Forbes Denies Existence Of Oil And Gas Subsidies

• Steve Forbes: “U.S. Oil And Natural Gas Companies Do Not Receive Taxpayer Subsidies.” In his op-ed in Politico, Steve Forbes wrote:

What the president knows, but fails to divulge in making his case, is that U.S. oil and natural gas companies do not receive taxpayer subsidies. The provisions he's targeting for repeal are the same tax credits and deductions available to a broad swath of other U.S. companies -- including a domestic manufacturing credit and a measure to prevent double taxation on income earned abroad. [Politico, 10/26/11]

NY Times: “Oil Production Is Among The Most Heavily Subsidized Businesses.” The New York Times reported in July 2010 that “an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.” The article further stated:

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

[...]

Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes. Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.

Other tax breaks were born of international politics. In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers. Saudi Arabia and others began to treat some of the royalties as taxes, which entitled the companies to subtract those payments from their American tax bills. Despite repeated attempts to forbid this accounting practice, companies continue to deduct the payments. The Treasury Department estimates that it will cost $8.2 billion over the next decade. [New York Times, 7/3/10]

Congressional Research Service: Size Of One Subsidy “Typically Exceed[s] The Capital Invested In The Project.” From an April 14 Congressional Research Service report on energy tax policy:

There are a number of tax incentives currently available for energy production using fossil fuels. They can be broadly categorized as either enhancing capital cost recovery or subsidizing extraction of high-cost fossil fuels. Between 2010 and 2014, the total cost of tax expenditures related to fossil fuels is estimated to be $12.2 billion.

Among the capital cost subsidies, the allowance of the percentage depletion method is estimated to cost the most in foregone revenue, $5.0 billion between 2010 and 2014. Under percentage depletion, a deduction equal to a fixed percentage of the revenue from the sale of a mineral is allowed. Total lifetime deductions, using this method, typically exceed the capital invested in the project. To the extent that percentage depletion deductions exceed project investment, percentage depletion becomes a production subsidy, instead of an investment subsidy. Other capital cost recovery provisions include expensing of intangible drilling costs related to exploration and development and a decrease in the amortization period for certain geological and geophysical property. The expensing of exploration and development costs is also a relatively large tax expenditure, estimated to cost the federal government $4.6 billion in revenue losses over the 2010 through 2014 budget window. [Congressional Research Service, 4/14/11]

Taxpayers For Common Sense: Industry Will “Receive More Than $78 Billion” In Subsidies In The Next 5 Years. A report from the fiscal watchdog organization Taxpayers For Common Sense estimated that oil and gas companies will receive “more than $78 billion” in subsidies, including $55 billion in industry specific subsidies:

During World War I, U.S. taxpayers provided the oil and gas industry with its first federal tax break. Over the decades, more lucrative tax breaks have been added. The latest major installment came with the passage of the 2005 Energy Policy Act, which included another $2.6 billion in subsidies for oil & gas companies. But it hasn't stopped there. As recently as December of 2011, oil and gas companies received more subsidies. Each year the oil and gas industry takes advantage of tax breaks and other subsidies worth billions of dollars. In all, oil and gas companies are expected to receive more than $78 billion in industry specific and general business subsidies over the next five years. [Taxpayers For Common Sense, May 2011]

Obama Proposed Eliminating Several Industry-Specific Subsidies. Obama proposed paying for his American Jobs Act in part by repealing or rolling back 8 tax breaks benefiting the oil and gas industry. The vast majority of these subsidies are specific to oil and gas companies. These provisions, which would save an estimated $41 billion over 10 years, have not been considered by Congress. [American Jobs Act Legislative Proposal, 9/12/11]

Oil Industry Also Benefits From Massive Indirect Subsidies. From an October 26 Grist post by David Roberts:

The first and greatest indirect subsidy is the tab that the public picks up for the external costs fossil fuels impose. These include the extraordinary public health costs of air and water pollution. (A recent analysis from respected economists found that coal-generated electricity imposes more in public health costs than the electricity is worth on the market.) There are the national security costs of reliance on oil, which account for at least some portion of the estimated $3 trillion cost of the Iraq and Afghanistan wars, and which have compelled the U.S. military to try to end its oil addiction.

And of course there are the costs of climate change. These are notoriously difficult to calculate, but there's good reason to think the "social cost of carbon" being used by the U.S. government to calculate damages from climate change is radically understating the danger. Or, put another way, it is radically underestimating the public subsidy to greenhouse-gas-emitting industries.

