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U.S. House Votes to End Subsidies and Tax Breaks for Oil Companies

Money saved would be invested in alternative energy and conservation

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January 19, 2007 – The U.S. House of Representatives, under new Democratic leadership, yesterday passed legislation that would end more than $14 billion in subsidies and tax breaks for oil companies and earmark that money to help develop renewable energy, alternative fuels and conservation technologies.

Despite strong opposition from the oil industry and the Bush administration, which argued the measure could increase U.S. dependence on foreign oil, the bill passed by a vote of 264 to 163, with many Republicans joining Democrats to ensure an easy victory. House passage of the bill to end oil subsidies and tax breaks is only the most recent indication that Congress will give energy and environmental issues more substantive attention now that Democrats control both houses following the 2006 elections.

“Today’s vote represents the first step toward a future of energy independence,” said House Speaker Nancy Pelosi.

How the New Bill Would End Oil Subsidies and Tax Breaks
The bill would end $7.6 billion in tax breaks for oil companies, which Congress passed in 2004 and 2005, and impose $6.3 billion in royalties on companies that drill for oil and gas offshore in the Gulf of Mexico and near Alaska.

All of the money would be placed in a reserve account, to be used to develop renewable energy sources such as wind and solar power, alternative fuels such as ethanol and hydrogen fuel cells, and conservation incentives and technologies.

House Democrats Get to Work
The bill to end oil subsidies and tax breaks was the last of six major pieces of legislation passed by the House during the first 100 hours of legislative business in 2007. The other bills passed during the 100-hour blitz include legislation to:

  • implement recommendations of the 9/11 Commission;
  • increase the Federal Minimum Wage;
  • promote embryonic stem-cell research;
  • require the government to negotiate for lower Medicare prescription drug costs; and
  • reduce interest rates on student loans.
Will Bush Veto Bill to End Oil Subsidies and Tax Breaks?
Before any of the six bills passed by the House can become law, they must also be passed by the Senate and signed by President Bush. If Bush decides to veto any of the bills, it is not clear whether Congress would have enough votes to override his veto.

Although the president is an ardent supporter of the oil and gas industry, and despite his outspoken opposition to the new bill, he may be inclined to sign it into law rather than veto it.

In his 2006 State of the Union address, President Bush decried America’s addiction to oil and called for a stronger commitment to developing renewable energy sources and alternative fuels. Meanwhile, some major oil and gas producers have said publicly that they don’t really need special subsidies and tax breaks to turn a good profit.

How and Why Oil Companies Stopped Paying Royalties
In the late 1990s, the U.S. Interior Department signed drilling leases that, because of errors in the documents, allowed oil companies to avoid paying billions of dollars in royalties for a decade. The new legislation includes a provision that would require companies that refuse to change their leases to pay a “conservation fee” on each barrel of oil they produce or be denied additional leases. If they don’t pay, they don’t drill.

“Big Oil is hitting the taxpayer not once, not twice, but three times,” according to Rep. Nick J. Rahall II (D-WV), chairman of the House Natural Resources Committee. “They are hitting them at the pump. They are hitting them at the Treasury through the tax code. And they are hitting them with royalty holidays.”

"The oil industry doesn't need the taxpayers' help. ... There is not an American that goes to a gas pump that doesn't know that," said Majority Leader Steny Hoyer, D-MD. Gasoline prices soared to $3 per gallon or above in 2006 as oil companies like ExxonMobil continued to earn record profits.

Hoyer said the new legislation signals a critical shift in U.S. energy policy and “starts to move our nation in a new direction.”

Senate Hearing Reveals “Bureaucratic Bungling”
At a hearing of the Senate Energy Committee prior to the House vote, the Government Accountability Office estimated that errors in the oil leases signed in the 1990s has cost the U.S. Treasury $1 billion, and could end up costing $10 billion if the leases aren’t changed.

Basically, the leases were supposed to allow oil companies drilling in certain waters to avoid paying royalties on their initial production, but the incentive would end if oil prices exceeded $34 per barrel. Unfortunately, that clause was mistakenly omitted from many leases signed in the 1990s, so oil companies with the flawed leases haven’t paid a dime in royalties for several years.

Earl E. Devaney, the Interior Department inspector general, told the senators at the hearing that the mistake was first spotted in 2000, but it wasn’t made public until The New York Times reported it in February 2006. Apparently, officials at the Interior Department and the Minerals Management Service (MMS) decided they couldn’t change the leases because it would mean violating a contract—a view the White House shares.

Devaney called the agency’s failure to act “a shockingly cavalier management approach” and a “jaw-dropping example of bureaucratic bungling.”

After the hearing, U.S. Sen. Maria Cantwell (D-WA), a member of the Senate Energy and Natural Resources Committee, told reporters that the government’s oil and gas royalty program is “riddled with blatant mismanagement” and said the Senate would likely take legislative action to fix it.

"Today's hearing proved that the more we learn about the MMS program to collect these royalties, the more problems it seems to have," Cantwell said. "The American people deserve a fair return on the natural resources they own, not more giveaways to oil companies already enjoying record profits."

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