March 2nd, 2012

I read today the President Obama, whipping his political vision on snowy New Hampshire is once again demanding that Congress eliminate “oil and gas company” subsidies, which he labeled an “outrageous” government give-away. “Let’s put every single member of Congress on record: you can stand with oil companies or you can stand for the American people.” The media informs us that the he was addressing the $4 billion plus in annual tax breaks, in addition to the subsidies for the oil and gas industry, which our government supports during their time of burgeoning profits and rising domestic production, according to Obama and his gang, whereas “It’s outrageous. It’s inexcusable. I’m asking Congress: eliminate this oil industry giveaway right away.” This by-the-way is his fourth attempt to do away with tax breaks and oil subsidies, his previous efforts have consistently run up against bi-partisan opposition in Congress and some pretty heavy duty lobbying from the producers of oil, natural gas and coal. The head of the oil and gas lobby maintains that Obama has it backwards, in that the industry subsidizes the government through billions of dollars in taxes and royalties, not the other way around. I would think that before the President once-again makes his pitch to do away with incentives for fossil fuels, he should take a close look at how the administration is approaching the situation, where they continue to provide substantial aid to oil and gas companies as well as billions of dollars in

subsidies for coal, nuclear energy and other energy sources with large and long-lasting environmental impacts. And once again there will be a re-kindling of long-running debates over Federal Subsidies for petroleum, coal, hydropower, wind, solar and biofuels. The opposition to such subsidies often referred to as incentives, tax credits, preferences or loan guarantees, run the ideological spectrum, from conservative economists who believe that such breaks distort the marketplace to those environmentalists who believe than renewable energy sources will always lose out in subsidy battles because of the power of the entrenched fossil fuel industries. Last year it was reported that the President wanted Congress to slice $3.6 billion this year in oil and gas tax breaks for a total of $46.2 billion over the next decade, finding fault with the century-old oil and tax industry tax “deduction” for the costs of preparing drill sites and a manufacturer’s (processing) tax break granted to the oil industry in 2004. Albeit the number is significant (if you’re an employee making $50,000 a year) it is still less than 10% of the Federal Subsidies that oil and gas companies “might” receive over ten-years. This total amounts to more than half (52%) of total benefits distributed to other energy sectors by the Federal Government. The mantra continues where the President is referring to a feature of the US Tax Code that in-part allows the domestic companies to “defer taxes” on unrepatriated income, in simple words, the revenue that companies earn through their overseas subsidiaries goes un-taxed by the IRS as long as it stays-off the company books in the United States. Many economists (even left-leaning ones) do NOT agree that eliminating this provision will bring-an-end to off-shoring, why? In the United States these companies are taxed 35% on earning of $10 million to $15 million or on “all” earnings over $18.3 million – this is the highest tax-rate in the World, making an overseas move “somewhat” attractive to companies that wish to avoid the US Tax Rate. Is this the leading reason for the shift to off-shore movement, accord to a GAO report issued in 2005 (bit dated I know), where the primary reasons are the global technological advancement, increased openness in China and India,

