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Friday, February 17, 2006

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.

    Posted by on Friday, February 17, 2006 at 04:42 PM in Economics, Oil, Regulation, Taxes | Permalink  TrackBack (0)  Comments (3)


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