Oil production is one of the most heavily subsidized businesses in America, with tax breaks available at almost every stage of the exploration and extraction process, according to an analysis by The New York Times. The tax breaks average about $4 billion a year, based on various government reports, and are preserved by the oil industry's massive political influence.
The many subsidies in BP's (BP) disastrous Deepwater Horizon drilling venture, which resulted in the worst offshore oil spill in U.S. history, are typical. Transocean (RIG), the owner of the Deepwater Horizon drilling platform, registered the rig in the Marshall Islands, where it is subject to lower taxes and less stringent safety regulations. The company moved its corporate headquarters overseas from Houston in 1999, saving $1.8 billion in taxes in its years abroad. It is headquartered in Switzerland now, where it has far fewer employees than in Houston.
BP also gained huge tax benefits in leasing the Deepwater Horizon rig, writing off 70% of the platform's rent -- a deduction of more than $225,000 a day since the lease began, according to a letter sent to the Senate Finance Committee.
Paying Much Lower Taxes Than Virtually Any Other Industry
The Times reports: "According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9%, significantly lower than the overall rate of 25% for businesses in general and lower than virtually any other industry."
For many small and midsize oil businesses, the tax on capital investments is so low that their returns on them are often higher after taxes than before.
The government is now considering a new tax on petroleum production to pay for the enormous Gulf oil spill cleanup. This, and attempts to curb the oil industry's tax breaks, are likely to encounter fierce opposition in Congress. The Times reports that the oil and natural gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.
The oil industry claims that cutting the subsidies and tax breaks threatens jobs and oil production. But a Treasury Department economist cited in 2009 a study that found oil prices and potential profits were so high that eliminating the subsidies would decrease U.S. output by less than 0.5%.
Take the first steps to building your portfolio.View Course »