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"Oil is not our future, and the expansion of the industry should not be encouraged."

............ Yes! THE reason for tax subsidies IS that of a functioning democracy deciding that the benefits of the subsidy more than outweigh the costs of the lost income. It is WE who should guide the future of our energy policy. Had we shifted even a small amount of income tax burden onto nonrenewables in the 70's or even in 1992 when the Clinton Admin suggested an across the board BTU tax (on fossil fuels) we'd be in a very different, and better position today.

The case for moving toward, and giving incentives to conservation and alternatives is so clear that we should not fear "picking winners" but simply setting an overall direction -- away from our wasteful over-dependence on imported oil.

And........... ha! hardly onerous:

"The aggregate values of these subsidies to the U.S. oil industry is approximately $5 billion a year, almost as much as the industry pays in federal income tax ($5.7 billion). The industry's total profits exceed $30 billion, so it would not be facing a crushing burden if the subsidies were to be eliminated; the Obama Administration proposes to eliminate only $2 billion of the subsidies."

(Didn't the "big five" just have a $35 billion QUARTER?) The $2 billion is so small as to be unworthy of the debate it's getting.

Peter Pearson

Surely the effects of these subsidies are largely neutralized by fuel taxes; and since the benefits of the subsidies and the costs of fuel taxes are ultimately largely borne by the consumer, it makes sense to compare them on a dollar-for-dollar basis. http://www.fhwa.dot.gov/ohim/mmfr/jan11/jan11.pdf seems to report that state and federal fuel taxes sum to about 40 cents per gallon, and that gasoline sales totaled 138 billion gallons in 2010, indicating that gasoline taxes alone were about $50 billion in 2010. Shouldn't that $50 billion dollar tax load be mentioned in a discussion of the $5 billion subsidy?


Posner omits the fact that he is a lecturer at a university founded by John Rockefeller. And his antipathy toward the oil and gas industry suggests a naive belief that Americans can subsist on no more than air, water, and Facebook pages (assuming the Chinese will sell us devices on which to view them).

Drill, baby, drill.


Peter? What oil co do you owe such allegiance?

"Shouldn't that $50 billion dollar tax load be mentioned in a discussion of the $5 billion subsidy?"

NOT at all! Since the automotive era began those "taxes" have been user fees to build and maintain the roads. As most know, we're now woefully behind on maintenance and urgently needed upgrades, soooooooooo assuming there is no tooth fairy, we should be raising those fees, which have nothing to do with oil-cos profit and loss accounting.

TANS? did you read the piece? And is the crack about Rockefeller funding, to indicate that our profs ought not bite the long dead hand of an oil monopolist having funded an institution of higher learning? Do you think John the philanthropist thought he was buying a propaganda mill in perpetuity?

Lastly....... this is hardly about some age-old idea of treating today's oil industry as if it were just another manufacturer competing on razor thin margins.

No...... we've entered an era when those typically ideologically opposed to steering our future by democratic process conclude:

" Oil is not our future, and the expansion of the industry should not be encouraged. "

Indeed. This iceberg is melting beneath our boots and we'd better prepare for moving to the next one.

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Matt A.

I agree that we don't need to subsidize oil companies any more; we reached land-based-drilling peak oil long ago and will probably do so overall soon if we haven't already, so there's no hope of this subsidy producing much more oil. It's better to end the distortion of the situation and make the adjustments necessary to reach true equilibrium.

The only thing I have to add is that taxes/royalties paid to foreign governments are not just a tax benefit for the companies. They're actually a U.S. credit for any citizen receiving dividends from foreign companies, at least up to a point. That means that the amount of those foreign taxes is effectively tax-free income to ordinary citizens.

Xavier L. Simon aka Xavier

Excellent analyses of the impact of subsidies on production. But notice their limitation: they are reductionist and thus restricted in scope to understanding the subsidy-production relationship. Reductionism has been a—not “the”—fundamental tool that made possible the Scientific and Industrial revolutions and is continuing to give us our technological progress. But only “a” tool because it is only part of the equation as I have pointed out in these pages, particularly on 05/02/2011 at 02:02 PM (on the Becker side)


(Help! How can I keep the hyperlink embedded in the date and time, and not have to repeat the expanded version when posting?)

To ask about the relationship between subsidies and production is entirely different than to ask how to get oil companies to produce more. The two questions get confused. As an engineer by training, if not practice, I am interested particularly in the latter although along the way I also have to understand and consider the former. Yet it is crucial that we keep the two separate. Becker and Posner do this well and is probably why the comments have been more muted this week.

