Obama Takes Aim At Oil Industry Subsidies?

During the State of the Union, President Obama recommended the elimination of about $4 billion in subsidies for the oil industry. There are two things to talk about here. The first is how is the oil industry getting $4 billion in subsidies? The second is did Mr. Obama propose giving it back later in the SOTU?

How is the oil industry getting $4 billion in the first place? One of the major ways is the method oil companies use to account for the cost of oil and drilling for tax purposes. This is similar to depreciation of equipment for normal businesses. In a normal business, if you buy a piece of equipment for $5,000 you get to take some portion of that cost as a deduction to income each year up to the $5,000.

Oil companies have options when it comes to depreciation, or as its called for oil and other natural resources depletion, that are not available to most other companies. Oil companies can calculate depletion based on what was paid for the oil (cost of the oil and drilling) or they can use the percentage of completion method. Oil companies are generally required to use the method that gives them the higher deduction. The advantage of the percentage of completion method is that it can give the oil company total deductions that are more than what the oil company paid for the oil and the cost to drill over the life of the well. Think of it as being able to deduct $6,000 for something purchased for $5,000. About 50% of oil companies use the percentage of completion method and it is one of the key tax advantages targeted by the President.

The total amount the President is targeting is $4 billion in oil industry subsidies. The President would like to take this $4 billion and shift it to renewable energy, clean coal and natural gas. And there is the kicker — many oil producers are also producers of natural gas. So while the oil companies are being asked to give up $4 billion, they will be getting at least some portion of it back in subsidies targeted at natural gas.

So will the President be successful in taking away the subsidies provided by the percentage of completion depletion method and other methods from the oil industry? Presidents since Truman have been trying. My cynical side says that the oil industry will be able to keep the current depletion rules and get some nice additional subsidies for natural gas. Good Luck, Mr. President.