Oil companies are among the largest and most profitable corporations in the United States, and yet our government gives them billions of dollars in tax breaks and subsidies, many of these sponsored by elected officials who receive huge contributions from the industry. From Washington to Helena, we support fossil fuel producers at the expense of the communities in which we live.

Oil companies are the most profitable in the US
Let’s start by looking at the incredible size and profitability of Big Oil. These companies are hugely profitable, as you can see by clicking on the chart at right — the five largest oil companies in the United States earned $93 billion in profits in 2013. On the 2012 Fortune 500 list of the largest US companies by revenue, ExxonMobil ranked first, Chevron third, and ConocoPhillips fourth. HUGE companies.

Despite the size and enormous profitability of Big Oil, the US has showered $470 billion in tax subsidies on the industry since Marathon Oil began drilling in Carbon County, Montana 100 years ago. Many of these subsidies are rooted in oil and gas issues that are a century old, but Congress continally renews them as the oil companies keep pouring those dollars back into lobbying and direct campaign contributions.

Click to download copy of TCS brochure

The tax breaks
According to a 2014 brochure produced by Taxpayers for Common Sense (TCS), a nonpartisan federal budget watchdog organization, the largest oil and gas companies pay an overall tax rate of about 20%, barely half of the overall corporate tax rate of 35%. Major tax breaks include:

• Intangible drilling costs (IDC) deduction. IDCs are the costs of designing and fabricating drilling platforms, as well as direct “wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production.” These costs can represent 60-80% of the cost of drilling a well, and the IDC deduction allows them to be deducted immediately.

The IDC deduction is a historical artifact. First granted in 1913 and passed into law by Congress in 1916, they were enacted because drilling for oil was once a very risky business. In those days start-up costs were high, and prospectors couldn’t be sure they’d find oil. To encourage the fledgeling oil industry, Congress approved the IDC deduction for the first year of a well’s life. Today sophisticated technology makes the likelihood of a dry hole minimal (follow the timeline of Energy Corporation of America’s well exploration in Belfry), but the deduction remains. Annual cost to taxpayers: $700 million to $3.5 billion

• Special percentage depletion allowance. Theoretically, depletion is similar to the depreciation deduction for the capital cost of plant and equipment; the costs are deducted from income before the net income is taxed. This deduction should allow recovery of the cost of leases for oil and gas wells, and should approximate an accurate deduction of capital costs

But that’s not the way it works in practice. In the tax code depletion has been completely severed from the concept of recovering the capital cost of oil production. It effectively makes a certain portion of gross income tax-free without regard to capital costs.

According to Mother Jones, here’s how a 1959 newspaper article described the use of the special percentage depletion allowance as it was used by a trio of movie stars:

Jimmy Stewart, Bing Crosby and Bob Hope take their salary and invest it immediately in oil. If oil is hit, cost of drilling is deducted and 27.5 percent depletion is taken off the top with no taxes. If the well is dry, cost of drilling is deducted before taxes. This is called “drilling with tax money.”

And in the 1956 film Giant, James Dean explains it this way:

James Dean: Bale, l’ll tell you what old Pinky thinks….That oil tax exemption is the best thing to hit Texas since we whooped Geronimo. One of the finest laws ever passed in Washington.

The percentage depletion has changed over time, but it still allows deduction of 100% of the profit from a well. Percentage depletion was first passed by Congress in 1926. Today it’s annual cost to taxpayers is $612 million – $1.1 billion.

• Domestic Production Activities Deduction. Included in the American Jobs Creation Act of 2004, this deduction amounts to about a 2% reduction in tax for manufacturing costs that could be imported overseas.

While this makes sense for a variety of goods that could be exported, it makes little sense in the oil industry. The jobs associated with producing oil from domestic wells cannot be exported in the same way that jobs producing consumer goods might. You can’t, after all, import jobs extracting oil from a Bakken well to China. The annual cost to US taxpayers of this exemption is $574 million.

