Tax Breaks and Oil Companies

(David Mansdoerfer) – Today, at $4.39 a gallon, I spent over $50 completely filling up my 2005 Kia Spectra. When I got back into my car, the announcer on the radio mentioned that Exxon Mobil had reported an $11 billion profit for the first three months of 2011. After that, I went home to read that President Obama wants to take away the nearly $4 billion in tax breaks that is given to the major U.S. oil and gas companies.

At first, still bristling from paying over $50 at the pump to fill up my car, I almost grumbled my agreement with President Obama. (That would have been a first.) Yet, when I began to analyze the potential impact taking away these tax subsidies might have, I regained my common sense.

First, it is important to note that oil industry profits are tied to the price of oil. This might seem like common sense but the oil market is incredibly tricky and is not based wholly on supply and demand. It would be easier to justify rage at oil companies if they were the ones setting the price of oil. But they’re not Since the price of oil is determined by multiple factors including value of the dollar, OPEC production, and geopolitical stability, taking away these companies tax subsidies will drive up the cost of oil production and, thus fore, increase the cost of gas in the long run.

OPEC, which has a roughly 40 percent market share, sets limits on the amount of oil that can be produced. This gives them incredible power over the price of oil and sets the baseline for what U.S. oil companies can produce oil at.

What little control oil companies have over price is partially determined by extraction costs. U.S. oil companies use these tax benefits to improve current production measures and to expand production facilities. They also use these subsidizes to counter losses they experience when trying to expand oil production throughout the world.

For example, in 2007, Hugo Chavez, the President of Venezuela, nationalized Venezuela’s oil rigs ceding control from several U.S. companies including Exxon Mobil, Chevron, and Conoco Phillips. If U.S. companies are forced to make risky investments trying to ensure stability of the U.S. oil industry, and they suffer huge losses because of unforeseen circumstances, the U.S. consumer will be the one paying the price in the end.

Remember, gasoline is an inelastic good – meaning that demand will remain constant no matter what the price. If there is a dramatic supply shock where oil production suffers a significant decrease, prices will skyrocket.

Additionally, the federal, state and municipal government has been leveraging gas taxes against increased spending for the last couple of decades. In 2011, the national average tax on a barrel of oil is 48 cents. In California, the gas tax is 66 cents a gallon. In Nevada it is nearly 52 cents a gallon.

Taking away tax subsidies for oil companies is irresponsible and will only hurt the consumer in the end. Since the demand for gas will continue to grow, the U.S. needs to work with oil companies to ensure stability of the U.S. oil supply. If we take away their tax benefits, the government might have more money, but you and I will have less.

(Mr. Mansdoerfer is the Director of Federal Affairs for Citizen Outreach)