The second big indirect subsidy is to demand for fossil fuels, which has been locked in by a century's worth of massive and ongoing infrastructure spending. [Grist.org, 10/26/11]

Forbes Falsely Claims Ending Oil Subsidies Will Hurt Consumers

• Forbes: Repealing Fossil Fuel Subsidies Would Hit “The Pockets Of American Consumers.” In his op-ed, Forbes claimed that the “influx of revenue expected from rolling back these fossil-fuel 'subsidies' -- close to $90 billion when factoring in the effects on related industries -- is actually a national energy tax that will likely come straight from the pockets of American consumers.” [Politico, 10/26/11]

ProPublica: Experts Agree The Tax Incentives “Don't Have Much Effect On Gas Prices.” ProPublica reported in May that “most experts agree” that the tax incentives benefiting oil and gas companies “don't have much effect on gasoline prices, one way or the other.” ProPublica cited Stephen Brown, a professor of economics at the University of Nevada, Las Vegas, who conducted a study that found if oil industry subsidies were cut, “the average person would spend, at most, just over $2 more each year on petroleum products.” [ProPublica, 5/12/11]

Severin Borenstein: “The Incremental Change In Production That Might Result From Changing Oil Subsidies Will Have No Impact On World Oil Prices.” According to Severin Borenstein, co-director of U.C. Berkeley's Center for the Study of Energy Markets, cutting subsidies for oil companies “would not affect gasoline prices.” He further explained:

Gasoline prices are a function of world oil prices and refining margins. The oil companies are quick to point out that they are not to blame for oil prices because the price is set in the world market, or which they are a small share. That is all true. But one implication of that is that the incremental change in production that might result from changing oil subsidies will have no impact on world oil prices, and therefore no impact on gasoline prices. [Email to Media Matters, 4/28/11]

Michael Canes: Ending Oil Subsidies Would Have “Very Little” Effect On Gasoline Prices. Michael Canes, a distinguished fellow at the Logistics Management Institute and former chief economist of the American Petroleum Institute wrote in an email to Media Matters that ending subsidies to oil companies would have “very little” effect on oil prices. He further said that there could be “Some small effect if at the margin domestic production is adversely affected, but I suspect that effect would be very small indeed. Personally, I'd like to see an end to ALL energy subsidies, but that's another issue entirely.” [Email to Media Matters, 4/27/11]

Forbes Cites Industry's International, Not U.S. Tax Rate

• Forbes: “The Industry Is Taxed At An Effective Rate Of 41 Percent.” In his op-ed, Forbes wrote, “U.S. oil and gas producers now pay the federal government more than $86 million a day in taxes, royalties and fees. The industry is taxed at an effective rate of 41 percent.” [Politico, 10/26/11]

Tax Rate Comes From API Report. In an October 2011 report, API stated that “U.S. oil and natural gas companies pay considerably more in taxes than the average manufacturing company. In 2010 income tax expenses (as a share of net income before income taxes) averaged 41.1 percent, compared to 26.5 percent for other S&P Industrial companies.” [American Petroleum Institute, October 2011]

Rate Of 41 Percent Represents International Income Tax Expenses. An American Petroleum Institute spokesman confirmed that the 41.1 percent tax rate is what the industry pays globally, not to the U.S. government. [Phone conversation, 10/28/11]

Other Countries Tax Oil Companies At A Much Higher Rate Than U.S. From a May 2007 BusinessWeek article:

From 2003 to 2007, Exxon's earnings grew by 89%, while income taxes grew by 170%. Much of that growth was overseas. Oil-producing countries charge companies like Exxon dearly to dig for oil. Arrangements vary from country to country, but Russia and Libya charge companies up to 90% of the revenues they collect for extracting oil, according to Fadel Gheit, senior analyst for Oppenheimer (OPY). These arrangements--whether production share agreements or royalty contracts--are not disclosed by companies and governments. [BusinessWeek, 5/2/08]

U.S. Rate Paid By Oil And Gas Companies Varies, But Is Significantly Lower Than 41 Percent. According to data compiled by Aswath Damodaran of NYU, the oil and gas distribution industry paid an effective U.S. income tax rate of 15 percent last year; the petroleum producing sector paid 8.5 percent; integrated petroleum companies paid 27 percent; oilfield services and equipment companies paid 16.5 percent; and the natural gas sector paid 15 percent. [Aswath Damordaran blog, 1/28/11]

Forbes Overstates Number Of Jobs In Oil And Gas Industry

• Forbes: Oil And Gas Production Supports “More Than 9 Million Affiliated Jobs.” From Forbes' op-ed: “If the administration were serious about deficit reduction and accelerated job growth, it would partner with our domestic energy producers to help increase their employment base -- which now encompasses more than 9 million affiliated jobs -- by letting them expand their output.” [Politico, 10/26/11]

