Will rolling back tax breaks for US oil and gas companies necessarily affect output?

Energy Intelligence said in a report on Wednesday U.S. domestic oil output could fall as much as 10 percent over the next ten years if Obama administration’s proposals to roll back tax breaks for oil and gas companies get through.

President Obama had proposed tax increases to the tune of $31 billion on oil companies in his first budget, and he raised tax proposals to $37 billion in last year’s budget.

The issue of rolling back tax breaks resurfaced in the backdrop of the Gulf of Mexico oil spill which President Obama used as a window of opportunity to push his case against Big Oil.

In a speech made at Carnegie Mellon University in June Obama pitched for tax overhaul in the oil sector.

"The votes may not be there right now, but I intend to find them in the coming months," he said. "I will continue to make the case for a clean energy future wherever and whenever I can, and I will work with anyone to get this done. And we will get it done."

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Congressional Joint Committee on Taxation for the 2011-2020 period has estimated that a proposal to bar Big Oil from using the deduction for domestic manufacturing will raise $14.8 billion over ten years.

Again, a plan to stop oil companies from immediately writing off intangible expenses related to oil exploration, such as wages, machinery and materials, will fetch $10.9 billion over a period of ten years.

Another proposal by President Obama will plug a loophole whereby oil companies save a lot of money by flatly deducting a certain percentage of gross revenue under the 'property depletion' head. This proposal, if accepted, will bring in another 9.6 billion to the exchequer.
There have been proposals also for modifying rules for 'dual capacity' taxpayers, and to reduce the break for amortization of geological and geophysical expenses.

Oil companies argue that rolling back of the tax breaks will hit profitability and thereby hurt exploration and investment, leading to output cuts and price rises.

However, there are analysts who think otherwise.

In an article published in Citizens for Tax Justice last month, Jeff Hooke and Steve Wamhoff contended that among the largest five oil companies, less than 10 percent of profit goes to exploration for new oil fields. "High profits do not encourage exploration," they say, suggesting that a clampdown on oil tax breaks doesn’t necessarily mean output reduction and price rise at least in the near term.

"In fact, in the top five oil companies, managers direct most of their excess cash to dividends and stock repurchases, both of which drive up the companies' share prices and the executives' stock option values," they argue, citing SEC filings made by the companies.

"The percentage of net profits directed towards dividends and stock repurchases for the top five oil companies was 58 percent in 2005, 73 percent in 2006, and 72 percent in 2007, 71 percent in 2008 and 89 percent in 2009.

These figures are high in comparison to other industries. To the extent that tax loopholes targeting the oil and gas industry boost their profits, there is no evidence that the additional profits lead the companies to explore for more oil so that they can increase the supply."

The Energy Intelligence report says oil firms are fast-tracking lobbying efforts to scuttle the President’s proposals. According to data from the Center for Responsive Politics, oil industry spent a whopping $44.5 million for lobbying in the first three months of the year, surpassing the previous year's record.