As Gas Prices Rise, Oil Company Tax Breaks Debated

Enlarge this image toggle caption Donna McWilliam/AP Donna McWilliam/AP

Exxon said Thursday that its profits surged during the first three months of the year: The company said it earned $10.6 billion during that period — an increase of 69 percent.

These higher profits come at a time when gasoline prices are exceeding $4 a gallon in some states. So, in Washington, there's once again talk of eliminating some of the tax breaks the industry receives.

When gasoline prices begin to rise, politicians begin to take aim at the oil companies. And so it goes right now. The White House has already announced plans to investigate the role that speculators play in rising energy prices. And in his weekly radio address on Saturday President Obama went further, saying it was time to reconsider some of the tax breaks the oil industry receives each year.

"That's $4 billion of your money going to these companies when they're making record profits," he says. "And you're paying near record prices at the pump. It has to stop."

It may not be a surprise to hear a Democratic president talk like that. But on Monday, Republican House Speaker John Boehner took up the call as well, in his interview with ABC.

"We're in a time when the federal government is short on revenues," he said. "We need to control spending, but we need to have revenues to keep the government going. And [oil companies] ought to be paying their fair share."

The Treasury Department says oil companies will get more than $40 billion in tax breaks over the next decade. They get $12 billion for deducting certain drilling costs, for instance, and an additional $11 billion for the so-called energy depletion allowance.

Rayola Dougher of the American Petroleum Institute says these tax breaks go to support an industry that employs 9 million Americans and is leading the search for new energy supplies.

"As an industry, we really want to grow the tax base," she says. "We want to grow the jobs and we want to grow the energy we are bringing in, and [reducing oil company tax breaks] would erode the ability to do that."

Dougher says politicians may think they're going after big profitable oil companies if they eliminate these tax breaks. But she says the ones that would actually be hurt the most are the small oil and gas producers that don't always have a lot of capital to stay in business.

"Some of the provisions they're going after would affect [small producers] the most, the soonest," she says. "Then it would ripple through the rest of the industry. You just would absolutely end up with less to be able to invest. There is just no way around that fact."

But oil industry analyst Philip Verleger, who teaches at the University of Calgary, is skeptical of that argument. He says the incentives in the energy business are strong and he believes small and medium-size companies can thrive even without the tax breaks they receive.

"I can think of several new energy companies that have grown over the past several years and they would have done fine," he says. "They wouldn't have made quite as much money and their stock price wouldn't have been quite as high had these taxes and benefits not been there."

Verleger says when you consider how strapped the government is right now it makes a lot of sense to go after the industry's tax breaks. Still, he says some of these breaks stretch back to World War II and the industry has managed to fend off efforts to eliminate them. Whether it can do so again will depend, in large part, on how much higher gasoline prices climb.