Right-Wing Media Falsely Claim That Cutting Tax Breaks For Oil Companies Will Boost Gas Prices

››› ››› FAE JENCKS

Right-wing media outlets have criticized President Obama's call to end certain tax breaks for oil companies, claiming that doing so will increase the price of gasoline. However energy experts contacted by Media Matters explain that cutting the tax incentives will have little to no effect on prices at the pump.

Like Boehner, Conservative Media Claim Gas Prices Will Increase If Oil Subsidies Are Cut

Boehner: Cutting Tax Breaks For Oil Companies Would "Increase The Price At The Pump." From an April 26 Los Angeles Times article:

Obama has proposed eliminating subsidies to oil and gas companies, which the administration pegs at $4 billion. Republicans have argued that they are necessary to keep the energy industry competitive and encourage domestic oil exploration.

A Boehner spokesman quickly shot down the possibility that the speaker was moving closer to the president's proposal.

"The speaker wants to increase the supply of American energy and reduce our dependence on foreign oil, and he is only interested in reforms that actually lower energy costs and create American jobs," Boehner spokesman Michael Steel said. "Unfortunately, what the president has suggested so far would simply raise taxes and increase the price at the pump." [Los Angeles Times, 4/26/11]

Erickson Claims "Obama Came Out In Favor Of Even Higher Gas Prices" By Calling For An End To Oil Subsidies. From CNN contributor Erick Erickson's April 27 RedState post titled, "Barack Obama Comes Out For Even HIGHER Gas Prices":

He's definitely an amateur and it shows when, late yesterday, Obama came out in favor of even higher gas prices.

As a friend noted on Facebook, Obama's popularity is falling so fast that Kenyans are now claiming Obama was born in the United States. This won't help that.

Now, he does not say he is in favor of higher gas prices (though his Secretary of Energy does), but Obama wants Congress to "take 'immediate action' to end tax subsidies for oil and gas companies" [RedState, 4/27/11]

Fox News' Hemmer: If Oil Subsidies Are Eliminated "We're Gonna Pay For That Gallon Of Gasoline Even. They're Just Going To Pass That On To Us." From the April 26 edition of America's Newsroom:

HEMMER: Yeah, if you took away the subsidies though - you know, listen, we're gonna pay for that gallon of gasoline even. They're just going to pass that on to us. They're not going to want to cut into their profits, correct? [Fox News, America's Newsroom, 4/26/11]

Hot Air's Morrissey: Ending Oil Subsidies "Would Have The Short-Term Effect Of Raising Prices At The Pump." From a post by Ed Morrissey on Hot Air:

Ending the subsidies, as Obama demands, would have the short-term effect of raising prices at the pump, not lowering them. His argument is as incoherent as it is hypocritical, but it does highlight the over-involvement government has in energy production altogether. [Hot Air, 4/25/11]

Gateway Pundit's Lady Liberty: "Remove The Subsidies...Prices Go UP!" From a post by Lady Liberty on the blog Gateway Pundit:

It must be that new math. President Obama points his finger at the evil oil companies and blames them for high gas prices. He claims that if we eliminate their subsidies that prices will go DOWN! Huh?


Wikipedia defines a subsidy (also known as a subvention) as a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor.

Got that? Subsidies prevent an increase in prices. Remove the subsidies...prices go UP! [Gateway Pundit, 4/23/11, emphasis original]

NRO Contributor: Eliminating Subsidies "Could Actually Encourage Oil Prices To Rise." According to a post by Jonathan H. Adler on National Review Online:

The percentage depletion allowance for oil and gas can enable a producer to claim total depreciation in excess of the cost of their investment. This is because the depreciation is calculated as a fix percentage of annual gross revenue. I think it is fair to characterize this as a subsidy, and I would not want to extend its application more broadly. Of course, eliminating the percentage depletion allowance would not bring down gasoline prices. Indeed, insofar as it discourages additional production on the margin, it could actually encourage oil prices to rise. [NRO, 4/27/11]

