U.S. House of Representatives Passes Oil Tax Legislation

In a 236-182 vote, the U.S. House of Representatives yesterday passed a bill that could see subsidies worth US$18 billion to the oil industry being repealed over a 10-year period. The legislation calls for these additional funds to be diverted towards extending tax credits for research and development of renewable and alternative energy technologies such as biofuels, geothermal, solar, and wind power, most of which will otherwise lapse at the end of this year. Under the bill, US$4,000 in tax credits are also provided to consumers who purchase hybrid vehicles, while provisions are included that would see U.S. oil producers pay taxes on income earned abroad, even if already taxed there.

Democratic lawmakers have pointed towards US$100/b oil and multi-billion-dollar profits as evidence that the industry had no further need for the subsidies. The White House, home of President George W. Bush, has continued to maintain that legislation unfairly targets the oil industry, and has vowed to veto the bill if it somehow also manages to pass unscathed through the Senate. The Senate has in the past been loath to introduce such legislation, and there is reason to believe this stance will continue.

Outlook and Implications

The industry has been facing somewhat of a popular backlash throughout the last two or three years, as oil prices have continued their ceaseless march upwards. A combination of refinery and pipeline accidents has been seen, in conjunction with high refined product prices, over a period of time when energy companies have consistently announced record profits—giving the impression that these factors were intricately and directly related. Of course, the tax breaks had originally been introduced to stimulate exploration and production in the United States, particularly in the deepwater Gulf of Mexico (GOM), back when such activities were being shunned on the basis of cost. Despite GOM production from the deepwater having increased markedly over the years, this increase has been met by output declines almost everywhere else in the country. Globally, demand for crude has continued to outpace production growth, leading to tighter supplies and thus higher prices. Unfortunately for lawmakers wishing to repeal the tax breaks, even though they certainly make a compelling case that the industry itself is not in dire need of continued subsidies, the reality is that doing so would result in but one certainty: ever higher prices for the very people they have sworn to protect. The House Ways and Means Committee has estimated that the bill, if passed, would require the largest oil companies to pay out an average of US$1.8 billion, each year, for 10 years. Such a move would almost certainly result in raising costs for producers—costs which would inevitably be passed on to the consumer eventually. Elements of the bill—such as the extension of renewable tax credits—are certainly worthy of consideration, but tying this to a sinking ship does little to stem the flow of incoming water, nor does it do justice to renewable and alternative energy industries.

This is not the first time Democratic efforts to secure oil tax increases have been observed. Indeed, the Democrats have been complaining about "price-gouging" and trying to repeal oil subsidies throughout most of 2007, most prominently while debating a comprehensive energy bill that subsequently became law. At the time, the threat of a presidential veto was sufficient to dissuade lawmakers from including the offending provisions, lest the entire bill be thrown out, but not before prompting Democrats to promise to revisit the issue. This situation will likely repeat itself this year in that a veto is guaranteed if the Senate moves in the same direction as the House. Indeed, Democratic lawmakers may simply have to wait until 2008 to reintroduce the bill targeting the oil industry. Continued high oil prices and tight refined product supplies at that point will almost certainly ensure that the industry comes under the spotlight of the next administration, which itself is unlikely to waste time using its precious political capital to make sweeping changes during its honeymoon period. The industry should prepare itself for such an eventuality if the United States elects a Democrat as its next president.

Related Articles

United States: 27 February 2008: Administration of U.S. President Bush Vows Oil Tax Veto

United States: 20 December 2007: Energy Bill Signed Into Law by U.S. President

Find out more about Same-day Analysis