Tuesday, April 26, 2011

Time to pull the plug on government subsidy: When oil companies declare obscene quarterly profits?

Keywords or Terms: Strong earnings; Obscene profits; Subsidies; Below cost loans; Defraying pollution costs; Domestic production; Oligopoly arrangements; Tax rates; Public goodwill; Chevron; British Petroleum; and, Exxon-Mobil

Can huge profits obliterate sin against the environment? Probably not, but many oil companies are already saying that their contribution to the economy should not be measured by one or two errors of environmental bastardization by one lone wolf among them. Chevron Corporation wants to be an ideal company; and, this is probably why it has been running advertisements ahead of the quarterly earnings set to be released sometimes this week. British Petroleum is set to release its second quarterly profit first among peers, tomorrow. British Petroleum would also want you to overlook its recent omission or commission in the Gulf of Mexico. Other oil and gas companies that have not suffered the faith of British Petroleum, would want you to see their industry as one that promotes civic responsibility, pay taxes, create jobs, increase higher levels of workplace skills, develop confidence and professionalism among workforce, and contribute to America’s independence from foreign energy sources; achieving all these and more, under a regime of disciplined environmental custody. Are these really true? Are oil companies making all those reported obscene profits without some corporate welfare and or environmental capitulation?

If oil companies make the 'holier-than- thou' argument or pronouncement regarding their expected huge profits, each of them must realize that but for some federal subsidies, in terms of tax deferments, royalty forgiveness or bank rolling of their explorations activities, none of those obscene profits will be possible. Many oil companies may have initiated business decisions that have resulted in better outcomes, but for continued subsidies to their industry, some of these companies would not be announcing the eye-popping quarterly profits. Further, many of the oil and gas companies probably achieved the huge corporate profits from environmental pollution and degradation; sales tax deferment; favorable public policy and or, under the auspices of belligerent attitude towards workplace safety management. While British Petroleum had made some atonement for its sins against the environment by setting aside some restitution for its flagrant misbehavior in the past year in the Gulf of Mexico, the company cannot say it is out of the woods yet; neither can it boldly say that the distressingly real experience of the explosion at the Deep-water Horizon rig, must be overlooked because it has declared another block buster quarterly profit. In fact, just a few years ago, British Petroleum committed another sin in the workplace, when it sent a few of its employees to their early graves in the Waco refinery explosion. It is probably getting to be a tradition for British Petroleum to send their workers to early grave in the drive to make huge profits?

Strong earnings by oil companies belie their poor custody of the environment. Many oil and gas companies, including British Petroleum, have reasons to make their pronouncements with tongue in cheek or reservations, considering what we now know, is their errors in safety management; and, the recent experience in the whole industry in general has neither been helpful. Exxon-Mobil gave us a dose of its failure to preserve the environment while moving oil across Valdez Alaska waters a little over two decades ago. Egregious behavior against the environment from other oil and gas companies, some of which have escaped the scrutiny or radar of government regulatory agencies, have only made us wonder, when is the oil and gas industry going to sit up and get with the program of averting constant oil spills and repeated deaths on their work-sites or projects.

Probing a bit more deeply into how these companies come about their huge profits, one discovers that there is a serious problem of corporate welfare for oil and gas companies and the profits declared quarterly are both the derivatives of excessive government subsidies and a deceptive representation of the true cost involved in making the profit. Cleantech.com reported that the US Government has generally propped up the oil and gas industry through: 1) Construction bonds at low interest rates or tax-free; 2) Research-and-development programs at low or no cost; 3) Assuming the legal risks of exploration and development in a company's stead; 4) Below-cost loans with lenient repayment conditions; 5) Income tax breaks, especially featuring obscure provisions in tax laws designed to receive little congressional oversight when they expire; 6) Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods; 7) Giving money to international financial institutions (the U.S. has given tens of billions of dollars to the World Bank and U.S. Export-Import Bank to encourage oil production internationally, according to Friends of the Earth); 8) The U.S. Strategic Petroleum Reserve; 9) Construction and protection of the nation's highway system; 10) defraying the cost of pollution; and 11) Relaxing the amount of royalties paid by oil and gas companies. The site further documents that oil and gas industry often want to justify these subsidy under the pretext of energy security, environmental compliance, bolstering domestic production and meeting defense requirements.

