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US House takes on Big Oil

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Left untouched would be one of the industry's most important federal tax breaks – the oil and gas percentage depletion allowance, created in 1916. Between 2006 and 2010 that break will cost taxpayers nearly $1 billion a year by allowing smaller, independent oil companies to deduct 15 percent of sales revenue to reflect the declining value of their investment, according to the Joint Committee on Taxation (JCT), which reports to Congress on the costs of federal tax legislation.

Another surviving tax break permits big oil companies to immediately deduct 70 percent of their "intangible drilling costs," such as the cost of wages, supplies, and site preparation. Smaller companies are permitted to deduct all of those costs. That break will be worth a little over $1 billion a year through 2010, the JCT found.

Industry officials deem such breaks as critical to US domestic oil production that they say would otherwise dwindle, since it costs far more to produce oil domestically than import it.

That claim is overblown, some analysts say. Even if such subsidies were triple their current level, they would have practically no effect on reducing oil prices and boost domestic production by only 0.2 percent, writes Gilbert Metcalf, a Tufts University economist in a recent study.

The industry receives federal largesse beyond tax breaks and relief from royalty payments. Add in research and development subsidies and accounting breaks and the total looks more like $6 billion a year for the next five years, according to a Friends of the Earth tally of JCT data.

Other economists say the industry's federal subsidies are far higher. They average about $39 billion annually if items such as defense of oil lanes in the Persian Gulf, guarding domestic infrastructure like the Alaska Pipeline, and paying to maintain the nation's Strategic Petroleum Reserve are also included, says Doug Koplow, founder of Earth Track, a Boston consulting firm that analyzes natural-resource subsidies.

"There probably is a public interest in government involvement in maintaining security of supply and reducing price, but those costs should be borne by oil markets and not by taxpayers," he argues.

The strategic reserve, for instance, stores about a two-month supply of oil for the nation in salt domes in Louisiana and Texas. Maintaining it costs the nation an average $2 billion or so a year, Mr. Koplow says. Guarding Middle East oil lanes averages about $19 billion a year, he found, which doesn't include the recent surge in spending because of the Iraq war.

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