Saturday, July 10, 2010

Extractive industries mining the American public

We have commented in the past about unnecessary corporate subsidies. This new report from our friends at Citizens for Tax Justice describes the biggest tax subsidies enjoyed by oil and gas companies and explains that these subsidies do nothing to encourage energy independence or cleaner energy.

Oil and gas industry insiders and lobbyists often argue that the tax breaks they enjoy encourage them to locate and extract more oil and gas, which allows them to increase supply and thus keep energy prices down below the level they would otherwise reach.

But among the largest five oil companies, less than 10 percent of profit goes to exploration for new oil fields. In fact, in the top five oil companies, managers direct most of their excess cash to dividends and stock repurchases, both of which drive up the companies' share prices and the executives’ stock option values.

To the extent that tax loopholes targeting the oil and gas industry boost their profits, there is no evidence that the additional profits lead the companies to explore for more oil so that they can increase the supply.

Nor does the current tax treatment of oil and gas companies encourage them to develop alternative energy. These companies always claim to be interested in alternative energy, but they actually invest very little in it. Reviews of oil company press releases, SEC filings and published articles suggest that alternative energy investments approximate less than of 5 percent of profits for the top five firms. For example, Shell Oil announced in 2009 that it was reducing alternative investment because conventional operations provided higher returns.

It’s obvious why these companies devote so little to alternative energy. Any substitute for oil would result in a reduced value for the industry's reserves, refineries, pipelines and the like. These companies cannot be relied upon to make these investments, at least not without public policies that change their incentives.

Read the full report here


Blogger Physiocrat said...

The principle that the value of natural resources belongs to all applies both the the actual surface of the earth and to that which lies beneath, which was put there by nature (or God, if you like).

Oil companies should be rewarded for the work they do in exploring for the oil and for doing whatever it takes to get it out of the ground. They should not receive the benefits of any surplus value over and above that which they have created by their activities.

The Norwegian government may have got its oil and gas tax regime about right from this point of view but one would need to look at the details.

5:28 pm  

Post a Comment

<< Home