This context makes it easier to answer Peter Pearson (05/16/2011 at 10:56 AM). The $50 billion in gas taxes don’t affect the subsidy-production relationship directly. If they do then it is only indirectly and then by strengthening or weakening the direct relationship through their effect on consumption. But the effects may balance and cancel out anyway. Thus, while taxes normally limit an activity, in this case driving, their use in building highways encourages the activity, thus more consumption, more demand, and a larger opportunity for higher prices and profits in what remains for the producers.

Now, as to the broader question of how to increase production in the US, I think it doesn’t take a genius to understand that the subsidy is just one element and in this case probably a trivial one. Today regulation is more important, and since the bulk of the highway and road systems are already built, even the consumption tax may now be having a larger negative impact on consumption, thus neutralizing some of the effects of the subsidy, than when it was first instituted.

On the other hand, the consumption tax has an impact on the relative price of gasoline and thus influences decisions on whether and how much to invest on producing alternatives—I suspect relative prices have not had an impact on whether to produce more oil because world demand keeps growing. But here too the anecdotal evidence is that regulation plays an important role.

Whether and how important all of these are will depend on the precise question asked. For many years one of my duties in Mexico for a multinational was to manage the analyses that helped put together the capital investments budget. We weren’t in oil for gasoline but believe me when I say that considerations like the above were always important. In fact, some mistakes happened when we ignored one of those relationships thinking that it was too remote. At the same time, our analyses were always determined by the precise investment or question asked.


Yes, Jack, I read Posner's piece. It is disappointing to see a man of Posner's intellect descend to unfounded eco-propaganda that disparages the oil and gas industry on no more than wishful thinking about "alternative" energy sources.

Such thinking is exactly what has caused America over the last 40 years to decline, from a nation that could put men on the moon at will, to one that henceforth must rent space on Russian launch vehicles (!) simply to reach low orbit. Good heavens, the corrupt intelligentsia and their elected/appointed handmaidens have so mortgaged our future that mail delivery on Saturday is now considered an unaffordable luxury.

All that said, out of fairness to Posner let me amend the assertion above that he subscribes to a "belief that Americans can subsist on no more than air, water, and Facebook pages." A more complete description of Posner's belief system probably would make room for a call center in India that American citizens can contact to complain about being subjugated to Luddite rulers.


Xavier -- Geez! you appear to have goals heaped atop "goals!"


"Now, as to the broader question of how to increase production in the US, I think it doesn’t take a genius to understand that the subsidy is just one element and in this case probably a trivial one."

.......... Indeed, but trivial as it is, it's paying something for nothing, along with distorting the market towards the yesteryear of plentiful supply available so cheaply that something of a kicker DID influence oil co behavior.

The even broader question is that of doing any spending or assuming any uncomfortable positions to "increase production". Was it here that a poster reminded us that it's EXTRACTION?

The US has become and "also ran" in oil extraction with bringing up only 15% of world supply. Thus we aren't "market makers" and (other than reforming our futures mkt scam) are NOT going to influence world price. Thus! we are going to PAY the world price, PLUS any amount wasted on oil co "incentives". They will receive world price, which is pretty juicy right now (ha!) plus whatever we taxpayers are foolish enough to ladle out to them.

So....... running well back in the pack as "producers" with thin reserves what is wrong with just going along and letting "the market" tell them when it is time to chase deep, risky, or otherwise costly oil?

For KEEPING our energy dollars at home our push should be that of really getting after conservation and alternatives that while costly and labor intensive on the front end use almost no imported oil during the rest of their economic life.

Some, perhaps most oilcos are now using green flowery looking logos and CLAIM to be "energy companies". Great! if there are incentives to be dangled lets dangle those that develop the future of energy instead of that of pumping America dry as fast as technically possible.


TANS The "wishful alternatives" ARE the future.

Here's a graph showing the historical decline of oil extraction in the US:


Then if I were to super-impose our demand line onto the graph, the supply in the 80's might have been 50% of consumption/wastage, and dropping to 30% today. A sharp departure to say the least.

Be held up for a manipulated price for imported oil? Or......... get busy with lessening demand, and producing viable alternatives?

But, Ha! as a resident of an OPEC state, if you guys do insist on sending us fresh crisp Benjies for a bbl of oil, we will keep taking 'em!


