ExxonMobil

Rex Tillerson at Senate confirmation hearings
Rex Tillerson at Senate confirmation hearings

In yesterday's confirmation hearings for Rex Tillerson, the former ExxonMobil CEO stated that

'I'm not aware of anything the fossil fuel industry gets that I would characterize as a subsidy... Rather it is just the way the tax code applies to this particular industry.'

You can review the relevant testimony, and commentary on it by Oil Change International, here.

Denying there are Subsidies Seems a Bedrock Strategy of the US O&G Industry

That Tillerson frames industry subsidies as non-existent is no surprise.  In the nearly 30 years I've been working on fossil fuel subsidy issues, denial that government provisions provide them with special support has been a bedrock part of the industry's strategy to keep them. 

This is most commonly expressed by their trade association, the American Petroleum Institute (API) -- which spent more than a quarter of a billion dollars in 2014 to defend the interests of its members.  Here's how Stephen Comstock, API's tax lead, spun the issue in a 2014 blog post:

Since its inception, the U.S. tax code has allowed corporate taxpayers the ability to recover costs. These cost-recovery mechanisms, also known in policy circles as “tax expenditures,” should in no way be confused with “subsidies” – direct government spending or “tax loopholes.”

Comstock's spin is nearly identical to two decades earlier when API's Rayola Dougher authored a hit piece on a this detailed study on US oil subsidies I co-wrote with Aaron Martin back in 1995.  A bit of hand-waving to pick a definition of subsidies they like, dismiss supports to oil sector receives as irrelevant or baseline, and suddenly, as with Tillerson, API concludes if subsidies are above zero, they are so small as to be immaterial. Problem solved. 

When other industries get government supports, they are subsidies.  Oil & gas?  Nah -- just part of the standard way the miraculous thing we call our tax system happens to play out in the oil sector. Of course that system is even-handed across all taxpayers, and not-at-all influenced by the lobbying of special interests. 

Other industries need to treat "soft costs" like surveying, engineering, architectural, legal, site preparation, fuel and labor -- critical in the completion of a multi-year asset, though with little or no salvage value -- as part of their investment cost that must be recovered over the useful life of that asset.  But if oil and gas investors can write them off immediately as "intangible drilling expenses" -- a huge benefit to their financial returns -- it must again just the way the tax system "applies to this particular industry." 

Other industries can deduct from their taxable income only the costs they've actually incurred in the making of their goods and services.  Oil and gas get to deduct the market value of their fuel via percentage depletion if it gives them more tax savings -- a subsidy that actually rises when prices for fossil fuels are the highest and any economic case for industry support is at its weakest.  It's hard to envision how Tillerson thinks this is normal treatment.  For more discussion on the provisions the industry claims aren't subsidies but are, go here.

Subsidies to renewable energy (and yes, even the wind and solar guys acknowledge they are subsidies) are configured to expire frequently so as to prevent them from becoming an entitlement.  But if oil and gas subsidies are hardwired into our tax code so they never expire, and have been there for nearly a century in some cases, it must once again be another of those mysterious coincidences of a neutral tax code interacting with the oil and gas sector. 

Tillerson's "See No Subsidies" View is Not Reflected by Government Agencies

Despite Tillerson's view that O&G gets no special treatment, this is not a gray area for most federal and international agencies.  It never has been.

In a striking example, the Joint Committee on Taxation -- which we rely on to this day to estimate the scale of current tax breaks and provide input to Congressional Members on the expected cost of their proposed ones -- has been flagging the percentage depletion allowance subsidy since the 1920s.  The extract below if from a report they published in 1927.

-US Joint Committee on Taxation, Division of Investigation, 1927

Here's a quick comparison of estimates for the US I put together for a conference late last year that shows (a) other groups believe there are subsidies to oil and gas; (b) the range continues to be contested; and (c) API is a huge outlier in its denial these exist. 

US ff subsidy estimates by source_2016

Rex's Reading List on US Fossil Fuel Subsidies

There's a fairly long list of organizations that disagree with Tillerson's conjecture that subsidies to O&G don't exist.  I thought it might be useful to put together a reading list so he can brush up on the topic.  Although many NGOs have done detailed work on this area as well, I know Tillerson will discount that work.  Thus, I've limited this list to government agencies. 

US Federal Government

International Agencies

  • Organisation for Economic Cooperation and Development.  Inventory of Support Measures for Fossil Fuels 2015, US Data. Notes on US Data.
  • World Trade Organisation.  Overview of the WTO's definition of subsidies.
Earth Track Blog Post

A recent post by Ken Cohen, head PR guy at ExxonMobil, laments the temporary shut-down of offshore oil and gas drilling and its impact on all of us -- not them, but us, through lower federal taxes, higher deficits, less jobs, and less security.

Cohen titles his entry "A trillion-dollar missed opportunity -- enough to pay the U.S. deficit," and then goes on to provide data contradicting his claim.  He references research done by ICF International for the American Petroleum Institute to that claims the foregone earnings to government by not leasing up our coastal oil and gas resources are $1.3 trillion over the lifetime of the projects.  But the $1.3 trillion deficit Cohen is pointing in his blog title as being offset is an annual figure.  Thus, if the foregone projects last 10 years, the income would be only 1/10th of the deficit over the relevant period; if they last 15 years, 1/15th, and so on.  Net out subsidies, and the contribution to federal stability shrinks further.

The ICF study is actually kind of a mixed bag for supporting Cohen's points.  Page 31 highlights growing oil security risks around the world.  The fact that the US offers such a stable regime for oil and gas operators like his firm simply underscores how much the feds are undercharging energy companies for the leases right now, especially by improperly boosting federal takes automatically as global energy prices rise.  The feds should perhaps charge even more for the access in the future.  Note that this conclusion on US undercharges is broadly in line with a Government Accountability Office analysis of the issue a couple of years ago.  GAO noted that "the U.S. federal government receives one of the lowest fiscal takes in the world" (page 2, emphasis added).

ICF's data on page 17 regarding industry investment into carbon mitigation strategies is also problematic for Mr. Cohen.  Upon first skim, the data suggest that the oil and gas industry have been good guys, taking the problem seriously and investing more in mitigation than anybody else.  OK; so it's not hard to beat the coal industry.  But $58.4 billion in total investments for nine years (2000-08 inclusive) isn't much to write home about either for one of the core industries linked to the climate change problem.  That's $6.5 billion per year for the entire oil and gas sector.  In comparison, ExxonMobil alone (which, we learn on page 33, is not even very big by international standards), had revenues of $477 billion in 2008 and $311 in 2009.  Big difference.

Even these limited investments seem a bit diminished once one starts to dig into what the industry has counted as carbon mitigation spending.   The largest share seems to be directed towards making their own operations tighter, such as reducing gas flaring and improving the efficiency of refineries.  This is certaintly nice to see, but belongs in the same category as WalMart boosting in-store energy efficiency.  It's a stretch to treat these investments as an illustration of industrial leadership poised to to address sector-related problems head-on.  In fact, much of this spending is likely for high return investments that should have been done years ago, and would have been had there been any price on carbon.