Sometimes, Crony Capitalists Oppose A Subsidy
In the summer of 2007, as gas prices rose to the highest levels in their history, presidential candidates Barack Obama and John McCain responded to the rising anger by promising to “stand up” to Big Oil.
In this narrative, which has been perpetuated by Democrats and Republicans, both sides set up their canvas and painted an oil landscape featuring the exploitation of the average American because Big Oil executives were really greedy and mean and must hate life.
With the recession in full force, it was easy to accept that Big Oil was targeting and exploiting the average consumer for some extra profit. The narrative went further, linking Big Oil with Big Government through special tax breaks that hurt the average American, especially at the pump.
Politically, it’s been a smart move to paint the picture this way. It is a story that environmentalists, hard line liberals, libertarians, and conservatives who hate corporate welfare can appreciate.
It’s also a narrative that average Americans accept, according to a recent CNN poll showing that the “majority of Americans blame oil companies — rather than the Obama administration — for the high gas prices.”
But it’s simply misleading. And not for the reasons you think. The Obama administration is right in suggesting that the oil subsidies should be eliminated. But they’re also equally wrong.
The President pushed for cutting oil subsidies, which total $4 billion a year, once he was elected in 2008. He tried and failed again in 2011 and, more recently, in the recent sequester talks with Republicans, when he focused on cutting the “special tax loopholes,” like corporate jet and oil subsidies, to create a more balanced approach.
But this isn’t an issue the President is alone on. In 2011, the House Budget Chair of the Republican Party echoed the same sentiments, linking the subsidies to “corporate welfare.” You might know his name. It’s Paul Ryan.
“It’s certainly something we should be looking at,” some other Republican guy said.
Who was that? House John Boehner, R-Ohio.
That’s John Boehner, Paul Ryan and President Barack Obama agreeing on something.
So why does it have almost no chance of happening? And why did it not even gain enough traction to pass the Democratic-controlled Senate in 2011?
Despite almost total agreement that oil subsidies are wasteful, both sides have different reasons that they are horrible.
For Democrats, the focus is that Big Oil should pay their fair share by ending corporate welfare. For Republicans, they simultaneously agree with this statement, even using this language against Democrats, but also claim that ending the subsidies will cause increases at the pump, which goes against the important narrative above. It’s a case of one trying to up the other on a story that isn’t true.
Firstly, the idea of oil executives reaping the benefits of huge profits is misleading at best. A study by former undersecretary of commerce for economic affairs Robert Shapiro showed that the “ownership of oil and natural gas company shares is made up of a broad cross section of Americans.”
“This study disproves the popular misconception that ‘Big Oil’ is owned by a small group of industry insiders.” Shapiro told Energy Trends Insider. “In reality, across the oil and natural gas industry only 1.5 percent of shares of public companies are owned by company executives.”
Shapiro also said that “the data show that ownership of industry shares is broadly middle class, with the majority of industry shares held by institutional investors, often on behalf of millions of Americans through mutual funds, pension funds and individual retirement accounts.” Over 43 percent of oil shares are held in mutual funds from 55 million Americans, with a mean income of 68,700.
An additional 41 percent are in IRA’s and pension funds. That’s a total of 84 percent of all oil stock directly owned by middle class Americans.
Secondly, as the Cato Institute has pointed out in examining the oil subsidies, these are not special tax loopholes catering specifically to oil.
“The largest tax break at issue is a tax credit passed in 2005, which is available to all U.S. manufacturers,” Cato said. “Oil and gas companies qualify for that credit, so they will likely deduct somewhere in the neighborhood of $18.3 billion from their tax bill over the next 10 years. Note that this isn’t really an ‘oil subsidy’; it’s a manufacturing subsidy that oil and gas companies — along with many other companies — enjoy.”
Those manufacturing companies include Apple and Samsung. The same tax credit Apple uses so they can make an IPhone is the same one oil and gas companies use to fill your gas pump.
The other major tax subsidies, which apply to deducting equipment when constructing wells and drills, go specifically to small oil companies, and not to Big Oil.
Thirdly, the effects of eliminating these subsidies would do nothing to increase or decrease prices at the pump.
“The Republican charge that eliminating these tax preferences will increase prices at the pump is for the most part nonsense,” the Cato Institute also points out. “Given stable demand, oil prices are determined by whatever factors increase or decrease production anywhere in the world.” Instead, removing the oil subsidies which effect smaller oil companies would probably lead to more mergers with Big Oil— the exact opposite effect people would want.
Yes, the tax breaks for manufacturing corporations needlessly complexes and distorts the market. To eliminate one of those manufacturing groups from the list of companies receiving the subsidies doesn’t simplify anything. Rather, it’s an exercise in the kind of crony capitalism that both sides, occasionally, deride.
Ryan Willard is a writer based in Washington, D.C. Oil works image courtesy of Big Stock Photo.