Men In Tights

Democrats launched a plan this week to; as the Washington Post put it, put “the heat on GOP over oil companies”. In a press release from Max Baucus, Democratic chairman of the Senate Finance Committee, they seek to:

“…end billions of dollars in tax breaks for large, multinational oil and gas companies and invest in cleaner and cheaper domestic energy sources.  The Finance Chairman called his plan a blueprint for legislation that he intends to craft in the Committee.  Baucus said today that with energy prices rising and large oil and gas companies announcing billions in first quarter profits, now is the time to end these subsidies and instead direct that investment to cleaner and more affordable domestic energy solutions.”

Their new and earth shattering ideas? Same old, same old.

Repeal tax breaks for the largest oil and gas companies – end tax incentives for the five largest oil and gas companies that announced tens of billions of dollars in first quarter profits this week.  This includes the elimination of the section 199 manufacturing deduction, reduction in the foreign tax credit for royalty payments to foreign governments and the imposition of an excise tax on certain Gulf leases.

Promote demand for clean, domestic fuel – encourage increased production of cleaner and more affordable domestically-produced fuel by making it easier for manufacturers to produce and for consumers to purchase.

Incentivize fuel efficient vehicles – increase demand for the most fuel efficient vehicles by providing incentives for the purchase of these vehicles and encouraging manufacturers to increase production.

Build a clean energy infrastructure – incentivize the infrastructure needed to support clean energy vehicles, such as alternative energy fueling stations, that will make the clean energy transportation of the future possible.

What will this do to reduce gas prices? Nothing.

Oil companies actually make pennies on a gallon of gasoline. From Exxon Mobil’s public information blog, Perspectives:

ExxonMobil’s earnings are from operations in more than 100 countries around the world. The part of the business that refines and sells gasoline and diesel in the United States represents less than 3 percent – or 3 cents on the dollar – of our total earnings. For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon. That’s not a typo. Two cents.

Who gets a larger share of income from a gallon of gas? The State and Federal governments do, this map at the API website shows gasoline taxes by state (combined local, state and federal), which range from a low of 26.4 cents per gallon in Alaska to a high of 66.1 cents per gallon in California, averaging 48.1 cents per gallon across all states.

Exxon Mobil (NYSE – XOM) – $0.02/gallon, Government – $0.48 per gallon. 24 times the evil oil company take. Who is gouging now, especially since the governments have no risk involved in the exploration, production or retailing of the product? Every cent of Exxon’s expenditure is at risk. Government has no risk.

One has to ask about motivation for this move by the Democrats. Populism ala the Tea Party? Sound policy? Raw political opportunism?

The facts are that global investment by the largest oil companies will total $375 billion this year. $4 billion represents 3.7% of this amount. Exxon Mobil is the largest US based oil company and it only ranks 14th in the world behind 13 state owned oil companies. Exxon invested $32 billion last year, if we assume that the tax breaks are allocated in proportion to investment, XOM got $341 million in breaks. In reality, the other 13 get 100% subsidies from their national governments. Is XOM at a competitive disadvantage? You bet.

Why won’t it impact the price at the pump? The ending of subsidies is a zero sum game because it increases taxes on the companies. Taxes are expenses. Expenses must be paid; the way that they will get paid is that prices will actually go up by $4 billion in the total market to pay those taxes. Who wins? Government. They are $4 billion richer, the oil companies are not affected other than their pass-through costs just got increased (they have a fiduciary responsibility to shareholders to return dividends and shareholder value, so this WILL get passed on) and the public now has $4 billion less to spend.

Once again the erstwhile Democratic Robin Hoods slip on their tunics and green tights, draw the bow and loose the arrow at “Big Oil” only to miss once again and hit the American public. Women, children and the poor hardest hit – and this time that statement is true.

I’m not a fan of subsidies in any shape or form because they distort the demand curve. They are an unnecessary intrusion in the free market and cause unintended consequences. I actually don’t think that ending subsidies is a bad thing overall but claiming that this is an effort by Democrats to lower the pump price is patently dishonest.

Since this won’t make it through a Republican controlled House anyway, I’m going to have to cast my vote for raw political opportunism.

Talk Amongst Yourselves:

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