Analysts Say Cutting Tax Subsidies Will Have Little Effect On Oil And Gasoline Prices

President Obama Proposed Repealing $4 Billion In Annual Tax Subsidies For Oil And Gas Companies. From an Associated Press summary of President Obama's proposed budget for fiscal year 2013:

Obama would repeal more than $4 billion per year in tax subsidies to oil, gas and other fossil fuel producers. The budget proposal says the plan “eliminates inefficient fossil fuel subsidies that impede investment in clean energy sources and undermine efforts to address the threat of climate change.'' [Associated Press, 2/14/12]

Energy Expert: “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]

Oil Industry Analyst: Impact Would Be Negligible. FactCheck.org reported:

Tom Kloza, an oil industry analyst and founder of the Oil Price Information Service, agreed that the impact would be negligible. “It is a small amount of money considering the huge sums flowing in and out of oil futures,” he said, referring to the commodity markets. [FactCheck.org, 5/27/11]

Former API Economist: 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 went on to say 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]

Economist: “The Impact Would Be Extremely Small.” ProPublica reported:

Most experts agree, however, that the tax incentives in question don't have much effect on gasoline prices, one way or the other.

“The impact would be extremely small,” said Stephen Brown, a professor of economics at the University of Nevada, Las Vegas. Brown co-wrote a study in 2009 arguing that if the subsidies were cut, the average person would spend, at most, just over $2 more each year on petroleum products.

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From the beginning, the Treasury Department has said the President's proposal would raise prices at the pump by less than a cent per gallon at most. Brown's study, produced for the non-partisan think tank Resources for the Future, came up with similar results. Even the American Petroleum Institute, which opposes cutting the subsidies, said in a press release on Monday that eliminating them wouldn't affect gas prices. [ProPublica, 5/12/11]

Economist: Reduction In Oil Supply Would Be “Imperceptible.” Time reported in April 2011:

The higher the price of oil, the less tax breaks matter. At $10 a barrel, you might care about the size of the government subsidy. At $100, the tax break is just icing. Back when the API did the first of their studies in August of 2010, the price of oil was about $80 a barrel. Now it is around $110. So you would expect the effect on production would have gone down.

And remember we are just talking US production here. Gilbert Metcalf, an economics professor at Tufts who has studied the relationship between oil and gasoline prices, says that when you look at world oil markets, the reduction in supply from removing the U.S. tax subsidies for oil companies will be “imperceptible.” “This will have no affect on the price of oil or gas,” says Metcalf. [Time, 4/29/11]

Energy Expert: “It Won't Change The Price Of Gasoline.” When asked how the proposed cuts to oil subsidies would affect gasoline prices, John Kingston, Director of News at Platts, an energy information firm, said: “It wouldn't, and I don't view them as subsidies.” He added:

The tax breaks on oil are part of the endless discussion about how to tax an economic activity. Do you tax it at 0%? Do you tax it 100%? Or do you tax it in between? You want to tax it at the rate that provides the most money for the government while not inhibiting economic activity.

But that is not a subsidy. My demand for oil isn't going to change one iota because of the changes that are under consideration, and therefore it won't change the price of gasoline.

Oil companies will argue that the changes in the tax rate could change supply. Now you could build some theoretical model that says, if the tax rate is changed, it MIGHT inhibit production, and therefore down the road, supplies would be less than they would be otherwise. Therefore, the price could be higher and my demand might be less. This is not as crazy as it sounds. If the rate on these forms of exploration went to 100%, obviously, no company would produce that oil, the overall market would tighten, and the price could go up. But that's not in question; the administration is not proposing a 100% tax rate. [Email to Media Matters, 4/27/11]

Moody's Economist: Decisions On Production And Development Of Oil Wells “Are More Influenced By Other Factors Such As Oil Prices And Technological Innovation.” In an email to Media Matters, Moody's economist Chris Lafakis stated that while he hadn't conducted a full analysis of the implications of tax breaks to oil companies and thus couldn't comment on the impact of President Obama's proposals, factors other than tax incentives usually have more of an influence on oil companies' decision to begin exploration or production of a well. According to Lafakis:

Generally speaking however, my sense is that while tax breaks encourage exploration, production and development of oil wells, those decisions are more influenced by other factors such as oil prices and technological innovation. For instance, tax breaks have had little to do with the increase in oil rig drilling since the third quarter of 2009. Instead, oil rig drilling has risen as oil producers have developed methods to extract oil from shale formations in the West North Central census division. [Email to Media Matters, 4/27/11]

Conservative Media Wrongly Use Gas Prices To Defend Oil Tax Breaks

Wash. Times: Closing Tax Loophole “Would Just Raise The Price Of Gas.” From a column by Emily Miller, senior opinion editor for The Washington Times:

Mr. Obama proposes to end the oil and gas industry's ability to expense drilling costs. Sticking it to oil and gas companies appeals to his liberal base, but this tax change would only generate $4 billion, barely enough revenue to cover 30 minutes of federal spending. Closing this “loophole” and not others would just raise the price of gas and put countless Americans out of work. [The Washington Times, 2/23/12]

Fox's Andrea Tantaros: When You “Take Away Their Tax Breaks,” Oil Companies Pass On Costs “To The Consumer.” From the February 22 edition of Fox News' The Five:

TANTAROS: Bob, that is the reason. But it's no secret also that the president has been openly hostile to fossil fuels. His tax plan released recently goes after oil companies. And when you go after oil companies and you try and take away their tax breaks, that just gets passed along to the consumer. And a lot of older folks and myself included have retirement, mutual funds in oil companies. [Fox News, The Five, 2/22/12]

Investor's Business Daily: Tax Change Will “Accelerate Steeply Higher Energy Prices.” From an IBD editorial:

President Obama's election-year prescription to accelerate steeply higher energy prices is to add billions of dollars to the oil companies' tax bills. Expensive gasoline fits the Obama political template.

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House Speaker John Boehner was quick to respond that “a freshman-year economics student could tell you that increasing taxes on energy production would make gas prices go up, not down.” [Investor's Business Daily, 3/2/12]

Fox's Ed Henry: Obama's Proposal “May Raise Prices.” Fox News correspondent Ed Henry stated:

HENRY: As he was serenaded by cheers of “four more years” in New Hampshire, however, today's step was demanding Congress and billions in tax subsidies for oil and gas companies which may raise prices. [Fox News, Special Report, 3/1/12, via Nexis]