Conservative media claim that recent proposals to repeal tax breaks for the five largest oil companies will “make gasoline more expensive.” However, energy experts say that cutting the tax incentives will have little to no effect on prices at the pump.
Conservative Media Claim Cutting Subsidies Will “Make Gasoline More Expensive”
WSJ's Moore: “The Price Of Gasoline And Oil Is Going To Go Up.” From the May 10 edition of Fox News' Happening Now:
STEPHEN MOORE: The problem I have with though, this circles back to the whole issue of when we pay for gasoline at the pump. If you raise the taxes on gasoline and oil, the price of gasoline and oil isn't going to go down. The price of gasoline and oil is going to go up. [Fox News, Happening Now, 5/10/11]
Wash. Examiner: “More Likely, The Obama-Reid Program Will Make Gasoline More Expensive.” From a May 9 Washington Examiner editorial:
At best, Reid's approach will do absolutely nothing to take the pressure off the wallet of American families. More likely, the Obama-Reid program will make gasoline more expensive. By discouraging U.S. oil production, Obama and Reid will force American consumers to be even more dependent on foreign sources like OPEC and Venezuela's Hugo Chavez. This in turn will hinder the economy from creating new jobs to ease the 9 percent unemployment rate. [Washington Examiner, 5/9/11]
Beck: “If You Cut The Subsidies,” Then “Your Price Is Going To Go Up.” From the May 10 edition of Glenn Beck's radio show:
BECK: OK, so if you cut the subsidies --
GRAY: It goes up.
BECK: -- then your price is going to go up. So everybody who says let's cut the subsidies to the oil companies, I just want you to understand how that works. That means the price goes up. [Premiere Radio Networks, The Glenn Beck Program, 5/10/11]
Ben Ferguson On Fox: “We're Going To End Up Paying More Because He's Wanting To Go After Their Tax Breaks.” From the May 10 edition of Fox News' America Live:
FERGUSON, RADIO HOST: This president is proving that he does not mind these high gas prices and is willing to go only after the oil companies. And guess what? That's going to be passed on to us so we're going to end up paying more because he's wanting to go after their tax breaks. [Fox News, America Live, 5/10/11]
Energy Experts Say Cutting Oil Companies' Tax Breaks Will Have Little Effect On 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 legislative 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]
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. One of the tax breaks President Obama seeks to end is a domestic manufacturing credit. According to a Congressional Research Service 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]