Big Oil Reacts to Obama's 'Discriminatory' Proposals

Offshore oil rig
Offshore oil rig

The petroleum industry is pushing back against President Obama's demand, brought up during this week's State of the Union address, that tax subsidies for oil and gas drilling be curtailed.

"It's not as if the government is taking money out of its pocket and paying the oil and gas industry," says Stephen Comstock, manger for tax policy at the Washington, D.C.-based American Petroleum Institute. "The fact is we're in a net income tax system, and in many instances these are recovering our costs. To sit there and say they are OK for everybody else, but they are not OK for you seems discriminatory."

In his speech Tuesday, President Obama called for increased subsidies for renewable energy sources like biomass and wind power. But he went one step further and called or eliminating existing subsidies for the oil industry.

"I don't know if you have noticed, but they're doing just fine on their own," Obama told Congress, which must approve any reduction in oil industry subsidies. "So instead of subsidizing yesterday's energy, let's invest in tomorrow's."

Intangible Drilling Costs

Obama didn't specify exactly which subsidies he'd like to eliminate. The API issued a fact sheet that quoted a government study estimating that the oil industry received $2.15 billion in subsidies and support.

This is mostly for so-called intangible drilling costs, mainly the costs of labor for drilling a new well, which Comstock says is similar to deductions for research and development enjoyed by most big companies such as drug firms. The other tax benefit is the oil depletion allowance, which allows a deduction from gross profits for depleting exhaustible resources.

Another tax benefit the oil industry receives is manufacturing assistance for their operations. Most manufacturers receive a 9% deduction for that expense, but oil and gas companies are capped at 6% and could conceivably lose it all together.

50,000 Jobs Lost?

"Unfounded assertions that the oil industry receives special tax treatment accomplish nothing -- except to threaten the industry's ability to contribute to the nation's economic recovery," Ken Cohen, vice president for policy and government affairs at ExxonMobil (XOM), the nation's largest oil firm, wrote on his blog.

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Comstock says the API prepared an assessment of what the impact would be if the government imposed $5 billion of new taxes on drillers. It estimated that such a move would cause 50,000 jobs to be lost by 2014 and reduce production by 700,000 barrels of oil equivalent a day.

"It breeds on itself because that generates less income for the companies, which then leads to reductions in their drilling budgets, and it has a cascading effect," he says.

Drilling has been curtailed by the moratorium in the Gulf of Mexico, but new wells are still being drilled in the Marcellus area of Pennsylvania, which provides natural gas along the East Coast, and the Bakken field in North Dakota.

Obama's comments didn't seem to adversely affect oil stocks: The oil index ($XOI) is up 5.21% so far this year, including a 0.05% bump Thursday.

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Originally published