Oil Subsidies

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FriscoMike's picture
FriscoMike
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Joined: Mar 17 2011
Posts: 29
Oil Subsidies

 

I would like to know if anyone can tell me where to find factual information on who is actually benefitting from oil subsidies.  The recent rhetoric suggests that only the smaller companies benefit but they also claim that they are drilling most of the wells.  So I am trying to understand how removing this subsidy would impact the small independent company.  How interdependent are the large oil "Big Oil (Exxon/Shell/Chevron/BP)" companies on the smaller independent companies.  I try to equate this to my business where we subcontract our dirty work (wire pulling) out to smaller independently owned companies.  I have tried to use simple common sense logic to this and apply the same principles.

 

 

FriscoMike's picture
FriscoMike
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Posts: 29
 By reviewing the IRS site

 By reviewing the IRS site > http://www.irs.gov/publications/p535/ch09.html I have found that independent companies along with "Related Person" can both claim deductions - either by cost or percentage depletion.  I am sure that the large oil companies have a significant ownership or interest if by nothing else but the downstream product.

I guess where I am going with this is... if the government would stop spending useless cash on oil subsidies, the claim is that all of the independent companies would go out of business and 4 million people would be without jobs.  But that would also suggest that the 90+% of all domestic oil that is being produced today by the independent would be stopped.  I just don't but into this.  Why wouldn't the independent companies be incentivized by the simple market demand of their product?  If large oil corporations were no longer able to purchase the downstream product - wouldn't they step back into the picture and either take over exploration / production....or subsidies these independents with their deep pockets?

Related person.   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you.

 

For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. A partnership and a trust are related persons if one person holds a significant ownership interest in each of them.

For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following.

 

  • The value of the outstanding stock of a corporation.

  • The interest in the profits or capital of a partnership.

  • The beneficial interests in an estate or trust.

osb272646's picture
osb272646
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Joined: Mar 14 2010
Posts: 120
A good place to start

I looked into this a few months ago, trying to get a handle on what subsidies were being given to the big oils.  It didn't take long for me to realize that a good place to start would be to define what is a subsidy.  Tax accounting 101: One man's subsidy is another man's deduction.  This is especially true in times of political divisiveness and rancor that we see these days.

I could not find a clear example of a subsidy in the petrol business.  Often, the depletion allowance is offered up as the prime example of a subsidy.   The depletion allowance is a deduction not unlike the depreciation expense or cost of goods sold in many businesses.  Depletion is used in the resources industries, such as mining, forestry, and of course the petroleum business.  It provides the mechanism for which a taxpayer can deduct, over time, the amount that he originally paid for the oil he's pumping out of the ground. 

If the depletion allowance were taken away, then the cost of producing oil in the U.S. would shoot up to the point where domestic drilling and exploration would dry up over a very short period of time. 

True subsidies are not easily identifiable.  They're so rampant in our economy and the ptb like to keep them hidden from view.  For an example, just read the history of a pro basketball or football arena in any city of your choice.  The list goes on and gets murkier from there.

Unfortunately, most folks will believe anything their favorite politician tells them.  If that politician states that the "percentage depletion allowance" is nothing but a subsidy for big oil,   they'll bite.   They don't understand what it is, or even care. 

 

FriscoMike's picture
FriscoMike
Status: Bronze Member (Offline)
Joined: Mar 17 2011
Posts: 29
 Thanks for the response

 Thanks for the response – and yes, I understand that a subsidy is just a means for tax deductions which equates to more income.  What I am fishing for is to understand who really benefits from these deductions…?  The mainstream Conservative party states that the subsidies are only benefited from the smaller independent companies who are actually drilling the well-heads and “producing” the output which then is sent downstream to the larger companies for refinery and eventually to retail.

 

The depletion deduction is set up so that independent companies are incentivized to explore and develop new production well-heads as existing ones decline in product output.

 

My thought is that sure while the smaller independent companies may benefit from these deductions as the well-head starts a production decline…why would they need additional capital to re-invest for exploration into new leases and developments?  Shouldn’t any company with a solid business plan have future resources accounted for in current operating expenses?  For example, I know that at the end of the year, my escrow on my home might be short… I have to put cash to the side and anticipate a shortfall.  Same with oil companies…they know that in 5-10 years (theoretically) on any given well-head, production is going to decline.  Why would they not be stashing some cash into an escrow to cover exploration and future production expenses?

 

Am I just misunderstanding how this percentage depletion deduction currently works?

 

So if .gov decides to pull the plug on this deduction, will the independents truly go out of business and the large oil companies continue to succeed without these guys?

osb272646's picture
osb272646
Status: Silver Member (Offline)
Joined: Mar 14 2010
Posts: 120
depletion allowance

The depletion allowance is the cost recovery side of the revenue stream.  If depletion is eliminated, then it would be like telling a grocery store they have to pay taxes on their entire revenue with no deduction for what they had to pay for the things they're selling to generate that revenue.   How long would a grocery store stay in business if it had to pay it's income taxes on 100% of its revenues with no offset for the cost it had to pay it's suppliers?  Loss of the depletion allowance would hurt big and small producers alike.

Sometimes I wish the conservatives would just step back and let those politicians who want to do these things have their way.  In about six months, the populace would be screaming for the heads of those who implemented these "easy sell" solutions.  Unfortunately, that's not how it works.

If you want to delve into an interesting subsidy, why not take a look at the "home interest deduction"?  Who is that subsidizing?  The home owner?  Or is it really subsidizing the construction/financing/real estate broker conglomerate (who, by the way, pay a lot of campaign contributions and employ a lot of lobbyists)?  Before you answer that, ask yourself what would happen to house prices if that subsidy were taken away, and how the real estate market would adjust within a year or two, maybe less?

 

 

 

 

docmims's picture
docmims
Status: Platinum Member (Offline)
Joined: Jun 17 2009
Posts: 644
Cut the subsidy and oil

Cut the subsidy and oil companies will just raise prices to compensate.  The consumer will then get to see the "real" price of oil.  The government will get more revenue from the consumers by way of the oil companies.  The blame for rising oil prices will contunue to be shifted to the oil companies while the govt makes out like bandits. Consumers will cut back on their driving, and the poor will continue to get poorer..  What could go wrong?

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