Energy Experts Say Cutting Tax Breaks Will Have Little Effect On Oil And Gasoline Prices

Borenstein: "The Incremental Change In Production That Might Result From Changing Oil Subsidies Will Have No Impact On World Oil Prices." According to Severin Borenstein, co-director of U.C. Berkeley's Center for the Study of Energy Markets, cutting subsidies for oil companies "would not affect gasoline prices." He further explained:

Gasoline prices are a function of world oil prices and refining margins. The oil companies are quick to point out that they are not to blame for oil prices because the price is set in the world market, or which they are a small share. That is all true. But one implication of that is that the incremental change in production that might result from changing oil subsidies will have no impact on world oil prices, and therefore no impact on gasoline prices. [Email to Media Matters, 4/28/11]

Canes: Ending Oil Subsidies Would Have "Very Little" Effect On Gasoline Prices. Michael Canes, a distinguished fellow at the Logistics Management Institute and former chief economist of the American Petroleum Institute wrote in an email to Media Matters that ending subsidies to oil companies would have "very little" effect on oil prices. He further said that there could be "Some small effect if at the margin domestic production is adversely affected, but I suspect that effect would be very small indeed. Personally, I'd like to see an end to ALL energy subsidies, but that's another issue entirely." [Email to Media Matters, 4/27/11]

Kingston: "It Won't Change The Price Of Gasoline." When asked how the proposed cuts to oil subsidies would affect gasoline prices, John Kingston, Director of News at energy information firm Platts said: "It wouldn't, and I don't view them as subsidies." He added:

The tax breaks on oil are part of the endless discussion about how to tax an economic activity. Do you tax it at 0%? Do you tax it 100%? Or do you tax it in between? You want to tax it at the rate that provides the most money for the government while not inhibiting economic activity.

But that is not a subsidy. My demand for oil isn't going to change one iota because of the changes that are under consideration, and therefore it won't change the price of gasoline.

Oil companies will argue that the changes in the tax rate could change supply. Now you could build some theoretical model that says, if the tax rate is changed, it MIGHT inhibit production, and therefore down the road, supplies would be less than they would be otherwise. Therefore, the price could be higher and my demand might be less. This is not as crazy as it sounds. If the rate on these forms of exploration went to 100%, obviously, no company would produce that oil, the overall market would tighten, and the price could go up. But that's not in question; the administration is not proposing a 100% tax rate. [Email to Media Matters, 4/27/11]

Lafakis: Decisions On Production And Development Of Oil Wells "Are More Influenced By Other Factors Such As Oil Prices And Technological Innovation." In an email to Media Matters, Moody's economist Chris Lafakis stated that while he hadn't conducted a full analysis of the implications of tax breaks to oil companies and thus couldn't comment on the impact of Obama's proposals, generally speaking, factors other than tax incentives have more of an influence on oil companies' decision to begin exploration or production of a well. According to Lafakis:

Generally speaking however, my sense is that while tax breaks encourage exploration, production and development of oil wells, those decisions are more influenced by other factors such as oil prices and technological innovation. For instance, tax breaks have had little to do with the increase in oil rig drilling since the third quarter of 2009. Instead, oil rig drilling has risen as oil producers have developed methods to extract oil from shale formations in the West North Central census division. [Email to Media Matters, 4/27/11]

JEC: Eliminating The Domestic Production Tax Deduction "Would Have A Negligible Effect, If Any, On Consumer Energy Prices." One of the tax breaks Obama seeks to end is a domestic manufacturing credit. According to a 2007 analysis by the Joint Economic Committee, eliminating this tax credit would "have no effect on consumer prices for gasoline and natural gas in the immediate future." From the JEC report:

The following analysis by the majority staff of the Joint Economic Committee (JEC) at the request of Senators Jeff Bingaman, Chairman of the Senate Energy and Natural Resources Committee, and Max Baucus, Chairman of the Senate Finance Committee examines the impact of denying the Internal Revenue Code (IRC) Section 199 manufacturing deduction to major integrated oil and gas producers on consumer prices of oil and natural gas. The report finds that the removal of this deduction would have a negligible effect, if any, on consumer energy prices. This tax provision will likely be included in a larger Senate energy bill as a way to finance renewable and energy conservation efforts.

