WTF? This is What They Mean by Oil and Gas Subsidies?

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries.   They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them.  But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes?  Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry?   In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry.  So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments.  Typically, politicians of both parties have advocated for the current rules to encourage investment.  Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas.  I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow.  I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions.  But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak.  Not to mention flawed.  Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made.  LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling).  Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.

  • Another guy named Dan

    Even worse - the chart, according to the footnote, ascribes all tax savings as a result of LIFO accounting and presents them as a subsidy to the fossil fuels industry. ("a. This number represents the full elimination of Last In, First Out Accounting for all industries.")

  • Sol

    By my quick math, this is something like $2 per barrel of oil (over that time period)? That's a pretty minor subsidy, especially since half of it appears to be imaginary.

    Which isn't to say it's not worth getting rid of it...

  • http://sailorette.blogspot.com Foxfier

    When you confront liberals with this, they tend to say that it's still a "subsidy."

    I tend to say "Great! So we're on the same side when it comes to all businesses playing by the same rules, then? There's no relative gain if everyone has to follow the same accounting rules, right?"

    Then they get mad and stomp off....

  • MJ

    I'm in favor of eliminating these "subsidies" so that people like Kevin Drum can no longer use them as a stalking horse for propping up "green" energy schemes.

  • Mark

    The problem is that if prices were consistently falling, then these morons would be wanting to reinstate LIFO accounting. They have no consistency in their viewpoint except to expand governement revenues and power at all costs.

  • Methinks

    A long time ago, when I was an oil and gas analyst, I came across certain tax exemptions for upstream operations. When I researched what they were, I found out that the clowns in government imposed so many costs on oil companies that they no longer found it economic to drill. So, they invented certain small tax exemptions to offset the regulatory tax they imposed on the firms in order to encourage them to find go find some hydrocarbons.

    And we wonder why our tax code is so messed up.

  • Val

    Kevin Drum... Not very smart, or disingenuous?

  • http://stopthebreathing.blogtownhall.com astonerii

    Your not missing anything. It has already been argued that all your points are the case, repeatedly. In fact, their amortization calendar is worse than many other industries that do get special treatment, so is really a net cost, not a net gain for the oil and gas companies.

  • John Moore

    Liberals have always hated big oil (but loved big government - go figure). With modern environmental fundamentalists added to the mix, they *really* hate big energy. They are horrified at the enormous natural gas reserves now available - heck, it would be awful if we actually used that nasty fossil fuel.

    So this is all emotional crap - rationalizations to flay the oil witches.

  • Xopher

    Yes, eliminate subsidies because the government needs more tax revenue. Business' don't pay taxes, the consumers do when they pay for the product or service from the business. This is just another way of justifying more money for an already overspending government. And hold on to your socks boys and girls, when UMACT goes into effect (Nov 2011) utility prices will be going up. Since the regulations aren't finalized, no one knows by how much. The estimate is 10-35%. So by all means, lets add an additional 61 trillion for the government.

    We are in a depression (forget the double dip recession nonsense - The reason Obama has had is spending spree is because government spending counts for GDP calculation and so he has used that to boost GDP. If you figure out a Depression they way they did in Hoover's day, by unemployment we are there) so further tax and regulatory increases are just what we need to spend our way out of debt.

    What does it say when the Tea Part is radicalized and as far as I understand it the platform is spend within your budget? Nothing good.

  • TimG

    I went down the rabit hole at alarmist forum where these subsidies came up.

    I was trying to argue that various studies put the 'social cost of carbon' at $0.11/gal so the current $0.50/gal tax more than covers the 'social cost of carbon'.

    Of course that did not go over well with the alarmists who insisted the 'carbon tax' had to be above whatever is in place today. When I poked them about how nonsensical that position was they responded that the gas tax pays for roads so it can't be counted as paying the social cost of carbon.

    They started calling me names when I pointed out that roads are necessary for EVs as well so the cost of roads is not something one should have to pay from the gas tax...