PS --- it took will and skill to "put men on the moon". In regard to being flown up a blind canyon on energy since the warning bell sounded loudly in the early 70's, we've not had the will to shift some of the tax burden on our labors and renewable creativity, onto non-renewables while a rotten collection of political mistakes has LONG delayed the tech to put our consumption/wastage curve in line with supply and the amount we can afford to spend on using twice as much energy per capita/gdp et al as other nations.

It's well past bedtime and that of putting the fairy tales of "infinite" oil just beyond our reach into the box marked "fiction".

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All that said, out of fairness to Posner let me amend the assertion above that he subscribes to a "belief that Americans can subsist on no more than air, water, and Facebook pages."

Vivian Darkbloom

Judge Posner's discussion of the US tax rules pertaining to "royalties" paid to foreign governments unfortunately casts much more darkness than light.

Judge Posner wrote this:

"The principal tax subsidies for the oil industry are as follows: ... and last the companies are permitted to deduct royalties they pay to foreign government, on the ground that royalties paid to a government are really a tax".

Brevity might be the essence of wit, but I'm afraid it's a very poor tool for understanding the United States Tax Code. US oil companies (and all other US companies conducting activities abroad) are subject to US tax on their worldwide income. In order to prevent double taxation of income earned and taxed abroad, US companies are entitled to *credit* against their US tax the foreign taxes paid or accrued on their foreign income up to an amount not exceeding the US tax on that same foreign income. I'm sure most readers would associate the phrase "allowed to deduct royalties" to mean a deduction against income rather than a credit or deduction against tax despite Posner's clumsy attempt to say so by ultimately stating "on the ground that royalties paid to a government are really a tax".

Oil companies present a special case here because often they often do business in foreign countries that nominally do not have income taxes. Rather, these countries prefer to charge oil companies exclusively "royalties" for the privelege of extracting oil because that is administratively easier and more predictable than if they were to charge a separate income tax.

Posner wrote that oil companies are allowed to deduct such "royalties" (although I'm sure he meant credit them against US taxes). This conclusion is very debatable, at least if one believes in Shakespeare's phrase "a rose by any other name would smell as sweet". Or, less prosaically, "if you call a pig a bird, that doesn't mean it can fly". The relevance here is that what is nominally called a "royalty" (or something else) might actually be more akin to a "tax" in economic reality. (Of course, the same is true and what might nominally be called a "tax" is not treated as a tax under the Code, either).

Until now, the Tax Code has recognized this and has allowed oil companies to determine what part of what is nominally called a "royalty" is actually an income tax or a levy "in lieu of" tax and take a credit for that amount (but not exceeding the US tax on that foreign income). Rules now allow a "safe harbor test" to be used or, at the election (and burden) of taxpayers, a facts and circumstances test. While these rules may not be perfect, their very aim is to strip out that portion of levies paid to foreign governments that actually constitute taxes in the real economic sense. The amount derived under existing rules are not "royalties" unless one believes the current regulations are defective in accurately distinguishing them from taxes (a reasonably debatable proposition) or you believe you really can make those pigs fly by calling them birds.

There is another thing that is relevant to the issue of whether these rules actually constitute "subsidies" and whether the rules consitute good or bad tax and economic policy. As mentioned above, the US taxes its corporations on their worldwide income (including income earned through controlled foreign corporations). Most other foreign countries don't. Rather, they follow a "territorial" rule under which only profits earned domestically are taxed. Thus, profits earned outside the country of organization are not taxed at all on income earned abroad. This often puts US companies (including oil companies) at serious competitive disadvantage. The existing rule puts US oil companies a little bit more on par with their competitors from "territorial" tax systems, but not completely.


The issue, fundamentally, is basic bugetary concerns. Such that, revenue must be greater than or equal to expenditures in order to balance the budget and pay down debt. With the advent of massive tax cuts, revenue has been decreased, while at the the same time, expenditures have been massively increased. Health Care costs have been on an inflationary rise for the last twenty years; resulting in massive increased costs in Entitlement Programs. The has been a massive increase in National Security Expenditures at a rate of 130 billion dollars a year to "liberate Muslim Terrorists". Couple this with the multi-trillion dollar bail out of a corrupt Financial and Banking system and you end up with a budget where expenditures are greater than revenue and debt liabilities have expanded drastically.

What to do? What to do? The tax cuts have become something of a "sacred cow" and will not be touched because of the "Depression" the extra funds are needed by the consumer to stimulate the Economy. So what is left to solve this budgetary crisis? Nothing short of cutting current subsidies and the like where allowable and the establishment of Tariffs, Duties and Customs across the board in order to raise the necessary revenues.

