Friday, May 13, 2011

Big Oil Kabuki*


Senator Rockefeller and fellow Democrats engaged in Kabuki theater on Capitol Hill today, hammering oil company execs for the misdeed of making profits when the price of their commodity soared. They were asked to answer false analogies like "What's more important, your tax breaks or student aid?" As if the wealth of their companies existed at the whim of the senators. The senators tried to get the CEOs to admit there was some level of profit at which they should pay higher taxes. What crap, those profits go to share holders who could probably use some relief in the aftermath of Democrat control of the economy. Further, those profits will be taxed anyway. Finally, the high oil prices are not the fault of these executives, but of market forces.

Professor Perry at Carpe Diem, points out that oil company profits by per cent are 114 out of 225 major industries.

Here are the lavish tax breaks the Senators propose to repeal:
  • A tax credit on payments to foreign governments — including petroleum income taxes — that they pay in exchange for some economic benefit. The five biggest oil companies would still be able to deduct foreign payments.
  • A domestic manufacturing deduction, which has generally been available to a broad range of U.S. firms.
  • A deduction for intangible drilling costs, such as the cost of repairs, site preparation and hauling supplies. Currently, integrated oil companies can expense 70 percent of the cost of these intangible drilling costs, but the legislation would require the big five oil companies to instead capitalize all of these costs.
  • A percentage depletion deduction for oil and natural gas wells, computed using a portion of the revenue from the sale of those hydrocarbons.
Are you kidding? These are normal accounting practices. To what extent are they different from the credits to mining or any other extraction industry? Probably not at all different. If the price of coal soared, would you see Senator Rockefeller hauling in Big Coal and taking away their mineral depletion allowance?

This is all hogwash designed to hide the fact that we don't allow drilling in this country, which would increase supply and therefore reduce prices. Maybe not by much, but who knows, we let the free market work that out. The Democrats are so reflexively against everything that produces jobs in this country its a wonder any of them ever get elected.

*In common English usage, a Kabuki dance is an activity or drama carried out in real life in a predictable or stylized fashion, reminiscent of the Kabuki style of Japanese stage play. Source Wikipedia citing Webster's Dictionary of Allusions.


  1. Great post, these senators know full well that they are pandering to the economic illiterates in the country...sadly, there are a lot of them. It's up to us to educate!

  2. Yes, it is reflexive pandering, and trying to control the prices of internationally traded commodities is a sure fire fail, but cries of 'drill baby drill' will lead to only a bit more oil production a decade down the road. The extent to which it is implied that temporary oil price surges can be mitigated by despoiling remaining oil reserves is a great red herring

  3. Calivancouver,
    I agree on the probable result of drilling resulting in only a small change. But what do I know? Free markets are the best arbiters of this. No reason to discriminate against domestic production.

  4. I would agree entirely that the market should function freely--were there not ancillary effects that the market fails to account for--environmental damage, oil spills, pollution, damage to fishing stocks, damage to wildlife, and etc. There are more market friendly ways of accounting for these costs, via Pigouvian taxes and cap and trade schemes, however these are generally torpedoed by anti tax sentiment, leaving the government to deal with them via wasteful and inefficient command and control schemes. Not to mention that most of the remaining off limits domestic oil production is in protected areas or is being held up by safety standards reviews, due to the poor judicial history of forcing large oil projects to cover broader costs.