The Best Congress Oil Could Buy
By Steve Kretzmann

Widely denounced as a “do-nothing” Congress, the 2005-2006 U.S. Congress did manage at least one notable accomplishment: It lavished more than $6 billion in royalty relief, tax breaks and other incentives on the oil and gas industry in the Energy Policy Act that was passed in 2005.

The 2007-2008 Congress is quite different in composition, but the vast array of oil industry subsidies remains untouched.

When Representative Nancy Pelosi, D-California, took over as Speaker of the House, she promised that in the first 100 hours of the new Congress, representatives would repeal subsidies to Big Oil.

The Democratic House of Representatives delivered on this promise in part, closing loopholes that let oil companies underpay royalties from drilling on federal land, and allocating the earnings to support for alternative energy.

But the measure was not able to win sufficient support in the Senate, and the energy bill passed by Congress at the end of 2007 left Big Oil’s package of subsidies in place.

The loophole that allowed the industry to underpay royalties was actually an unintended omission: a failure to require royalties be paid if the price of oil exceeded a set value [see “Greasing the Deal: A Royal(ty) Scam,” Multinational Monitor, September/October 2006]. The industry says it would be unfair to fix this mistake, because a contract is a contract.

“You have arguments that this goes against the core principles of contract law,” says Erik Milito, senior counsel and spokesperson for the American Petroleum Institute. “The only way you can change a contract that’s already in existence is by the parties voluntarily agreeing to it. That’s really been where the resistance is coming from.”

“When you enter into a contract for one of these leases, the government hands you the contract, there’s no negotiation,” says Milito. “You win the bid, you get the lease, you either sign it or you don’t get it. So what they were signing was the deal. And that deal, when they signed it and got it, included no price thresholds in it.”

Perhaps the industry has successfully been able to keep an unintended, multibillion-dollar mistake in place because of its policy arguments.

Another theory is that it is getting a return on its political investments.

The oil and gas industry spent more on the 2004 election than ever before — $16.7 million in Congressional campaign contributions, 80 percent of which went to Republicans. They topped that figure in 2006, pouring $20 million into that year’s Congressional elections. This has been money well spent. With the value of ongoing and new subsidies to the oil and gas industry conservatively estimated at more than $6 billion a year, the industry is earning a return on investment of more than 650-to-1.

Like other major industries, Big Oil spends far more on lobbying than campaign contributions — about $139 million total in 2005 and 2006. But even taking these expenditures into account, the industry is earning an 8,000 percent return on investment.

The oil subsidies unsuccessfully targeted by House Democrats were only a slice of the large pie of assistance the government gives the oil industry annually. With oil company profits soaring and public support for alternative energy growing, it is an open question whether the industry’s political power will remain sufficient to preserve the rich collection of goodies it accepts every year from the U.S. government. A lot is at stake.

The Trouble With This Country

Franklin Delano Roosevelt is believed to have said: “The trouble with this country is that you can’t win an election without the oil bloc, and you can’t govern with it.” Oil interests heavily backed Roosevelt’s 1932 presidential campaign and then reaped substantive rewards from a Congress that was newly controlled by Texans in key leadership positions. At a time when low prices (less than 10 cents a barrel) threatened to lead to the collapse of the oil industry, the New Deal offered various supports to buttress the still-young industry: an expansion of the oil depletion allowance, price supports, import restrictions and so-called “hot oil” legislation, which heavily regulated interstate oil trade. Some of these subsidies remain in place, among them the accelerated oil depletion allowance.

Originally passed in 1916, this measure allowed oil companies to deduct 5 percent of their sales from taxable income to reflect the declining value of their investments in drilling equipment, refineries, etc. Twenty years later, the deduction was expanded to an amazing 27 percent. Today, after being renewed in the 2005 Energy Policy Act, it stands at 15 percent for oil companies without substantial refining or retail operations. This rate suggests that oil wells will be depleted in 6.5 years — far shorter than the life of a typical oil well. Over time, oil companies can — and often have — deducted more than their initial investments.

Big Oil’s Bounty

The 90-year-old oil depletion allowance will cost taxpayers $4.7 billion from 2006 to 2010, according to the Congressional Joint Committee on Taxation. When the allowance was initially enacted, the oil industry arguably needed assistance to compete and expand in a chaotic energy market dominated by coal. But today it is hard to argue that this subsidy is necessary to ensure the success of the oil industry.

Oil and gas receive more than half of all federal energy subsidies, according to Earth Track, a group that specializes in identifying subsidies in the energy market, while renewables other than ethanol receive only 7.5 percent. Ethanol, which enjoys the backing of agricultural giant Archer Daniels Midland (and comes from politically important Midwest states), currently receives 7.6 percent of total energy subsidies.

While there is general agreement on the rough allocation of federal energy subsidies, the absolute estimates of subsidy levels vary. Estimates of the value of federal subsidies to the domestic oil industry range from $31.6 billion in public dollars for 2005-2009 to an amazing $39 billion annually. There are several reasons for this discrepancy. First, accounting methods vary as to how to value subsidies. Second, while environmental and consumer groups tend to calculate the direct cost to taxpayers, Earth Track notes that “many subsidies have a higher value to recipients than their direct cost to the government.” Finally and most significantly, the higher estimate, which comes from Earth Track, includes a portion of defense spending.