the higher education of foreign workers in technological fields, and the biggest factor being the reduced (cheap labor) cost per foreign workers. Today, politicians and experts on both sides of the aisle strongly believe that even if such “tax breaks” were achieved (lowering the requirements in the Tax Code) do NOT believe that changing the tax requirement would bring to a halt the movement of jobs overseas. Translation, it is NOT the higher tax rate this shoving our jobs overseas. For the man-in-the-street when the CEOs from ExxonMobile, Chevron, ConocoPhilips, BP America and Shell tell us that gas prices “could” go up if Tax Breaks on domestic drilling and other costs are removed, their words ringhollow as we read in our local newspaper or splashed across the Web that their profits are through the roof. What about these high-prices at the local gas pump, let me refresh you memory, according to our own Energy Information Administration, at let’s say $4.35 per gallon of regular, $3.00 goes for the value of the crude, $0.57 is for Federal and State taxes, $0.28 is the cost of processing and Profits, and $0.52 is for marketing and distribution expenses. A barrel of crude yields between 19 and 20 gallons of gasoline, the latest cost of a barrel was running around $110 a barrel (42 gallons) which equals $2.62 per gallon of crude, but than again processing only achieve 19.5 gallons of gasoline which in reality equals $5.64 per gallon of regular…but keep-in-mind that the entire 42 gallons CANNOT be refined as gasoline, whereas one-barrel will yield (in addition to the gasoline) 9 gallons of diesel or heating oil, 4 gallons of jet fuel, and 8 to 9 gallons of various other products such as plastics, oil for your engine, etc., etc., which lowers the value of the process 19.5 gallons you use to go to the store. According to recent reports the average price of gasoline (2-29-2012) is running around $3.72 per gallon of regular, around $0.24 higher since they began moving upward, where prices in Alaska, California, New York, Connecticut and Hawaii they are topping at least $4.32 per gallon. The majority of the increase is been blamed on the increasing cost of a barrel of crude and the raising tensions between the West and Iran over its nuclear ambitions. Republicans “insist” that the Democrats push to end tax benefits will only push the prices even higher.

Let’s get back to those profits the man-in-the-street reads about: 1) 2) 3) 4) 5) BP America generated $17.7 billion in 2011 Chevron a cool $21.7 billion Conoco Philips a little $9.0 billion ExxonMobile a staggering $31.7 billion Shell around $24.2 billion

All five together reaped an amount of $101.2 billion in take home to grandma money. Now I’m not saying they didn’t deserve all those big bucks, but it sort of leans toward being a bit un-fair when you and I give them almost dollar for dollar breaks when it comes to their R&D (research and development) or with tongue in cheek (rape and duck), whereas their drilling (research) and increased processing facilities (development) are written off their tax returns. A certain percentage but all of it? Consider for the first time in a long time the top export commodity in the USA is fuel – wait! I though we were the world’s biggest gas guzzler, yet our producers are on pace to ship more gasoline, diesel and jet fuel than “any” other export, a pace that has been tracked effectively since 1990 or the first year in more than 60-years that America has been the “net” exporter of fuel. How big of shift is this, a decade ago our fuel exports did NOT even make the top 25 exports, and during the last five years our top export has been aircraft. The plus side is that for decades the United States has relied on huge imports of fuel from Europe, which only reinforced our image as the world’s top fuel hogs – and in addition the Congress and the media complained that US refiners were not growing fast enough to satisfy domestic demand, no longer can they bitch and moan. Although much or demand decreases during the off-season, our economy is forcing drivers to drive less and our vehicles have become more efficient, despite the growing amount of processed fuel we are nowhere close to energy independence as the world’s largest importer of crude oil – between January and October last year we imported approximately $280 billion of the “black gold”. Our export values have topped the economic value of $88 billion. The downside of this wonderful news is that American drivers are paying more for a gallon of gasoline, whereas in the oil world the companies main goal is to derive as much as they can from each gallon of the highly demanded

