials as likely to be adopted.

But the impact of the tougher requirements would have been borne almost solely by the increasingly troubled domestic auto industry, a concern for the administration.

Its broad plan to overhaul the light-truck mileage rules would change the regulatory system from one using averaged mileage for an automaker's entire annual light-truck output to one that sets up five or six classes, determined by a vehicle's size.

The rules, the first major rewriting of fuel economy standards since they were created in the 1970's, will be released late this month. They are sure to renew vigorous debate about the nation's dependence on foreign oil, a matter underlined by rapidly rising oil and gas prices.

The administration plan is still being reviewed by the Office of Management and Budget, which has had a role in drafting the plan. Further revisions could be made, including on the question of extending the regulatory system to cover larger vehicles. Until the details are published, its potential effect on the nation's oil consumption will not be fully clear. And the volatility of oil prices could push consumers toward buying more efficient vehicles, a trend that may outstrip regulations in determining fuel consumption in years ahead.

"We have no comment on it until we're ready to release it," said Rae Tyson, a spokesman for the National Highway Traffic Safety Administration, a branch of the Transportation Department. "It's still a fluid process at this point. We look forward to significant fuel savings without sacrificing safety or doing harm to the American economy."

Because cars, S.U.V.'s and other light-duty vehicles account for 40 percent of the nation's oil use, changes in the regulatory system are always watched closely, more so in an era of increased concern over foreign oil imports, rising fuel prices and debate on the effects of global warming.

The broad outline of the Bush plan is almost certain to meet objections from environmentalists and those hoping for an aggressive approach to curbing dependence on foreign oil. But domestic automakers are likely to see it as a victory, since the new plan will decrease advantages that some foreign automakers, like Honda, have in the current system because they do not make the heaviest trucks and S.U.V.'s.

Roughly speaking, corporate average fuel economy regulations - known as C.A.F.E. standards in the industry - divide each automaker's annual new vehicle production into two categories: passenger cars and light-duty trucks. New cars must average 27.5 miles a gallon and light trucks 21.2 miles a gallon in 2005 models and 22.2 miles by 2007. The figures represent lab-generated mileage and overstate the numbers that can be achieved on the road. Rules for cars are not being changed.

When the current two-category system was created in the 1970's, cars ruled the American road. Since then, automakers have developed new classes of vehicles that qualify as trucks, including S.U.V.'s, minivans and family-oriented pickup trucks with two rows of seats. As a result, not only is the number of vehicles on the road increasing, but the average new vehicle is getting lower mileage than it did two decades ago because so many more new vehicles are trucks. An increasing emphasis on horsepower is also a major factor.

Larger sport utility vehicles and pickup trucks weighing more than 8,500 pounds when loaded, like many Hummers and Ford Excursions, have been exempt from the regulations. When the system was created, vehicles of that weight were generally used for commercial purposes, but now hundreds of thousands sold each year are intended for family use.

Automakers have had powerful incentives to produce such vehicles because they are exempt from fuel regulations, have had rich profit margins, and many consumers can claim tax breaks for them. The administration had suggested including larger S.U.V.'s in fuel economy regulations in a first wave of proposals in December 2003, but domestic automakers objected that such a move would harm their fragile bottom lines....

[calmo]

What a cunning ending:
...would harm their fragile bottom lines. What was Danny Hakim suggesting? That the worker's jobs were never considered? That the management would have to bring out the extraordinary measures?
Ok, did he have anything more than the financial bottom lines in mind here? Whose bottoms?
Hello?
This
Larger sport utility vehicles and pickup trucks weighing more than 8,500 pounds when loaded, like many Hummers and Ford Excursions, have been exempt from the regulations.
is obscene all by itself.

[Rich Truxel]

Talk abut a step in the wrong direction. AS you noted the fleet averages have been in place for 30 years, and for the record they have worked beautifully. What was the fleet average in the 70's?

What will happen if we go from a fleet average to a system with 7 categories for different car sizes? The sale of low mileage cars will no longer be restricted by the need to sell low mileage cars. The need to sell (and develop) low mileage cars will disappear because they will not be needed to average out the high mileage cars. The price of low mileage cars will go up, the quantity down - vice versa for high mileage cars.

We should immediately lump all passenger vehicles in the same group and adjust the minimum mileage to reflect the combination (somewhere between today's two categories.) This would insure meeting current standards with no harm to the industry or consumers. We could then continue to reduce the fleet average and the industry could adapt by changing product mix toward efficient vehicles, developing new technology, etc.

What effect would this have on the competitive advantage of companies who have a low mileage mix? It would increase it, which is a good thing!! In fact those who can already beat the standard would favor reducing the standard.