Cutting the three exemptions above was a key part of the Obama Administration’s FY2013 budget proposal. It was defined as a way to increase federal revenues by $22 billion from 2013-17, as described in this chart:

I doubt that you will be surprised that this proposal was ignored by Congress.

There are many other oil and gas exemptions in the Tax Code. The TCS brochure goes into nine of them in detail, and I recommend you download it and read it if you’re interested in how Congress continues to subsidize Big Oil.

This chart summarizes how Big Oil benefits from these ongoing tax breaks today, and have over the last century:

Source: Mother Jones

Helena chips in
Since 1999 the Montana legislature has granted a huge additional subsidy in the form of a tax holiday to oil and gas producers. Operators pay a tax of only 0.5 percent of the production value of a well for the first 12 months of production on all wells and 18 months on oil and gas from horizontally drilled, or fracked wells. The tax rate set by law is 9 percent.

Oil well production over time. Click to enlarge

The reason the holiday is set for 18 months is that, for a horizontal oil well, the vast majority of the production occurs in the first 18 months. As you can see from this graph, production declines by 69% in the first year alone, and by about 80% after 18 months.

In a nutshell, the 18 month holiday is pretty close to a free pass on any significant taxes on a horizontal oil well.

In the most recent legislative session SB374, introduced into the Senate Taxation Committee by Senator  Christine Kauffman of Helena, would have imposed a “trigger” on the current tax holiday that would require oil and gas companies to pay the full 9% tax when the price of gas rises above $52.59 a barrel.

The bill failed to make it out of Committee. So there will be no changes in the Oil and Gas Tax Holiday before at least 2017, and there is no reason to think that this Montana holiday will be any different from the permanent tax breaks enacted 100 years ago in Washington.

Direct subsidies
Beyond these tax breaks, oil projects in different states often get direct subsidies for their operations from politicians who receive political contributions from the companies that get the subsidies. Some examples:

• A proposed Shell refinery in Pennsylvania is in line for $1.6 billion in state subsidy, according to a deal struck in 2012 when the company made an annual profit of $26.8 billion.

The deal was struck by the then-governor Tom Corbett, who received over $1 million in campaign donations from the oil and gas industry. Shell has also spent $1.2 million on lobbying in Pennsylvania since 2011.

• ExxonMobil’s upgrades to its Baton Rouge refinery in Louisiana are benefiting from $119 million in state subsidy, with the support starting in 2011, when the company made a $41 billion profit.

The deal is championed by Governor Bobby Jindal, who has received 231 contributions from oil and gas companies and executives totalling $1 million over the last decade.

• A jobs subsidy plan worth $78 million to Marathon Petroleum in Ohio began in 2011, when the company made $2.4 billion in profit.

In 2011 Governor John Kasich was the leading recipient of oil and gas contributions in Ohio, at over $200,000. The same year Kasich appointed Marathon Petroleum’s CEO to the board of Jobs Ohio, a semi-private group “in charge of the economic growth in the state of Ohio”.

Source: Mother Jones

It all comes back to the money
With the passage of Citizens United, the amount of political giving by the oil and gas industry has exploded, as indicated in the chart from Mother Jones at right. We can only expect more of these play-for-pay oil subsidies in the future.

It won’t surprise you to know that the oil and gas industry is one of the leading contributors to political office holders. and it won’t surprise you at all to note that, according to OpenSecrets.org, of the 435 members of the House, our own (now-Senator) Steve Daines ranked sixth in oil and gas contributions in the 2014 election cycle:

And finally, while this isn’t a political blog, I’d be remiss if I didn’t mention that 90% of oil and gas industry contributions go to Republican candidates.

In the end, it’s all pretty simple. The government unnecessarily pays the richest companies in the nation to make huge profits pulling fossil fuels out of the ground, and refuses to regulate those companies in a way that protects landowner rights and safety.

It’s a sorry state of affairs.