Type: Economics
Pages: 3 | Words: 632
Reading Time: 3 Minutes

The U.S. government has given several incentives to encourage the production as well as the distribution of oil in the country. For instance, over the last five decades, the oil and natural gas industries have received over $700 billion from the federal government. Between 1950 and 2006, the two industries received about 60% of the total federal incentives with about 46% of this going to the oil sector alone (Makhijani, 2007). This amounted to about $ 335. The gas and oil industries receive percentage depletion as well as intangible drilling provisions in order to encourage exploration and development. The two sectors have also benefited from federal tax credits and deductions as incentives. Federal tax concessions for oil and natural gas constitute the highest incentives totaling to about 80% of all tax related allowances for energy (Makhijani, 2007).

Incentives for oil production and distribution have also been given in the form of price regulation (Ristinen, 2006). In fact, Oil from stripper wells as well as new wells receive the second highest amount of incentives which the federal government awards to a particular energy type (Ristinen, 2006). A 2005 report published in the New York times by the congressional budget office indicates that oil field leases and oil drilling equipments were awarded a very low taxation as an incentive. The report places the tax effective rate at 9%, which is lower than any other industry tax rate. The average tax rate is placed at 25% (Ristinen, 2006).

Incentives are also given to the small as well as the middle-sized oil companies. These companies are awarded a lower tax on their capital investments (Erwin, 2006).

This incentive given to such companies is called depletion allowance . These companies have 15% of their gross income from oil as well as gas wells exempted from taxation (Erwin, 2006). Oil producers also benefit from 100% deduction of intangible drilling costs in the year these costs are incurred. Intangible drilling costs are the costs of things such as labor, chemicals, mud, grease, and other miscellaneous items required in the drilling process (Erwin, 2006). These items account for about 65-80% of the t total drilling expense. This deduction is awarded irrespective of the result of the drilling process. This means that if the drilling process doesn’t give oil, the deduction is still valid. This is a great incentive for companies involved in the production and distribution of oil. Tangible drilling costs are also 100% deductable but are depreciated after a period of seven years. Tangible drilling costs are costs of the drilling equipment (Erwin, 2006).

The federal government also awards a 100% deduction for lease costs in the year they are incurred. These lease costs include: costs for the purchase of lease and mineral rights, lease operating costs, as well as legal, administrative and accounting costs (Daly, 2006).

The U.S. energy policy considers dependence on imported oil as an urgent energy, economic as well as national security plan (Daly, 2006). The country consumes 50% more oil than it produces. This policy promotes the development of domestic oil resources to bridge this gap. This is because, the policy makers believe that increase in domestic production would reduce dependence on imported oil as well as reduce OPEC’S ability to control oil supply and its price. This would prevent economic disruption by oil shocks (Daly, 2006).

The policy subsidizes domestic oil production in order to achieve its desired goals. This policy will not achieve the desired goal since domestic oil production is more expensive for U.S. than importing the same (Daly, 2006). The tax reliefs and other incentives awarded to oil producing companies will only hurt the economy. This is because, in the long run, domestic oil reserves will become depleted. Large investments in drilling of the same will not produce oil equal to the investment (Daly, 2006).

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