Oil and Gas Subsidies: Overview

Nov 14, 2008 | 11 min read | Print Article

*For more information on oil and gas subsidies, read our 2021 issue brief Getting the Facts on Oil & Gas Preferences.

Taxpayer subsidies to the oil and gas industry have played a major role in U.S. energy policy since 1916. Two of the largest tax breaks, expensing of intangible drilling costs and the percentage depletion allowance, were enacted in 1916 and 1926, respectively and were designed to reduce production costs and encourage more exploration for oil and natural gas. [i] In subsequent years, more and more tax breaks were added to the tax code to benefit the powerful oil and gas industry. In the past decade, despite rising oil and gas profits legislators continue to provide the industry with new and expanded tax breaks and subsidies.

Since 1950, the federal government has provided more than $160 billion in tax breaks and subsidies to the oil and gas industries (see Table 1). Table 1 shows the largest tax credits provided to the oil and gas industry over the past several decades. [ii] The table also includes royalty revenues that have already been lost from Gulf of Mexico deepwater oil and gas leases signed in 1998-1999. [iii] It is estimated that these leases will cost taxpayers an additional $6.4-$9.8 billion in lost revenue over the rest of their lifetime. [iv] Moreover, the Minerals Management Service is currently being sued by the Kerr-McGee Corporation, which alleges that MMS cannot include price thresholds in any Gulf of Mexico deepwater leases from 1996-2000; as of September 2008, MMS is appealing a lower court ruling in favor of Kerr-McGee. [v] GAO estimates that this lawsuit could cost taxpayers $16 to $39 billion in lost royalty revenues.[vi]

In addition to the subsidies included in the table the oil and gas industry receives substantial profits from using the “Last-In, First-Out” inventory method, which allows companies to underestimate the value of their inventory for tax purposes. [vii] LIFO accounting is estimated to cost taxpayers over $4 billion in the next 10 years. [viii]

Table 1: Selected Historical Oil and Gas Tax Credits and Subsidies and their Value
Tax credits and subsidies	Value (constant 2007 dollars)
Expensing of exploration and development costs, 1968-2007	45,300,000,000
Excess of percentage over cost depletion, 1968-2007	103,600,000,000
Exception from passive loss limitation, 1988-2007	1,400,000,000
Enhanced oil recovery tax credit, 1994-2007	3,200,000,000
Expensing of Tertiary Injectants, 1980-2000	400,000,000
Lost royalty revenues from 1998-1999 leases	1,000,000,000
Oil and Gas Research and Development, 1950-2003	13,800,000,000
Total	168,700,000,000
Sources: Agbara, G.M., “Federal Energy Tax Incentives and Subsidies and the Current State of Biomass Fuels”, Government Accountability office, 2006; Office of Coal, Nuclear, Electric, and Alternate Fuels. Federal Financial Interventions and Subsidies in Energy Markets 2007. April 2008. Energy Information Administration. 12 Jun 2008 <http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html; General Accounting Office. “Tax Incentives for Petroleum and Ethanol Fuels”. GAO/RCED-00-301R, September 2000; Bezdek and Wendling, “A half century of US federal government energy incentives: value, distribution, and policy implications”from Management Information Services, Inc. in Int. J. Global Energy Issues, Vol. 27, No. 1, 2007; Mark Gaffigan, U.S. GAO, “Royalties Collection: Ongoing problems with Interior’s efforts to ensure a fair return for taxpayers require attention”, March 2007.

At a time when oil companies are experiencing record profits, there is no need to reward them with taxpayer handouts. In 2007, Exxon posted $40.6 billion in profits — the largest annual profit number reported by any American company ever. [ix] Exxon set a new record for quarterly profits in the third quarter of 2008 with over $14 billion in profits. [x] Other oil companies are also topping the earnings charts, with the combined profits of 30 major oil and gas companies reaching over $200 billion in 2006.[xi]

Despite this, the Energy Policy Act of 2005 provides half a dozen more tax breaks to the oil and gas industries, detailed in Table 2. Over the next 10 years, these tax breaks will save the oil and gas companies an additional $2.3 billion – all at taxpayers’ expense. [xii] The recently-passed $700 billion bailout package included an expansion of the tax credit for 50% expensing for certain refineries and an extension of the suspension of the taxable income limit on percentage depletion for oil and gas produced from marginal properties. Together, these tax breaks are valued at $2.2 billion through 2013. [xiii]

