Chicago Sun Times Editorial - Now's a curious time to be dishing out oil welfare

Now's a curious time to be dishing out oil welfare

February 17, 2006. Copyright by the Chicago Sun Times

The U.S. government over the next five years will give a windfall of $7 billion to oil companies -- yes, the same oil companies that reported record profits last year. But wait, it gets worse: If one oil company that is suing the government succeeds, that windfall could hit nearly $35 billion. Oh, and one more thing: There appears to be little anyone can do about it. Think about that the next time you pay a small fortune to fill your tank.

There is nothing illegal about the program, which was reported by the New York Times this week. In fact, some folks might argue its goals were laudable 10 years ago, when the federal government with bipartisan support tried to encourage oil companies to drill in the deep waters of the Gulf of Mexico by promising to forgo the normal 12 percent or 16 percent royalty payments on leases there. Oil and gas prices were relatively low at the time, and it was deemed too financially risky for oil companies to invest in deep water drilling without the incentive. But isn't taking risks in hopes of gaining future profits what the market is all about? This was a bad idea from the start.

Much of the oil and gas that was found under the program is only now starting to flow, and the timing couldn't be worse -- for the oil companies, anyway. It comes as they are fighting a proposal to impose a "windfall tax" on their record profits last year, which were aided by oil prices that soared to $70 a barrel.

Many companies stopped claiming relief when oil and gas prices rose above certain trigger points built into the leases -- about $35 per barrel for oil. But those price triggers were waived in leases signed in 1998 and 1999 because companies still weren't investing in deep water drilling, and those leases will account for most of the $7 billion windfall.

And several companies are challenging whether the Interior Department had the authority to include those price triggers in the first place. According to the Times report, the Interior Department earlier this month announced 41 companies had improperly claimed $500 million in royalty relief in 2004. Most agreed to pay, but one, Kerr-McGee, said it would fight the department in court. It argues that Congress didn't specifically authorize the price thresholds. If it wins, that $7 billion windfall balloons to $35 billion.

While some lawmakers said they will try to undo the terms of leases that are in some cases 10 years old, they will probably fail. Others are rightly urging the Government Accountability Office to analyze the program and make sure it has been properly managed. Congress can at least make sure that when crafting similar programs it includes provisions for easing or ending incentives as prices rise.

While we don't favor a new tax on the oil companies' record profits, those firms aren't doing themselves any favors by refusing to pay royalties while they're rolling in the dough. They might find it hard to win incentives the next time their industry is in a slump. We can hope so. The oil industry can make plenty of money without the benefit of corporate welfare.