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No Crocodile Tears For The Oil Industry: A Response To
Nate Hagens And Robert Rapier

By Katherine M. Acosta

10 May, 2010

It's no wonder that so many Americans believe “peak oil” to be a hoax instigated by the oil companies to justify high prices at the pump. Prominent “peak oilers” Nate Hagen and Robert Rapier sound like shills for the industry and appear oblivious to the economic plight of ordinary Americans in their most recent articles, Complaining about Mosquito Bites While a Crocodile Bites Our Leg (Hagens), and Getting Even with Exxon Mobil (Rapier). Hagens begins his piece by announcing that he is “not an oil industry apologist” – then goes on to do just that. “It's a stretch,” he writes, “to say that Exxon is undertaxed.” Hagens defends Exxon's 2011 first quarter earnings of $10.65 billion, a 69% increase, saying that “vitriol” directed at the oil giant is “misplaced” and “counterproductive.”

Dollars are just digits in a bank, not real wealth, writes the former hedge fund manager. True wealth comes from the sun! (Try telling that to your mortgage lender or landlord, the grocery store clerk, or the gas station attendant, when the “digits” from your unemployment check don't cover the bill.) Exxon's $10.65 billion first quarter profit, Hagens continues, “is just the monetary accounting of the chemical and kinetic energy it contributed to society… This oil and gas then went on to perform myriad other activities in our economy… Quite a deal actually, for us.”

Apparently, even the New York Times didn't buy this. Hagens says he wrote the article at their request. The Times was seeking a response to Exxon's first quarter earnings, but rejected the piece because “This doesn't work. It's not too convincing.”

I get what Hagens is trying to say. I've been an avid reader of “peak oil” literature for more than six years now. I agree that, despite increasing prices, gas and oil are still deals in terms of the work those fuels perform. It's a concept the late, great Matthew Simmons better illustrated by pointing out that a cup of gas will move a car with air conditioning running and six passengers in it, two miles. At $4 a gallon, that cup would cost 25 cents. Viewed from this perspective, and in isolation from other economic factors , gas remains a bargain.

However, increasing gas prices are not the only economic factor affecting household budgets. Wages have been stagnating for decades, millions of jobs have been shipped overseas, 2.4 million over the last decade alone, un- and under-employment are high, and prices for necessities like housing and food are rising. These multiple factors make it difficult for Americans to absorb higher gas prices, no matter how great a deal that fuel is in the abstract.

Further, it doesn't automatically follow that enormous profits, due in part to huge public subsidies, should flow only into private hands, benefiting a fraction of citizens, at the expense of the majority. If higher gas prices were the result of taxation, and those taxes dollars were earmarked for building public transportation, the development of alternative energy, and other programs to help us transition to a “post peak” world, those prices would be more defensible.

Instead, current high prices enrich the few and further burden a society that is experiencing a massive transfer of wealth away from the working and middle classes to the top and ever-widening income inequality. One-third of the nation's income growth from 1979-2004 went to the top 1% of earners. Using the Gini coefficient, a mathematical ratio for comparing income inequality across countries, researchers rank the U.S. 95th out of 134 countries – meaning that only 39 have greater income inequality than we do. Among industrialized countries, we have the highest income inequality. In fact, the United States now has greater income inequality than Pakistan and the Ivory Coast!

Another measure of income inequality, the CEO to worker pay ratio, has also increased dramatically over the last few decades. In 1980 CEOs were paid, on average, 42 times the wages of blue collar workers. By 2010, that ratio had increased to 343:1. In a 2009 ranking of the 100 top paid CEOs, Exxon's RW Tillerson ranked 24th, receiving compensation of just over $27 million, 818 times the median worker's pay.

In this context of deteriorating economic conditions and gross economic inequality, lectures from Hagen on how we need to “grow up,” quit squawking about bailouts, stop blaming “evil” oil companies, and wake up to the reality of resource limitations, will fall on deaf, and increasingly angry, ears.

The most common argument for eliminating tax breaks for the oil industry is that these enormously profitable companies are no longer in need of public subsidies, especially when we are incurring staggering budget deficits. Fair-minded citizens are justifiably outraged when, for example, the Low Income Energy Assistance Program is cut by half to help reduce the deficit, yet industries making billions of dollars in profits balk at having their own subsidies cut. Seemingly obtuse to the social justice argument, Rapier claims that proposals to eliminate oil industry tax breaks are simply about “revenge” and are “not good energy policy.”

