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Editorial

Big breaks for Big Oil

Obama wants to cut unneeded and expensive oil subsidies, but Congress won't go along.

January 28, 2011

Analysts are expecting a bonanza when Exxon Mobil Corp. announces its fourth-quarter earnings on Monday; the company's stock has jumped by nearly 20% during the last year, and in the first three quarters of 2010, its profit was $21.2 billion — not a bad haul during a worldwide recession. Other oil companies have had similar success, thanks to growing demand in India and China. Yet U.S. taxpayers subsidize this industry to the tune of $4 billion a year.

This kind of largesse toward a hugely profitable business seems bizarre, especially at a time when the federal deficit is reaching alarming proportions, yet efforts to end the tax deductions and credits for companies that don't need them have gone nowhere. That isn't stopping President Obama from trying. In his State of the Union address, he proposed an uptick in federal spending on clean-energy research and development, to be paid for by ending subsidies for oil companies. "I don't know if you've noticed, but they're doing just fine on their own. So instead of subsidizing yesterday's energy, let's invest in tomorrow's," Obama said.

He is of course right, but that won't stop Republicans and oil-state Democrats from thwarting his plans. Obama has been trying since his first year in office to cut oil subsidies, calling in his last budget request for the elimination of $36.5 billion in industry tax breaks over the course of a decade. Congress turned him down.

The oil industry and its backers claim that ending these breaks, such as a domestic manufacturing tax deduction and deductions for certain "intangible" drilling expenses, would cause oil and gas prices to rise and cost American jobs. Independent analyses suggest that isn't true. A 2007 report by the Joint Economic Committee, which advises Congress on economic matters, found that ending the manufacturing deduction would have a negligible effect on consumer prices. That's because when crude is fetching high prices, as it has for many years and will for many more, companies have ample incentive to drill even without a subsidy — so eliminating it wouldn't cause the kind of supply shortages that push up prices at the pump. Subsidies also have a minimal effect on drilling decisions, including whether companies drill in the United States or abroad, so they don't preserve jobs for American workers.

Obama couldn't persuade Congress to end oil subsidies when it was controlled by Democrats, so it's even less likely he'll succeed now that the House is controlled by Republicans. It's still the right thing to do — and if Obama can make more Americans aware of their government's generosity to oil giants, he can boost his chances.

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