Key Points

• Because the removal of the tax deduction does not affect production decisions in the near term, removing or modifying the tax deduction will have no effect on consumer prices for gasoline and natural gas in the immediate future.

• In the long run, the removal of the tax deduction is unlikely to have any effect on consumer prices for oil and gas. Oil prices are more than three times higher than they were when the tax deduction was implemented in 2004 - and those high prices are an incentive for investors to continue to invest in oil and gas companies. Although natural gas prices are not significantly different from their 2005 levels, natural gas prices rose significantly over the last decade and those higher prices also provide good incentives for investors. [Joint Economic Committee, 12/18/07, in-text citations deleted for clarity]

CRS: The Market Price Of Crude Oil "Would Not Be Expected To Increase Very Much, If At All," If The Domestic Production Tax Break Were Rescinded. According to an analysis of the Section 199 deduction for domestic manufacturing:

As before, eliminating the deduction -- that is to say, raising the corporate tax rate -- would increase total (or average) business costs and therefore reduce profitability among the major oil and gas producers. As long as marginal production costs are unaffected, there would be no price effects in the short run. Similarly, the demand for imports is likely to remain the same in the short-run. Thus, this type of corporate income tax increase would arguably be an administratively simple and economically effective way to capture at least some of the oil industry's windfalls in the short run. However, at a current deduction of 6%, and a marginal corporate tax rate of 35%, only a small portion of the industry's likely windfalls would likely to be captured under this option.

The market price of crude oil and natural gas, or even of refined petroleum products, such as gasoline, would not be expected to increase very much, if at all, by such a change in the short run. In general, also, the income tax increases are not expected to have real output effects in the short run, although they could cause resources to flow to other industries in the long run as long as these other industries are allowed the manufacturing deduction, which is equivalent to a lower marginal tax rate. [Congressional Research Service, "Oil Industry Financial Performance and the Windfall Profits Tax," 9/30/08]

CRS Said Some Tax Increases For Large Oil Companies Would Not Increase The Price Of Crude Oil. According to a CRS analysis of a proposal that would have taxed the profits of "super-major" oil companies (ExxonMobil, Royal Dutch Shell, BP, Chevron, and Conoco/Phillips), such increases in taxes would not have increased the price of oil:

Numerous bills have been introduced in the Congress over this period to impose a windfall profit tax (WPT) on oil. Most of the bills were introduced in the 109th and 110th Congresses, after the enactment of the Energy Policy Act of 2005, which provided additional oil and gas industry tax incentives, on top of the industry's traditional tax subsidies. S. 3044, for instance, would roll back $17 billion in tax breaks over 10 years for the largest oil companies and impose a 25% windfall profit tax on major oil companies; revenues would be earmarked to expanding renewable energy development. In general, an excise-tax based WPT, like the one in effect from 1980-1988, would increase marginal oil production costs, reduce domestic oil supply, and raise petroleum imports, making the United States more dependent on foreign oil, undermining goals of energy independence and energy security. By contrast, the income-tax based WPT would be more economically neutral (less distortionary) in the short-run: sizeable revenues could be raised without reducing domestic oil supplies, which means oil imports would not tend to increase. Neither the excise-tax based or income-tax based WPT are expected to have significant price effects: neither tax would increase the price of crude oil, which means that refined petroleum product prices, such as pump prices, would likely not tend to increase. [Congressional Research Service, "Energy Tax Policy: History and Current Issues," 10/30/08]

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