Seven Million Of Those Jobs Were Categorized As “Indirect And Induced.” The source of Forbes' jobs numbers is a PricewaterhouseCoopers report commissioned by the American Petroleum Institute. The report estimated that “the U.S. oil and natural gas industry's total employment impact to the national economy in 2009, combining the operational and capital investment impacts, amounted to 9.2 million full-time and part-time jobs.” This includes 2.2 million direct oil and gas industry jobs and 7 million “indirect and induced” jobs. “Indirect” jobs are defined in the report as those occurring “throughout the supply chain of the oil and natural gas industry.” “Induced” jobs are those “resulting from household spending of income earned either directly or indirectly from the oil and natural gas industry's spending.” [American Petroleum Institute, May 2011]

Wash. Post: Economists Say API Inflated Job Numbers. In an October 10 article, the Washington Post reported that the API figure includes a “seldom-used category known as 'induced jobs,'” and that API counted 500,000 convenience store cashiers in its estimate of direct oil and gas jobs. The article also quoted energy economist Philip Verleger stating that “The API is the best there is at lying with statistics”:

But many economists say that the API has exaggerated the number of jobs linked to the oil and gas industry by including direct and indirect jobs (such as steel suppliers), and a seldom-used category known as “induced” jobs that API says covers everything from valets to day-care providers, from librarians to rocket scientists.

Moreover, the single biggest category of people working directly for the petroleum industry is cashiers at gasoline stations and stations with convenience stores -- 533,830 of them, according to the Labor Department's Bureau of Labor Statistics. Yet hardly any of those cashiers pump gas, check engines or inflate tires; mostly they ring up sales of snacks, not gasoline. According to the Labor Department, their median hourly wage is a meager $8.68.

“As the old saying goes, statistics do not lie but statisticians do,” said Philip K. Verleger, an economist, consultant and retired professor of management at the University of Calgary's business school. “The API is the best there is at lying with statistics.” [Washington Post, 10/10/11]

API Included Large Number Of Financial Partners In Its Figure. From the Washington Post article:

Drilling further into the API numbers of existing petroleum industry jobs shows just how murky these numbers and definitions can be.

According to the BLS, the number of people in the United States drilling wells, extracting oil and gas, refining petroleum and manning gasoline stations is about 1.1 million. If sole proprietors and business partners are included, the number rises to about 2 million, according to the Commerce Department's Bureau of Economic Analysis.

Kurt Kunze, an official at the BEA, said, “The big discrepancy in oil and gas extraction is that there are some big master limited partnerships with lots of partners. There is no way to separate out the people digging holes in the ground from someone who is just a financial partner.” He said given the number of partnerships, he would tend to use the lower BLS figure.

API used the higher figure. If half a million people were taken out of its baseline projection, the final total would have been reduced by 1.8 million. [Washington Post, 10/10/11]

Forbes Exaggerates Job Impact Of Expanding Drilling

• Forbes: More Domestic Oil Production “Would Create More Than 1 Million Jobs.” Forbes stated that “Allowing domestic producers to responsibly develop abundant energy in offshore and onshore deposits, according to a recent Wood Mackenzie study for the American Petroleum Institute, would create more than 1 million jobs nationwide; channel an estimated $800 billion in additional government revenues; and contribute 10 million more barrels of oil and natural gas per day by 2030. [Politico, 10/26/11]

Energy Expert: Oil Industry's Job Numbers Are “Unrealistic.” Michael Levi, an energy expert at the Council on Foreign Relations, examined the assumptions underlying the Wood Mackenzie/API study - which has also been cited by Republican presidential candidates -- and concluded that its numbers are “unrealistic”:

The numbers that Perry and Romney are offering for job creation in the energy sector are unrealistic. They assume that they will be reversing deeply anti-industry Obama policies that don't actually exist (which is not to say that the Obama policies have no flaws), ignore real constraints at the state level, and don't fully account for market dynamics. Five hundred thousand is a reasonable upper limit for the number of jobs that a new policy might create by 2030, of which 130,000 or so might actually be in oil and gas. Taking into account market dynamics could lower those numbers further. [The Atlantic, 10/14/11]

Wash. Post: Study Makes Faulty Assumptions. From the Washington Post article:

The ad cites a study by Wood Mackenzie, a consulting firm hired by API. Scott Mitchell, who oversaw the study as head of North America upstream research at Wood Mackenzie, said that only a third of the 1.4 million positions created would go to people working directly for the petroleum industry and that the rest would be indirect and induced jobs.

“To be confident about the induced job effects of additional spending is incredibly complex,” said Mark Fulton, head of research at Deutsche Bank's team of climate change advisers. Citing such figures involves “going another step toward lack of accuracy,” he said.

The Wood Mackenzie study also makes assumptions about current policy. For example, it assumes that current regulations limit the number of Gulf of Mexico exploratory wells to 20 a year. But the number of exploration wells being drilled now is already well above that. As a result, gulf exploration would have little effect on job creation. [Washington Post, 10/10/11]