Critics of government subsidies to oil and gas companies argue that the basis of subsidies for the industry by the federal government are questionable. Advancing argument against further subsidies to the industry on the grounds that: 1) subsidies hardly improve domestic production, since other variables, including oligopoly arrangements, futures trading and speculations enter into petroleum production and marketing; 2) royalties that could have accrued to government benefit oil and gas companies exploring in some difficult terrain have often been deferred; and 3) flip-flopping on existing energy policy allow oil companies to take advantage of loop holes, critics maintain that the whole industry is part of a network of government wastes. For instance, the roll back in the Energy Policy Act of 2005 has made it very easy for oil and gas companies to take advantage of government refusal to enforce part of its own policy to rake in additional profits. Further, there are questions permeating from every corner of the revenue collection apparatus of government, that if environmental regulations like the fuel efficiency standard for vehicles and local gasoline taxes are enforced by federal, states and local communities adjacent to oil and gas explorations, it would be more difficult for these companies to declare the size of quarterly profits that are often broadcast to the world.

A number of counter argument are often advanced by the oil and gas companies. Except there are enough subsidies, many companies would not explore for oil and gas off-shore or inland, because of the difficult geology and initial capital needed to explore at greater depths, as in the Gulf of Mexico. An argument that has been debunked by critics of subsidies to the oil and gas industry: while other countries’ governments continue to demand more of the oil producer’s revenue, the United States government continues to demand a smaller share of producer’s revenues on public lands and waters. Coupled with this, is the actual cost of watching a company like British Petroleum, owner of the largest leases in the Gulf of Mexico, pollute the environment. Till date, no one has been able to adequately cost the environmental debacle at the Deep-water Horizon rig, nor inform the government and public, the true cost of the oil spill and clean up to pre-April 20, 2010 status, in the Gulf Coast.

Despite the pro and con of government subsidies to the oil and gas industry, the reality of the obscene profits from players in the industry, is starting to sour the mouth of the public, who have to pay an average of four dollars and more per gallon at the gas pumps. The clamors for the removal of oil and gas subsidies are more likely to become pronounced. With gasoline prices at the pump turning up north in the past month and a half, the public goodwill towards subsidies to the industry may be waning. Indeed, there are already signs that some congressional leaders are asking blunt questions regarding what the increases in the gasoline prices are costing their constituents. Senators Patty Murray (D-Washington) and Maria Cantwell (R-Washington) were asking blunt questions at a rally organized in Olympia, Washington, regarding the impacts of future markets and speculations on the ever increasing price at the gasoline pump. Just like the politicians, the public is getting fed up; and past romance with the oil and gas companies, may be evaporating.

Finally, the escalating increases in the gasoline prices at the pump may be doing more havoc to the sluggish economy than has ever been told or measured by keen observers. The announcement of obscene profits by oil and gas companies may only exacerbate the pains felt by consumers at the pumps; and, may end up turning the public goodwill against any further subsidy from the U.S. government. The difficulty of an under-performing economy and the potential of increasing gasoline prices slowing down any type of improvements in the same, may be the final straw. The setbacks in profit outcome and performance in other industries are now gravely becoming serious with the increasing cost of gasoline at the pump. The magic of oil and gas explorations may produce huge profits and output, but for all intense and purposes, these increases do not seem to be benefiting the public as alluded to by the industry; or as advanced as argument for continued U.S. government subsidies.

There are institutional arrangements within the structure of government to manage the troublesome problem of excessive profits and environmental pollution from the oil and gas industry. There is every reason to believe that the oil and gas industry is not playing fair many at times; and if it is, there are some other illicit market behaviors, including future markets speculations and underhanded trading, that is making it difficult for the average public to benefit from any increased domestic production that is drummed up as the true reason for the government subsidies. For its part, the Obama’s administration has the obligation to correct this problem, if its ambition for the economy is not going to be completely eclipsed over the summer, when traditional price increases at the pump often phase in.

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