commodity, in other words they could give a “rip” on whether or not you have cash to purchase a loaf of bread. Consequently our supply of excess gasoline is kept at a minimum, and even thought efforts by the consumer and our more than shaky economy, they are shipping what could be perceived as a “glut” to overseas locations where they receive more bang for the buck…in our free enterprise system we call this “supply and demand”, in other words keep the supply low thereby maintaining the high demand. Thereby it should be no surprise to you that gasoline supplies are being exported to the “highest bidder”. Along with this it is natural to assume that they are not loosing money in their export efforts, if so why do it? The last time the USA was a net exporter of “fuels” was in 1949, that year we exported some 86 million barrels and imported 82 million barrels, in the first ten months of 2011 we exported 848 million barrels and imported 750 million barrels – just think those refiners got a tax break on 848 million barrels. Senator Orrin Hatch of Utah once remarked that the Democrats’ energy policy “is to increase the cost of energy”, where a study done by economist Stephen Brown of the University of Nevada-Las Vegas determined by removing the “tax incentives” would cost the American consumer around $2.00 per year. Democrats not to be distracted, point to information that tells us the ExxonMobile spent $5.5 billion or more of its total profits buying back some of its own stock, Chevron spend $1 billion (13% of its profits), and ConocoPhilips $3.1 billion (91%), this the detractors yell instead of investing in product development, new facilities, not talent or research – things they say could have created jobs, improve consumer offerings and accelerate alternative energy production. Don’t miss-read the above, you know all those “stock-options” they hand out to highly placed executives – you bet, buybacks and stock options are the “yin” and “yang” of corporate executives – they spend the company’s money to buy back stock and send up stock prices, and then flip their stock options so they can fuel up their $25mil yacht in the Mediterranean, granted there is no law against them doing so – but you know what I mean. When the dust settled in 2011 at ExxonMobile they cleared $43 billion in profits, just a bit shy of its 2008 record of $45 billion, the last time there was a huge spike in oil prices.

Granted our current employment and economic situation plus the expanding gap between Federal Revenue and Federal Spending has a great many of us up-on-step and focused our attention on all types of questionable fiscal goingson, not of which the least is taxes. Far-right conservatives have managed to make tax increases un-American, while it is obvious that the few politically feasible spending cuts, especially into areas such as Medicaid that are under discussion will not begin to close the revenue-expenditure chasm. Flip, once again our liberal side of the aisle are focusing on tax subsidies, but keep-in-mind the term is misleading. A tax subsidy is NOT a expenditure, but a selective tax reduction, a remarkable distance from some general or uniform reduction – therefore to eliminate a tax subsidy is to raise taxes. Nevertheless it sounds or appears as a way to reduce wasteful government spending rather than raising taxes, so in general it has a certain ring to it that makes it very popular to the man-in-the-street. Albeit doesn’t mean that it’s any more feasible politically, where as you and I know the American political system is NOT that democratic, albeit our leaders spread that the Democratic way is the answer to most of the problems across the globe, it is not even that populist. The simple fact that “tax subsidies” tend to be targeted on particular activities only means that a “proposal” to eliminate a “tax subsidy” jams together interest-group opposition, in the case of oil, a formidable opposition since “if” the interest group had been weak in the first place, the subsidy would not have been legislated in the first place. Tax subsidies are eliminated from time-to-time, as for us on the outside, it would be interesting to “speculate” on the conditions that made their eliminations possible – I do not have the resources or wherewithal to go any deeper than that simple statement. It is fair to also remark that NOT all subsidies are bad, just as there are tax subsidies that are all bad, for there is NO economic reason for believing that “all” activities should be taxed at the same rate, for instance a subsidy is defensible on economic grounds if it encourages the production of benefits that would be “under-produced” from an overall social-welfare standpoint were it not for the subsidy. This is primarily the argument for allowing expenditures for R&D to be written off on an accelerated schedule, whereas R&D is underproduced from an overall social-welfare standpoint because even with a

“patent system” a firms R&D is quite likely to pass on benefits to other firms for which the firm conducting the R&D will NOT be compensated, remember the practice of receiving a “patent” is that the applicant disclose the invention, and that disclosure may convey valuable information to competitors even though they cannot practice patented information without the patentee’s authorization. The oil companies, their principal “tax subsidies” are: 1) Domestic manufacturing deduction – this allows oil and gas companies to deduct an extra 6% of their taxable income 2) Intangible costs – which are costs for investment in oil exploration or production that have NO salvage value, such as clearing land to enable an oil well to be drilled, where the oil companies are NOT required to amortize these expenses over the expected life of the oil well 3) Deduct royalties – these are the money paid to foreign governments, based on the fact that the amounts in reality are a tax in themselves It is said that the first two categories are “likely” to increase domestic oil production, just as the industry maintains that expanded domestic production creates external benefits (benefits not reaped by the oil companies) by reducing our dependence of foreign oil, where much of it is produced by hostile or unstable countries. The last category, is defended as being the tool that encourages American oil companies to increase their production abroad, albeit is true the effect is more than likely small, especially relative to imposing a stiff tariff on oil imports, as some suggest. The tariff would actually generate revenue for the Federal Government without being labeled a “tax” (what else is a tariff?), reduce the income of foreign oil-producing countries, and increase domestic production by making foreign oil more costly – this would be okay if the environmental groups would stay home and not protest if the oil companies applied to explore and drill more wells on US Public Lands, increase the drilling in the Gulf, off shore of the Atlantic and Pacific Coast, and be able to run willynilly in ANWR. Which, excuse my language, ain’t gonna happen. The advocates of eliminating the “tax subsidies” argue that the oil industry profits are excessive in relationship to the high cost at the pump, while the defenders explain eliminating he subsidies would only result in higher, rather than lower prices at the pump, by reducing the overall production of oil.

