Rising pump prices, yawning deficit make oil industry a target

msnbc.com

updated 5/12/2011 3:41:33 PM ET 2011-05-12T19:41:33

The heads of the five biggest oil companies told lawmakers on Thursday that it would cost the nation jobs and economic growth if they passed proposed legislation that would limit tax breaks for the oil industry. Senate Democrats weren’t convinced.

Those Democrats want to cut billions of dollars in tax subsidies that were created to induce oil companies to explore for oil and drill wells in the United States. The lawmakers argue an industry which makes billions in profits each year doesn’t need tax breaks when the government is trying to cut spending and reduce its bloated deficit.

But executives at a Capitol Hill hearing on the proposal said it would end up reducing the competitiveness of U.S. oil companies.

By undermining U.S. competitiveness, they would discourage future investment in energy projects in the United States and therefore undercut job creation and economic growth, Exxon Mobil CEO Rex Tillerson said.

When you’re making a projected $125 billion in profits you certainly don’t need $21 billion of the taxpayers’ money, said Sen. Robert Menendez, D-N.J. in an interview with msnbc.com earlier this week.

Menendez is co-sponsoring the so-called Close Big Oil Tax Loopholes Act, which would eliminate roughly $2 billion a year in tax breaks for the five largest U.S.-based oil companies — ExxonMobil, Chevron, BP, Royal Dutch Shell and ConocoPhillips. The senator argues the legislation could save taxpayers more than $20 billion over a decade.

The U.S. oil industry has gotten its share of tax breaks over the years. Now a surge in pump prices and a scramble to close the federal budget deficit has put Congress in the mood to take some of them away.

At Thursday’s hearing, Oregon Sen. Ron Wyden, a Democrat, played a video of a 2005 congressional hearing in which oil company executives said they did not need generous tax breaks because oil was selling at $55 a barrel. As the hearing commenced, the price per barrel hovered just below $100.

You all said you didn’t need them in 2005, Wyden said.You seem to be telling a different story today.

Like virtually all American companies, oil and gas producers take advantage of tax provisions  that allow them to deduct business expenses, including investments they make in new drilling projects. During the Bush administration Congress passed additional tax incentives to encourage more domestic exploration and production.

Proponents of those provisions argue that they worked as designed. Domestic oil production, which had been falling since the 1980s, has risen for the past several years.

Senate Democrats don’t buy that argument.

The reality is, it is the market that has increased production, Menendez said in the interview, referring to soaring oil prices that have driven the average pump price for gasoline to nearly $4 a gallon.

Exxon’s Tillerson said he supported comprehensive tax reforms that would apply to all industries. But argued that proposed changes that would target just five oil companies would be misinformed, discriminatory and counterproductive.

Menendez demanded an apology from ConocoPhillips chief executive James Mulva for a press release from the company that said in the headline that the tax cut proposals were un-American.

Mulva refused, saying that no personal offense was intended.

Our industry and company are already taxed heavily compared to other industries in the United States, Mulva said.

Senate opponents of the Menendez proposal were quick to express support for the oil giants.

Utah Republican Sen. Orrin Hatch said Senate Democrats are holding the hearing to make some political hay at the expense of our witnesses today.

Senate Majority Leader Harry Reid, D.-Nev. has said he wants to schedule the measure for a vote as soon as possible. But he may not have the 60 votes required to enact it — especially from Democrats from oil-producing states.

House Speaker John Boehner gave mixed signals Thursday about his support for the measure.

We all know that going after oil companies is easy politics, but we also know if this bill were to pass it wouldn’t lower gas prices one penny, he told reporters. And I believe that as we get into looking at the fundamental reform of the corporate tax code, this and every other issue ought to be considered.

Of course, high oil prices and resulting high profits are one reason the oil executives are back in the spotlight.

Profits at the biggest oil companies typically dwarf those of other individual corporations because the industry is so highly concentrated in a handful of players. Relative to total revenues, the oil industry is only moderately profitable — generating 5.7 cents in profit on every dollar it gets from selling crude oil and refined products. By comparison, computer makers enjoy a 17.3 percent profit margin and drugmakers get about 19.4 percent.

Industry margins are relatively thinner because it costs huge amounts of capital to bid on leases and develop new sources of oil. In recent years, the industry has plowed upward of $250 billion a year into finding and developing oil in the United States, according to the American Petroleum Institute.

At Thursday’s hearing, the oil executives told the panel that, instead of eliminating the tax breaks, they should enact laws to expand domestic oil production to help the industry increase supplies and lower gasoline prices.

While we can’t predict or control the price at the pump, we do know that we can increase the stability of our energy future through a combination of efficiency gains and increased supply, Shell President Marvin Odum said in his prepared remarks.

Big Oil’s friends in Congress argue that the tax code should encourage the oil industry to invest in drilling, just as it encourages other industries to invest in research and development. Increasing oil supplies, they argue, will help keep oil prices low.

But with oil and gas prices surging, that argument is harder to make.

If these tax breaks are necessary to keep oil prices low, why is it that the biggest tax break we’re trying to get rid of wasn’t enacted until 2004? Daniel Weiss, a senior fellow at the Center for American Progress, a left-leaning think tank, asked on CNBC earlier this week. Since then we’ve had nothing but high oil prices.

Rising oil prices aren’t the only political headwind Big Oil faces. There’s the yawning federal budget deficit.

We can put this money to better use – and we should, said Finance Committee chairman Max Baucus, D-Mont. We should use this money to reduce our deficit instead of putting the burden on seniors and on our children’s future.

If oil industry tax breaks are repealed, it remains to be seen what Congress will do with the money. Some Democrats want to divert the funds to provide incentives for other forms of renewable energy.

Such a move would add to already generous subsidies for oil alternatives. The bulk of the oil industry tax breaks that are currently on the table came from energy bills that also provided tax incentives for nuclear power, more energy-efficient cars and research on renewable fuels.

The Associated Press contributed to this report.