Energy, Government and Subsidies
Posted January 10, 2011
Jeffrey Leonard has an article entitled "Get the Energy Sector off the Dole" in the January/February issue of Washington Monthly with some interesting policy ideas, but also some points greatly in need of clarification.
- Mr. Leonard attacks the intangible drilling cost deduction allowed for oil and gas producers as an often abused subsidy. Actually this deduction is no different than the deduction generally allowed for research and development; and, as such, it has helped drive new technologies that have led to the access and development of vast domestic oil and natural gas plays that Mr. Leonard concedes will be a huge factor in America's energy future. Further, there is no evidence of any real or perceived abuses of this deduction mainly, I expect, due to the fact that the IRS would have discovered them during the continuous audit program it employs on members of the industry.
- Mr. Leonard mentions that, according to an Energy Information Agency study, subsidies for domestic energy production doubled between 1999 and 2007. While this is true, he fails to mention that the majority of this increase went to the renewable sector and that only a little more than a 0.8 percent increase went to the petroleum industry.
- Mr. Leonard's claim that the foreign tax credit is in any way an oil industry subsidy is just plain wrong. The foreign tax credit is a mechanism that any US taxpayer may use to avoid double taxation of their foreign income. Furthermore, members of our industry have a much higher burden in claiming a credit than those in other lines of business as, contrary to his point, we must prove that the payments are income taxes and, in fact, not royalties.
- Mr. Leonard also mischaracterizes the Volumetric Ethanol Excise Tax Credit (VEETC) as a government handout that induces refiners into blending ethanol with gasoline. Refiners are "induced" to blend ethanol with gasoline because the federal law mandates they do so. The economic reality is that the VEETC does not inure to the benefit of the refiner, but either to ethanol producer as it allows them to charge the refiner more for their product, or to the consumer in the form of a lower price.
The oil and natural gas industry supports more than 9.2 million US jobs and 7.5 percent of the US economy. And contrary to popular perception the oil and natural gas industry is not against renewable energy or energy efficiency. In fact we greatly support efforts in both areas, with respect to the industry, I'd like to note that:
- Since 2000 it has invested nearly $2 trillion in US capital projects to advance all forms of energy, including alternatives, while reducing the industry's environmental footprint.
- US based oil and natural gas company investments in renewable energy accounted for nearly one-fourth of the money invested in renewables by all US based private industry and the federal government over the past nine years. More than $6.7 billion went toward the development of energy sources such as wind, biofuels and solar power.
- The oil and natural gas industry also accounts for 73 percent of all the North American investments made in fuel substitution technologies since 2000 - more than $21 billion developing substitute fuels, such as liquefied natural gas and reducing fugitive methane emissions.
Charles Pierce JD, LLM -- API Tax Counsel & Policy Analyst contributed to this post.
About The Author
Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Previously, Mark was a reporter, copy editor and sports editor at an assortment of newspapers. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela have two grown children and six grandchildren.
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