Cutting the Oil & Gas Subsidy by two billion is a drop in the bucket, but this needs to be done across the board in all industries until the Budget emergency passes. Without the raising of tax rates, Tariffs and Duties need to be implemented to cover this revenue shortfall. Although it needs to be implemented carefully so that it doesn't derail the ongoing Economic Recovery. If there is one.

As for the economic health of the Oil & Gas industry, from 1977 to 2006 the average rate of return on investment is 7.7% as compared to the 12.5% return realized for the other S&P 500's rate of return. This is a very small return in comparison. If one has an interest in the cost break down for every dollar spent on gasoline see the following:

Raw material crude price: approx. $0.70/dollar
Refining/Retail: approx. $0.077/dollar
All taxes, Fed./State/local: approx. $0.125/dollar

So one can see that the profit generated by the Oil&Gas industry is not as huge as opposed to what the Media portrays it as. Although, the crude producers are reaping a huge profit. Perhaps a Crude Duty (windfall profits tax) ought to be imposed until we get around the Budgetary Crisis we find ourselves in. Everyone is going to have to accept the pain that an Austerity Budget will impose.


Darkbloom corrects Posner's mistaken assertion regarding the US tax treatment of royalties paid to foreign nations by oil and gas companies.

This debate is hilarious to any student of history. The oil and gas industry is one of the most cyclical we have, and the cycle has repeated itself several times in human memory. At the peak everyone hollers about windfall profits and clamors for higher taxes on Big Oil companies. When the industry is in the trough and laying people off, the same pundits are silent. It's like a ratchet that defies fairness and logic. And the last time we tried windfall profit taxes, the administrative and compliance costs outstripped the government's take. (Calling tax collections "revenue" is a misnomer because "revenue" is earned, not exacted involuntarily).

Graphs showing the decline of US domestic oil production, relative to imports, are no news flash. Invoked like cartoons, such graphs are no substitute for rigorous thinking about how producers and consumers of oil behave, or should behave, at the margin.


TANS -- Every once in a while someone writes a book with a title like "The end of history". In terms of oil we're not quite there yet, but here in Anchorage, w/o even traveling 40 miles to Sarah's porch, I can see it from here. One hopes folks in better position to influence policy are seeing it as well.

As for ladling out or continuing to grease corpies with nearly the amount of tax breaks as we collect, but for our dire straits I suppose we could have the luxury of time to "study" which ones actually enhance the productive power of what remains of our capitalism.

Further? When any student of history can see from their own porch that we've long been flown up a blind canyon of "cheap and plentiful oil" for decades after the first warning bells rang (and created wiser policies in the nations with ears) it is T I M E for the wisdom of democracy to change our direction.

Obviously while mired down with the huge fleet of gashogs mentioned, the turn is not going to be a fast one, nor the adjustments easy, but continuing to give tax breaks to those of the oil era, likely to continue to reap windfalls as truly scarce oil emboldens speculators, is HARDLY going to return anything to the taxpayer.

Ha! BTW! Got a chuckle out of the airlines ALL trying to follow Southwest's, one time, coup on hedging fuel prices. Ha! with they and others laying big bets on current prices they're locking in profits and a floor for the very speculators who ARE ruining the airline biz, a biz which is HIGHLY sensitive to oil prices. But........ what are they to do?


NEH: As usual much agreement. As tokenish as it is taking the couple of billion bone away from the oil dogs is not likely to change anything in that industry.

Cuts in say a regulatory body of government is likely to be made up of 90% laying folks off, and leaving yet larger holes for the wolves to get into the hen house for negative gain.

As for oil cos "returns", having once been a retailer, I'm truly mystified as to how they hide their gleanings. Most small retailers, TRY to sell a wholesale $60 item for close to $100, but with sales etc do not attain those margins. But if the selling price were to merely double with costs well covered by the first $100 the 2nd $100 is pure gravy.

In AK the oilcos eked out a few bucks at $10 (of the late 90's) and made good money at $18, now $75 to over $100?? and here MOST of the oil just keeps flowing without a high percentage of exploration or development costs through a pipeline long depreciated out. How DO they hide it?

BTW today's paper reported on refinery carving off a substantially more --- but that's kinda OK as that has been a thin biz for quite a while.

Lastly "IF" (a huge IF) today's oil prices ARE based on S/D fundies which continue to bid up prices, during the many years it's going to take to fly back down the blind canyon, we're really teed up for being gouged and our energy wasting economy more vulnerable to oil costs than are those of the EU and Asia.

