Billions in Tax Breaks for Oil Companies?

Here's another complicated story broken by the New York Times. The one line summary is causing people to have a knee-jerk disgusted reaction. That summary is this, over the next 5 years, the government is giving oil companies $7 billion in tax relief. These are the same oil companies reporting insane record setting profits. Of course the left is blaming Bush for this and Bush is blaming Clinton. Here's the scoop.

In 1996 Congress wanted to encourage oil companies to explore and drill in the Gulf of Mexico, but this was expensive so oil companies balked. So Congress passed and Clinton signed the Deep Water Royalty Relief Act to offer tax breaks to encourage this. Lessening on our demand on foreign oil, sounds like a good thing. The tax breaks came in the form of relief from paying royalties to the government for drilling on federal land. Well it worked and oil companies started the long process to explore and drill in these areas. They are just now starting to produce oil. But now prices are much higher. The 12% royalty the government was giving up for oil at $10/barrel was one thing. To some people 12% of $50/barrel is another.

The way to solve this is with price triggers. Currently if oil is more than $35/barrel the royalties still need to be paid, but, Clinton wavied the price triggers for all leases awarded in 1998 and 1999. "The Interior Department announced that 41 oil companies had improperly claimed more than $500 million in royalty relief for 2004." Most paid up in January, but one, Kerr-McGee, is fighting it in court. They claim that Congress didn't set price thresholds for leases awarded between 1996 and 2000. If Kerr-McGee wins, the overall cost in royalities will be about $35 billion in the next 5 years.

So all of this happened 10 years ago and what can we do now? It turns out Congress has tried a few things. Last years energy bill had more tax relief in it. Administration officials say they opposed those features, but apprently not very hard. The Senate tax bill has a one-year tax of $5 billion on profits of major oil companies, but the administration is threatening to veto it.

So what's right here? Honor the original agreement which did what it was trying to do (encourage more oil production) and was perhaps badly written to not account for a possibility for huge oil price increases, or get money from companies making enormous profits when the budget is so crazy out of wack? The article points out that $35 billion is "about the same amount that Mr. Bush is proposing to cut from Medicare, Medicaid and child support enforcement programs over the same period."

Companies are clearly about making money. Some argue that companies also have a responsibility to society. Apparently some companies like Exxon Mobil have stopped claiming royalty relief. You'd think there might be a way to compromise here.