Earth Track’s Doug Koplow argues that a significant rationale for the major U.S. military presence in the Persian Gulf is to protect oil supplies, a non-controversial assertion. That there are other reasons for the U.S. presence in the Gulf does not mean that some portion of the cost of U.S. operations in the region should not be considered an oil subsidy. U.S. governmental research agencies, including the Government Accountability Office and the Congressional Research Service, have reached similar conclusions. The difficult challenges are to decide what share of U.S. military expenses are Middle East expenses, and what portion of military expenditures in the region should be considered an oil subsidy. Koplow also estimates a share of military expenses for protecting U.S. oil assets in Alaska, and the costs of maintaining the Strategic Petroleum Reserve, a vast stockpile of oil, held in case of a supply disruption. Koplow settles on an overall estimate of $19 billion for these three prongs of oil security. This figure does not include any costs associated with the Iraq war.

Exactly which companies benefit from the governmental giveaways? The short answer, says Tyson Slocum, energy campaign director at Public Citizen, is “the bigger the oil company, the bigger the piece of the pie they’re going to get. Big companies are getting the lion’s share.”

The Generosity of 2005

“The 2005 Energy Bill was perhaps the best example of the largesse Congress is willing to give to oil and gas,” says Erich Pica at Friends of the Earth. In one stroke, the Congress that received more support from the oil industry than any other returned the favor and passed legislation worth at least $2.6 billion in tax subsidies to the oil industry. Key elements of the bill permit companies to deduct the costs of certain oil refining equipment (a giveaway worth more than $400 million over 10 years, according to the Congressional Joint Committee on Taxation), speed up the depreciation schedule for natural gas distribution lines (worth more than a $1 billion) and deduct the costs of searching for oil and gas (worth almost $1 billion).

This kind of lavish attention is often justified by the need to keep gas prices down for consumers (and constituents), the need to reduce U.S. dependence on foreign oil, or the need to ensure that U.S. oil companies remain competitive in the global market.

“This bill will allow America to make cleaner and more productive use of our domestic energy resources, including coal, and nuclear power, and oil and natural gas,” said President Bush in signing the legislation. “By using these reliable sources to supply more of our energy, we’ll reduce our reliance on energy from foreign countries, and that will help this economy grow so people can work.”

The administration and Congress “are grasping at straws to deal with energy prices, and see subsidizing domestic industry as one way to fix our reliance on oil,” explains Pica. “They see the national security argument as justifying their support of subsidies.”

“The truth is we’ve been increasing market subsidies since the 1980s, but our dependence on foreign oil has increased — they [subsidies] are not working. I don’t see many legitimate arguments against repealing oil and gas subsidies.”

Separation of Oil and State

The current Congress is the least beholden to the oil and gas industries in a generation. In the 2006 election cycle, members of the incoming Congress accepted fewer total campaign donation dollars from the oil and gas industry than members of any other Congress in the past 15 years — less than $7 million, down from more than $11 million in the previous election cycle. (This is the amount accepted by winning candidates, not the overall industry investment.) The number of representatives and senators accepting no campaign contributions from the industry also jumped nearly one third between the 2005-2006 and 2007-2008 Congresses.

Moreover, an unprecedented four of the top five Congressional recipients of campaign contributions from Big Oil during the 2006 election cycle lost to cleaner candidates in close Senate races. The unseated recipients — all Senators — were Conrad Burns (Montana), Rick Santorum (Pennsylvania), James Talent (Missouri) and George Allen (Virginia). These results alone kept nearly $700,000 in oil money’s influence out of the current Congress.

Where campaign contributions are concerned, reality may be beginning to catch up to rhetoric. But so far the political momentum for a separation of oil and state has not led to the repeal of tax breaks and subsidies to the oil and gas industry, and only to modest legislative measures for increased investment in clean energy technologies and energy efficiency.

For now — and despite skyrocketing oil prices, a consensus that climate change is real and underway, and ever more dire warnings about the potential impact of global warming — Big Oil apparently has enough power in Congress to put the brakes on measures to reduce oil subsidies or facilitate a shift to clean energy technologies.

In five out of six key climate and energy votes in the House of Representatives, Oil Change International research has found, Members of Congress who voted against clean energy proposals took an average of four times more Big Oil money than those who voted in favor of clean energy. And in all six key climate and energy votes in the Senate, Senators who voted against clean energy proposals took 2.5 times more Big Oil money than those who voted in favor of the bills.

Nonetheless, Congressional attitudes and debts to Big Oil are discernibly different in the current Congress than the one preceding. The November 2008 elections perhaps portend yet another shift against Big Oil, in Congress as well as the White House.

Steve Kretzmann is executive director of Oil Change International, an organization that works to identify and dismantle barriers to clean energy. Meg Boyle provided research and writing assistance with this article.

© Multinational Monitor September/October 2007