POLICY: Oil Profits Under Fire

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Despite these strong arguments, the industry's critics in Congress remain unsympathetic. A main reason for their hostility is that the oil industry enjoys lucrative tax preferences. They are, in ascending order of importance:

ALLOWANCES FOR INTANGIBLE DRILLING COSTS. These "I.D.C.s" are the noncapital costs of drilling an oil or gas well, including wages for workmen and rental fees for equipment. Oilmen can deduct these costs from their taxable income immediately, rather than spreading the deductions over the years that the well is in operation. The Treasury Department figures that, in 1972, I.D.C. deductions saved the oilmen $600 million in federal income taxes.

DEPLETION ALLOWANCES. These permit an oil or gas producer to deduct from his taxable income up to 22% of the gross revenues derived from his well.

Depletion allowances aim to compensate the owner for the decreasing value of his well as oil is pumped out of it, and in 1972 they saved the oil industry $1.4 billion in taxes. Since the price of crude oil on which the size of the depletion allowance is based has doubled over the past year, the write-offs will be even greater in 1973. Most of these deductions come from domestic oil production, but oilmen can also use the depletion allowance to reduce U.S. taxes on their foreign income.

FOREIGN TAX CREDITS. These permit a company to deduct from the U.S. taxes due on its foreign income the income taxes that it pays to foreign governments. The aim is laudable: to prevent double taxation. But there is a catch. Many oil-producing countries mislabel part of the royalties that they charge on each barrel of oil as taxes, in order to create a U.S. tax credit for the oil companies. If the oil companies were forced to treat the disguised royalty as part of the cost of doing business—as other companies must—they would be able to deduct only 480 from their U.S. taxes for every dollar that they put out, instead of writing off the full amount.

An aroused Congress will change oil-company taxes this year. The only question is by how much. Except for an excess-profits tax, most of the proposals before Congress would do little to increase the tax liabilities of international oil companies. President Nixon has proposed that Congress repeal the U.S. depletion allowance for oil wells located abroad. The companies, however, generate such huge tax write-offs from other sources—mainly the foreign-tax credit —that they rarely need to use the foreign depletion allowance. More important it is likely that the domestic depletion allowance will be abolished or substantially reduced. But the depletion allowances are cherished by the oilmen, who still have powerful friends in Congress.

Have the oil companies been profiteering from the energy crisis? Based on the evidence to date, the answer is no. Despite the suspicions, no convincing proof has been presented that the petroleum shortage is phony or that the companies conspired to contrive it to raise prices and profits. In a time of high demand, they have been charging as much for their products as the law allows —but no more. Their behavior in attempting to maximize their profits is absolutely consistent with the purpose of corporations in a capitalist society: to make money for shareholders, millions of whom are middle-income people.