Oil Tax Breaks: Will Obama’s Plan Cause A Price Spike?

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Don’t worry you won’t pay at the pump for oil company tax increases (Mike Blake/Reuters)

Gas prices are up. Oil company profits are up. Should the taxes Exxon Mobil, Shell and others be going up as well?

An increasing number of politicians seem to be saying yes. President Obama has proposed eliminating $4 billion in tax subsidies oil companies receive a year. Congress may vote on the plan next week. Yesterday, Republican Paul Ryan said he was for ending corporate welfare, including breaks for oil companies. Earlier in the week, Speaker of the House John Boehner indicated that he would be for cutting tax breaks to the oil companies given the price of gas. But now he seems to be backing off that stance. Here’s what Boehner’s spokesperson had to say about eliminating tax breaks for oil companies  to our sister blog Swampland:

Boehner’s spokesman, Michael Steel, told TIME that “the Speaker is willing to look at any proposal that would actually lower gas prices. Unfortunately, what the White House has proposed at this point would actually increase gas prices.”

Really? I’m not so sure. Here’s why:

Indeed, the recent rise of gas prices seems to be slowing the economy. So raising taxes on oil companies does seem to be a bad move if it will  result in higher gas prices. But is that what would really happen? Probably not.

First of all, there doesn’t seem to be a whole lot of studies that can connect gas prices to oil company tax subsidies. The main subsidy that we give oil companies is to allow them to write-off nearly all of the value of the investment they make when they are drilling for oil. Usually, companies have to write off their long-term investment costs over time. So allowing the oil companies to take the break immediately lowers the cost of drilling.

In the past year, the American Petroleum Institute, which is funded by the oil and natural gas companies, has done two studies looking at how removing oil company tax breaks would affect the industry. And the conclusion of the API studies was that US production of both oil and gas would drop by about 4%. But since the industry lumps oil and natural gas (the kind that is likely to come out of your stove, not go in your car) together it’s not clear how much of that drop would actually be in oil.

Even that estimate might be too large. That’s because it matters what assumptions you make for the price of oil. The higher the price of oil, the less tax breaks matter. At $10 a barrel, you might care about the size of the government subsidy. At $100, the tax break is just icing. Back when the API did the first of their studies in August of 2010, the price of oil was about $80 a barrel. Now it is around $110. So you would expect the effect on production would have gone down.

And remember we are just talking US production here. Gilbert Metcalf, an economics professor at Tufts who has studied the relationship between oil and gasoline prices, says that when you look at world oil markets, the reduction in supply from removing the U.S. tax subsidies for oil companies will be “imperceptible.” “This will have no affect on the price of oil or gas,” says Metcalf.

Of course, this all might be a different story if the oil companies were hurting. But yesterday, Exxon Mobil announced that it made $10.4 billion in the first three months of the year, or roughly $79,000 a minute. And you could say that just because they do well doesn’t mean they should have to pay more taxes. But isn’t that how our system works, or should.

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