Usage per capita by country:


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Jack, Yeah. I read the same article. Currenty the Refining & Retail margins are up from the $0.077/dollar. Due primarily to keeping finished product inventories low via outside contract sales to Mexico and Latin America. Furthermore, gasoline is not the only product coming out of the refinery. Starting at the bottom of the Stills, one has:

1. Coke and Carbon
2. Asphalt
3. Heavy Oils & Fuel Oils
4. Kerosene, Jet fuel, Diesel Fuel, gas oil
5. Gasoline
6. Over head Gas

In order to decrease a given finished product supply, you just manipulate the process to produce other product and send it to finished product storage. Viola! Product shortage and elevated price. The Aviation Industry is in vital need of Kerosene and Jet Fuel, and the Trucking & Rail industry is in vital need of Diesel. Having come out of winter, Fuel Oil isn't such a big deal. To create one fraction, another fraction has to be reduced.

Tans, So then you're in agreement that in order to solve the Budgetary shortfall, the tax cuts that were implemented should be reinstated? You can't have it both ways, "having one's cake and eating it too".


NEH sounds like you're familiar with the oilbidness. I've been looking into it from here as the $4 NG price has put the death knell to the $40 billion AK Gas line. Next is the "instate" LNG pipe to tidewater to sell LNG "on the world market" that is fodder for "studiers" and overpaid board-sitters. DEAD. The pipe would eat up the market value before the LNG process began. Then! a "bullet line" to Anchorage of $4 billion. DEAD. Cook Inlet NG supplies most of the 150,000 customers.

Strange, eh? Many trillions of CF completely stranded in Prudhoe Bay.

Possibly...... a "Swiss" process to liquefy the NG, use it to thin heavy or cold oil and pump it all through the existing pipeline. One sez half the btu's are lost in the process, but! in the new price equation? So what? The old was $20 oil and $8 NG that WAS worthy of a pipeline. Now if half of $4 NG is lost in making a liquid fuel and enhancing extraction of $100 oil a very different equation.

Well, in the course of looking over AK's options I see this on coal to jet fuel:


.............. half a million bbls per month is SIGNIFICANT! AK has lots of coal and is a major air hub and refueling stop, so perhaps a coal to jet fuel is a possibility here.

Here's the best (most honest) I've seen on the fundies of AK gas line:


And a good graph quickly telling the story of "wot happened" to Pickens' wind farm and ALL AK gas line projects:


Speaking of Pickens, I think it's PA? that is really getting on with providing NG refueling facilities -- using OUR energy to power trucking is a good sized step in the right direction.

And Ha! hard to imagine a "budget deal" if no Repub will even vote to snake a couple billion of unwarranted tax breaks away from the oilcos!

But..... good to have Geithner calmly explaining that revenue enhancement has to be part of any deal -- cutting alone would be beyond what normal (non-teabagger/whackright) Repubs could tolerate. And sounds a bit like the grown-ups of the backrooms have some consensus while the carny barkers of Boehner ilk continue their ludicrous posing.

Eric Rasmusen

It would be useful to elaborate on the tax breaks. They don't sound like they're special to the oil business.

One commenter noted that any business (or individual, I think) gets a tax credit for foreign taxes paid. (ANother commenter confused the two, I think--- a person does get a tax credit if his mutual fund pays foreign taxes, but if its his oil company stock, the company gets the credit and the stockholder doesn't.) And as for the royalty portion, that I suppose is just a tax deduction, but a royalty is certainly a cost of doing business, so it would seem uncontroversial to let it be deductible.

Is the 6% for exploration costs a deduction for the actual amount paid out, or just a statutory bonus? If its just a deduction for the amount paid out, then it sounds like being able to expense research, a standard deduction for any business, not just oil. But if it's indeed a deduction for clearing land for any oil well, and the cost of the oil well itself is depreciated, that is anomalous. It's an interesting optimal tax question. If an oil well is disappointing and has a smaller useful life than average, what should be the tax consequences of shutting it down early? We don't want to encourage inefficient early shutting down, but it seems wrong to make the company depreciate the cost for years after the well has shut down instead of being able to deduct the loss immediately.

As so often, tax is an unexpectedly interesting subject, with bigger distributional and efficiency consequences than we think about. As an ind. org. economist, I feel chastened; the imperfect competition effects we study are small by comparison.


Something about oil and taxes:


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