Would that be a “bad thing”, where out knowledge of the exploration, production and consumption of oil is just not limited to our oil imports, whereas all oil action causes some environmental re-action, the air we breath is affected by its burning, we see from time-to-time minor and major oil spills, and our highways are so plugged today what used to be a 20-30 minute commute to that job (so we can fill up) takes up to 1-2 hours. In the not-to-distant past we encouraged ride-sharing to remove some of our vehicles from the freeways, today high prices as the pump are much more effective, albeit some label the high prices as a pollution tax and a way to reduce our imports. Futurists point to the simple fact that oil is NOT our future, thereby eliminating the “tax subsidies” is pretty strong thereby the expansion of the industry should not be encouraged – off to the side of the picture the oil companies understand (or at least pretend to understand) and show a slight move to give up their subsidies if subsidies in other industry are dumped. Although this in not a really good argument, because those subsidies, albeit most of them are no-more justifiable than the “tax subsidies” for the oil industry, in most cases do NOT impose costs on that industry. Thereby in a sense the oil industry is saying, “since the world is imperfect, we should be free to cheat and steal”. The coal industry is in 2nd place when it comes to Federal subsidies each year bouncing around $8 billion, or about 10% of total Federal generosity – this includes tax breaks, as well as millions of dollars on research into carbon capture and storage. Even though it’s been decades since a “new” nuclear power plant began construction, nuclear power receives around $9 billion a year in Federal subsidies – whereas the money is embedded in Federal decommissioning and waste management policies, as well as R&D at the our national laboratories, a recent poll in the Wall Street Journal showed that 57% of Americans favor chopping Federal subsidies to build new nuclear power plants, a fact that surprised many of us including our politicians. The Presidents 2012 budget would allow the DOE to triple the $58 billion amount of “loan guarantees” it can grant to support the construction of nuclear power plants. Where the Taxpayer would pick up the tab on the $58 billion, only if those loans defaulted.

There have been identified 30 Government subsidies for our nuclear industry during the past five-decades. About $6 billion in tax credits and other favorable policies flow annually to support the “ethanol” industry, whereas the amount has grown as ethanol use has increased – unfortunately so has the price of corn. Credits for “advanced” cellulosic bio-fuels have not really kicked in yet! The bulk of $6 billion in Federal subsidies flow into the wind power industry, the leading renewable energy industry. Solar, biomass, geothermal and other are playing catch up – whereas although Solar gets a lot of press, it is still the most inefficient of all the renewable energy sources –bar none. The last word seems to mimic David W Kreutzer of the Heritage Foundation who remarks that the “Federal Government should take its thumb of the scale by eliminating subsidies on all forms of energy, even if it means slowing development of cleaner-burning fuel sources. We know that petroleum and coal survive just fine in places where there are no subsidies. I don’t know if that’s true for wind and solar now, but someday it will be, when the price comes down”. Until that happens we will continue to live with our 60-year legacy of lobbying and political jockeying in Washington that loads the pockets of the oil coal, nuclear power, and corn-based ethanol – scrap them all and level the playing field.

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