Specifically, Rapier defends the Manufacturers' Tax Deduction, the Intangible Drilling Costs deduction, and the Percentage Depletion Allowance. The Manufacturers' Tax Deduction is an incentive for corporations to keep jobs in the United States , instead of moving them overseas, to places where wages are dirt cheap and environmental regulations are lax. I have always seen this corporate tax incentive as something of a “protection racket” – monies we, the taxpayers, give up in response to threats of offshoring jobs. Given the many millions of jobs shipped overseas in recent decades, our protection money doesn't seem to have bought us much.

The oil and gas industries, strictly speaking, are extraction, rather than manufacturing, industries. However, “manufacturing” was redefined in the tax code in 2004 to allow these industries to qualify for the deduction. Obviously, jobs connected with the extraction of these fossil fuels from fields in the U.S. cannot be shipped overseas, so it has been proposed that the tax credit be disallowed for U.S.-based operations.

Rather than offer a substantive argument in defense of the tax break, Rapier howls at the injustice of it all, (“They [oil companies] are trapped and there isn't a thing they can do about it. They can't move their oil fields, so we can tax them silly”); makes a wild claim comparing the discontinuation of this tax break to Hugo Chavez' energy policies, (“This is the same model Hugo Chavez used to mismanage Venezuela's oil industry into the ground…”); and then, in a confusing turn, assumes what he imagines to be the voice of spiteful industry critics justifying their proposal, (“…they might [move operations out of the U.S.], but so what? It's Big Oil we are talking about here. Who cares if they leave the U.S. ?”).

Another tax break Rapier defends is the Intangible Drilling Costs (IDC) deduction, enacted in 1916, just three years after the Constitution was amended to allow the federal government to collect income taxes. Since 1968, this deduction has amounted to $78 billion dollars. The IDC covers expenses such as labor, drilling rig time, and drilling fluids and chemicals. The idea here is to incentivize drilling of more wells by subsidizing expenses that cannot be salvaged should the well turn out to be dry. Most other businesses allowed this type of deduction must amortize those costs over the useful lifetime of the property. Oil companies, however, are allowed to deduct the entire expense the first year of drilling.

Rapier cites a poster from the Oil Drum who works in the industry, "Rockman," as saying that the effect of eliminating this tax break would be that “a number of projects become sub-economic and won't be drilled.” Drilling more wells, Rapier writes, “was once considered a good thing.”

This begs a number of questions, such as: Why should taxpayers subsidize “sub-economic” wells during a time of oil depletion? Who are the primary beneficiaries? The peak oil literature tells us that the “easy to extract” oil is mostly depleted, that the hard-to-get stuff is what is left. Won't retaining a tax break intended to stimulate a fledgling industry nearly 100 years ago, today merely incentivize drilling ever more “sub-economic” and risky projects? Do we want to encourage more Deepwater Horizons disasters? Won't retaining this deduction cost the taxpayer twice; first for the initial drilling, and second to clean up the ensuing environmental destruction?

While the IDC subsidizes intangible costs, the Percentage Depletion Allowance (PDA), established in 1926, subsidizes tangible property. As with the IDC, oil and gas companies, unlike most other business, are allowed the entire deduction the first year, rather than over the useful lifetime of the property. The PDA is estimated to have cost the U.S. treasury $111 billion since 1968. Further, according to the report, $1 Trillion in Profits and Still at the Trough: Oil and Gas in the 21st Century (Committee on Natural Resources, Democratic Staff Report, U.S. House of Representatives, 2/3/2011), “Under this method of accounting, total deductions regularly exceed the actual capital invested to acquire and develop the reserve.”

According to Rapier, elimination of this tax break will “make the costs of operating a well somewhat higher, which will probably mean that wells will stop producing at an earlier stage than before.” It seems obvious that the elimination of any tax break will increase the cost of doing business. The point is that oil industry profits have been extraordinary; it is the most profitable industry in the world; it can now shoulder some of the burden we, the taxpayers, have been carrying all these years.

Like Hagens , Rapier ends his screed with a lecture. It's up to individuals to stop being so lazy, make fewer car trips, become more fuel efficient. That's the way to reduce our contribution to oil industry profits – not viciously eliminating billion dollar tax breaks for companies earning record profits.

I agree with Rapier that we need to learn to use this amazing, increasingly expensive, and dwindling resource more respectfully and efficiently. I've already made the changes he recommends. But the former Conoco Engineering Team Leader is dead wrong about the tax breaks.

And if he and Hagens hope to be influential with the general public, to effect positive social change at the grass roots level, they need to think more critically about power relations and social inequality. Else they risk becoming “little Eichmanns” for the corporatocracy.

Katherine M. Acosta is a freelance writer in Madison, Wisconsin . She holds a PhD in Sociology and is currently working on a script about life in a "post peak" world. She occasionally posts at The Oil Drum as "lilith."



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