Congress to consider oil subsidies tomorrow

Marketplace Staff May 11, 2011

Congress to consider oil subsidies tomorrow

Marketplace Staff May 11, 2011

Kai Ryssdal: Nothing gets corporate officers a summons to Washington faster than a mind-bending profit report. Which is how it will come to pass tomorrow that oil company executives will be in the witness chairs at a hearing of the Senate Finance Committee. Senators want to know exactly why, in the face of tens of billions of dollars in quarterly profits, big oil should be getting billions in tax breaks.

Marketplace’s Scott Tong is here with a preview of that hearing. Hey Scott.

Scott Tong: Hi Kai.

Ryssdal: So let’s talk about these tax breaks. Who specifically is targeted in this bill?

Tong: The bill doesn’t actually name any companies, but it applies to certain producers with certain revenues who traffic in a certain number of barrels. And guess what — only the five biggest multinational oil companies meet the criteria: ExxonMobil, BP, Chevron, Conoco and Shell. What a coincidence.

I spoke today to analyst Kevin Book at ClearView Energy Partners, and he says with gas prices at $4, somebody has to pay a political price.

Kevin Book: The question of who is going to pay when prices are high has four answers: you can blame the president, the Fed, the speculators or the oil industry. And tomorrow is the oil industry’s day.

Now Kai, as factors, you also have Asian demand, which is rising. OPEC cutting production. I mean, it’s complicated gas prices, but if you want nuance, a congressional scolding is not the place to go.

Ryssdal: So let’s go into a little nuance then here, if we could. The president says oil companies can afford to live without subsidies from the government that they get. Oil company defenders say, you know what, we’ve got to keep drilling with prices so high. Where does reality lie?

Tong: All right, a quick five seconds of history here: One of the subsidies goes back to the dawn of the U.S. tax code in 1916. And back then, the government was all about drilling to promote car ownership, the Industrial Revolution. Well OK, we’ve had our revolution. And now the White House says, OK, let’s kill the subsidies. But that gets in the way of another White House priority, and that is more domestic energy sources. See, if you take away tax incentives to drill, you get less drilling, right? And the industry argues, yes we will have to drill because gas prices are so high. Except that it takes five or seven years for a company project to actually put gas in your tank. So yes, more U.S. supply could moderate prices, but not tomorrow. Maybe 2016.

Ryssdal: Well, speaking of tomorrow, what is going to happen? They’re going to have these hearings and Congress will chew it over, and then what?

Tong: Well we could have senators throw a bipartisan tantrum and then everybody goes home — that’s happened before in Washington. But what’s different this year is the laser focus on the budget and finding ways to end tax breaks, loopholes, corporate welfare — whatever you want to call it. And these oil industry provisions get you $2 billion a year. Now the issue may not be ripe today or tomorrow, but analyst Kevin Book thinks over the next year, the chances are pretty decent.

Book: When you get to next year, if prices are still high, we’ll have the same drivers and the same cars, with less cash and less credit, looking at the same politicians and asking, what have you done for me lately?

Now Kai, in the last few years, Congress has pared back a couple oil sector tax breaks, so it has happened before.

Ryssdal: This comes in the category of tax expenditures, for those keeping track in your federal budget debate handbook. Marketplace’s Scott Tong with a quick preview of the oil subsidy hearings in Congress tomorrow. Scott, thanks a lot.

Tong: You’re welcome.

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