Despite Rhetoric, Cutting Oil Subsidies Would Have Little Effect on Gas Prices

Democrats renewed their push to cut oil subsidies this week, saying high gasoline prices and big revenues for oil and gas companies make this as good a time as any [1] to eliminate billions [2] in annual tax incentives to the industry. Republicans countered that higher taxes on oil companies would only mean higher prices for consumers.

Most experts agree, however, that the tax incentives in question don’t have much effect on gasoline prices, one way or the other.

“The impact would be extremely small,” said Stephen Brown, a professor of economics at the University of Nevada, Las Vegas. Brown co-wrote a study in 2009 [3] arguing that if the subsidies were cut, the average person would spend, at most, just over $2 more each year on petroleum products.

This isn’t the first time Congress has debated the pros and cons of cutting the tax subsidies. President Obama has proposed eliminating some $4 billion in subsidies in each of his annual budgets since entering office in 2009 (the liberal Center for American Progress has a good breakdown [4] of the President’s proposal). Senate Democrats this week introduced an alternative plan [5] that would cut a little more than half as much, by targeting only the largest oil companies.

From the beginning, the Treasury Department has said the President’s proposal would raise prices at the pump by less than a cent per gallon at most. Brown’s study, produced for the non-partisan think tank Resources for the Future, came up with similar [3] results. Even the American Petroleum Institute, which opposes cutting the subsidies, said in a press release on Monday [6] that eliminating them wouldn’t affect gas prices.

The argument offered by [7] Senate Majority Leader Mitch McConnell and other Republicans who oppose cutting the incentives is that it would drive up costs for oil and gas companies and ultimately reduce production and supply, leading to higher prices. (Domestic production, incidentally, has increased 10 percent [8] over the last two years, and more oil wells were drilled in the U.S. last year [9] than in any since 1985.)

As the Treasury Department’s analysis showed, the numbers don’t support McConnell’s assertion. Treasury’s Alan B. Krueger told a congressional subcommittee [10] in 2009 that cutting tax incentives to the oil industry would raise costs by less than 2 percent and lead to a reduction in output of only one half of one percent. The United States produces about 10 percent of the world’s oil supply and holds less than 2 percent of global reserves. Since oil is a globally-traded commodity, a small drop in U.S. production would have an even smaller effect on the global price of oil.

In its 2012 budget proposal [11], the Obama Administration said cutting a number of tax breaks for the oil and gas industry would save more than $43 billion over the next decade. Republicans have opposed attempts to pass those subsidy cuts, most recently by rejecting attempts [12] to attach them to a series of Republican-sponsored bills that aim to expand domestic drilling. On Tuesday, Senate Democrats introduced a bill [5] that would cut subsidies only for the five biggest oil and gas companies, a more targeted plan that sponsors say would save $21 billion over the next 10 years.

There are other reasons why people support or oppose cutting these subsidies, including their effect on the budget deficit, job creation, reliance on foreign oil and interference in the free market. The President’s proposal could also shift more production [3] from smaller oil companies, which tend to operate less productive wells, to the big multinationals, said Brown, the University of Nevada economist. The National Journal hosted a blog forum [13] last week that gets into many of those arguments. Today, the Senate Finance Committee will host CEOs [14] from the big five oil companies to discuss the topic.

Gas prices also have been the rallying cause for another set of proposals in Congress that would speed permitting and expand offshore drilling. House Republicans passed two of those bills [15] in the last couple of weeks. A number of studies [16] and reports [17] have argued that the biggest of those proposals, expanded offshore drilling, probably wouldn’t affect gasoline prices much either.