    It is not about facts. It is religion and don't dare challenge a tenet of their religion. Oil subsidies is one of those tenets.

  • steve

    It's just an example of the old joke. How can you tell a politician is lying?

  • caseyboy

    Big government likes to pick winners and losers and the tax code gives them that leverage, as does the regulatory regime. Unemotional logic never enters into the equation. Pathetic!

  • http://abtinforouzandeh.com Abtin Forouzandeh

    It should be noted that, when switching between LIFO and FIFO inventory accounting methods, both SEC (under GAAP standards) and IRS require that you restate prior financials. Without an excruciatingly detailed analysis of oil company records, it would be impossible to determine the actual net change in taxes.

    In other words, while improbable, it is possible that switching from LIFO might actually result in a net decrease in tax liability over the last several years, resulting the government to issuing a refund.

  • Ted Rado

    More arguments for getting the USG out of the hair of business. There should be no subsidies. Period. If a business venture cannot succeed without government intervention, it should disappear. Conversely, the USG should not regulate things so that an otherwise successful business venture fails because of government regs and red tape.

  • tomw

    But, what does "Liberalize the Definition of Independent Producer" mean in fact?
    And, there is "Certain Income and Gains Relating to Industrial Source Carbon Dioxide Treated as Qualifying Income for Publicly Traded Partnerships" which must qualify as the most twisted of "giveaways to fat cats"....
    As the saying goes, my own,

    Lawyers {read CONGRESS!!} "the meaning of Is is..."
    Engineers, Accountants, the rest of the world:
    "he's a freaking liar."
    ... to be refined... heh
    tom

  • Old Soldier

    Check out page 34 of Exxon's annual report. $86 Billion in taxes and duties. They got to keep 21.5 Billion.

  • Old Soldier
  • http://www.ianrandom.com Ian Random

    Good list, I could only find the depreciation for wells as being a subsidy when I researched it years ago. I would love to see gas stations refuse service for bumper stickers, but businesses don't generally refuse a dollar. Or at the very list total the gas taxes at the bottom of the receipt.

  • diz

    A couple quick comments on LIFO for oil companies:

    I would see it as a significant one-time tax collection benefit for the government. Most of the inventories in the oil & gas business are in tanks at refineries, terminals and storage operations. The tanks have "bottoms" that essentially never get dipped into. The carrying value of these inventory layers may relfect prices from 50 years ago. If you switch to FIFO, presumbaly these layers come out of inventory. So, for example, you pull $5 crude from inventory, refine it in a $85 crude market and a lot of profit washes through the books. Once these old layers clear through the system, there is not reason to expect LIFO or FIFO to generate materially different taxes, until one assumes a general trend in prices.

    LIFO has generally thought to produce a more representative reflection of "true" book earnings in a cyclical commodity price business.

  • Mesa Econoguy

    I think I can answer most of the above questions, especially the ones concerning Mr. Dumb's intellect.

    LIFO is, as discussed, a perfectly acceptable tax accounting method, though I am not an accountant, but I know more than Mr Dumb.

    If they eliminate LIFO accounting from the list of acceptable accounting practices, this will directly affect every single accounting and investment decision in the universe, including the big bang.

    The punch line is that the new investment accounting rules covering all securities markets DOES currently allow LIFO as a stipulation, and Mr Dumb's highly insipid and ignorant belief that this particular method should be eliminated will affect everyone who, either directly or indirectly, invests in securities markets, which is virtually everyone.

    In short, Mr Dumb is in fact quite dumb.

  • Tiny

    Re LIFO

    As an accounting method it is bizarre.
    When working for one of the major auditing firms I raised the problem that we were certifying stock values which had no relation to current value and which of course did not physically exist anymore. Any normal business works on a physical FIFO basis.
    The only justification that anyone could give was that it times of inflation it helped give a truer current after inflation result. This may be so but to totally distort one part of the balance sheet to solve a different problem is not logical nor transparent.
    But as has been noted above bringing everyone to FIFO would only have a one time effect and a deal would have to be cut for the adjustment year. Too hard.