The Truth About Oil Subsidies

Class warfare between the producers and the looters

By Jeff Harding

Try this on your friends. Ask them if they think that Congress should eliminate subsidies to oil companies. I would guess that it would be almost unanimous that they should, at least from my experience.

But here is the trick: There are no oil subsidies.

If you define “subsidy” as “a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive,” then there are no oil company subsidies.

But in the Obama Administration’s class warfare, a “subsidy” is a tax break previously allowed by the government. In this case those breaks relate to drilling and depletion allowances. Intangible drilling cost write-offs are for costs related to any services or equipment in the drilling of a well that have no salvage value. The government allows them to be 100% expensed in the year made. This is not unlike certain write-offs for investment in plant and equipment. Also, depletion allowances allow a write-off of 15% of the value of oil royalties produced every year. Think of it as being similar to depreciation of equipment or real estate.

The implication of the Administration’s terminology is that the oil companies’ profits actually belong to the government and that they are just letting them keep enough profit as an incentive to produce more oil. This is demagoguery and serves to vilify oil companies in order for the government to justify seizing more of their profits. Imagine the reaction of most folks to the word “subsidy” when they hear that oil companies are now “reaping” (a term that is almost a homonym for raping) “windfall” profits. This is an old game played every time gasoline prices climb. Now it is just an excuse to seize revenue.

We can have a reasonable debate on tax write-offs. But when the issue is politicized, the discussion is reduced to class warfare between the producers and the looters.