Table 2: Recent Oil and Gas Subsidies
Recent Subsidies	Estimated Value through 2015
Temporary 50% expensing for equipment used in the refining of liquid fuels	2,180,000,000
Amortization of all geological and geophysical expenditures over 7 years[i]	680,000,000
Natural gas distribution pipelines treated as 15-yr property	1,020,000,000
Natural gas gathering lines as 7-year property	16,000,000
Expensing of capital costs with respect to complying with EPA sulfur regulations	100,000,000
Exempt certain prepayments for natural gas from tax-exempt bond arbitrage rules	53,000,000
Determination of small refiner exception to percentage depletion deduction	160,000,000
Extension of suspension of taxable income limit for percentage depletion allowance	124,000,000
Total	4,285,000,000
Sources: Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for Title XIII of H.R. 6, the ‘Energy Tax Incentives Act of 2005’”, July 2005; Staff of the Joint Committee on Taxation, “Estimated revenue effects of the conference agreement for the ‘Tax Increase Prevention and Reconciliation Act of 2005’”, http://www.house.gov/jct/x-18-06.pdf, May 2006; Staff of the Joint Committee on Taxation, “Estimated revenue effects of Title XV of H.R. 6, the ‘Clean Renewable Energy and Conservation Act of 2007’, as amended and passed by the Senate on December 13 2007”, http://www.house.gov/jct/x-117-07.pdf, December 2007; Staff of the Joint Committee on Taxation, “Estimated Budget Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to H.R. 1424, Scheduled for Consideration on the Senate Floor on October 1, 2008”, October 2008.

For more information, please contact Autumn Hanna at (202) 546-8500 x112 or autumn[at]taxpayer.net

[i] Staff of the Joint Committee on Taxation. “Description and Technical Explanation of the Conference Agreement of H.R. 6, Title XIII, The “Energy Tax Incentives Act of 2005”.” JCX-60-05. 28 July 2005. Joint Committee on Taxation. 19 Jun 2008 <http://www.house.gov/jct/x-60-05.pdf>.

[ii] This table includes only tax credits which exclusively benefit the oil and gas industries. Other tax credits, notably the Alternative Fuel Production Tax Credit (which totaled $16.9 billion from 1980-2005), benefit the oil and gas industry as well as containing subsidies for coal. Sources: Agbara, G.M., “Federal Energy Tax Incentives and Subsidies and the Current State of Biomass Fuels”, Government Accountability office, 2006; Office of Coal, Nuclear, Electric, and Alternate Fuels. Federal Financial Interventions and Subsidies in Energy Markets 2007. April 2008. Energy Information Administration. 12 Jun 2008 <http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html; General Accounting Office. “Tax Incentives for Petroleum and Ethanol Fuels”. GAO/RCED-00-301R, September 2000; Bezdek and Wendling, “A half century of US federal government energy incentives: value, distribution, and policy implications”from Management Information Services, Inc. in Int. J. Global Energy Issues, Vol. 27, No. 1, 2007.

[iii] Usually royalty relief is only granted if the price of oil is below a certain value, called the price threshold. However, for the 1998-1999 leases signed under the Deepwater Royalty Relief Act of 1995, the federal government failed to put a price threshold on royalty relief, due to an oversight in the contract language.

[iv] Mark Gaffigan, U.S. GAO, “Royalties Collection: Ongoing problems with Interior’s efforts to ensure a fair return for taxpayers require attention”, March 2007.

[v] U.S. GAO, “Oil and Gas Royalties: The federal system for collecting oil and gas revenues needs comprehensive reassessment”, September 2008.

[vi] U.S. GAO, “Oil and Gas Royalties: Litigation over royalty relief could cost the federal government billions of dollars”, June 2008.

[vii] Staff of the Joint Committee on Taxation. “Estimated revenue effects of the tax provisions contained in S. 2020”, November 2005. http://www.house.gov/jct/x-82-05r.pdf.

[viii] Staff of the Joint Committee on Taxation. “Estimated revenue effects of the tax provisions contained in S. 2020”, November 2005. http://www.house.gov/jct/x-82-05r.pdf.

[ix] J. Mouawad, “Exxon Mobil profit sets record again”, New York Times, http://www.nytimes.com/2008/02/01/business/01cnd-exxon.html, February 2008.

[x] S. Dorman, “Exxon Posts $14.83 billion profit”, Wall Street Journal, 30 October 2008.

[xi] T. Vital, “Industry Surveys, Oil & Gas: Production & Marketing,” Standard & Poor’s, March 2008.

[xii] Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for Title XIII of H.R. 6, the ‘Energy Tax Incentives Act of 2005’”, July 2005.

[xiii] Staff of the Joint Committee on Taxation, “Estimated Budget Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to H.R. 1424, Scheduled for Consideration on the Senate Floor on October 1, 2008”, October 2008.