I am not the greatest authority on this one, but I think that I know a lot more about the subject than 99% of the population. It is in the news every day that we are giving big oil companies all these "subsidies", but no one ever explains what those subsidies are. I know for a fact that 99% of the population don't understand "depreciation" or "depletion allowance". Do you know what "double declining balance depreciation" means? If you don't, you are not alone. That is the problem. The situation is made worse by how the problem with gas prices is structured. How can that be? Gas prices are "too dammed high". If drilling more oil wells or eliminating the so called subsidies will not lower gas prices, then why do them? If you think this is logical, you still have a problem.
First, let's take up the subsidy issue. Most of what is being called a subsidy is just normal depreciation. In any business capital investments in equipment and machinery can not be deducted 100% form earnings in the year they were purchased. If this were allowed, few growing companies would ever pay any income tax. Further, by accounting convention they want to show a true picture of earnings and to do that, accounting convention says that the cost of the new equipment should be charged off over the life of the equipment. I agree with that concept and it has been around a very long time. Let's say that you rented the equipment rather than purchasing it. The rental payments would be deductible against each years earnings. That seems logical and that is almost exactly what the end results are for new equipment. Let, further say that you borrowed the money to buy the equipment from a bank and paid the money back over a period of 10 years. You can not deduct the amount that you paid back to the bank each year except for that portion which was interest, but you can deduct the depreciation on the equipment that would in the end amount to the same thing. This is logical and it has been the law for many years, so why is this same thing when applied to a big oil company so bad? Big oil companies, just like small family businesses deduct the depreciation on their equipment every year. Here is where some people seem to have a problem.
Some equipment can last for many years beyond the depreciation period, while other lose value very fast, like a computer. On way to encourage companies is to allow for a faster depreciation rate. This helps the cash flow and delays the time that taxes have to be paid. In theory, the company will pay the same amount of tax on their profit either way. If people understood the basics about accounting, they would be able to see that this has all been a dog and pony show.
Next point has to do with depletion allowances. Never heard of this one? Think about it this way. Land can not be depreciated like buildings and equipment because it never wears out. If you know anything about rental property, you will understand that the value of a real estate property is made up of two parts. Land and improvements. You can depreciate the improvements, but not the land, but there are some kinds of land that can be depreciated and it is call depletion. If you purchased a track of land that had a deposit of gravel or coal or oil or any other mineral on it, the value of the land would be based in part on the value of that mineral. If that mineral were removed from the land, the land would be less valuable and thus depleted. Rather than tax you twice, first on the money that you earned to buy the land and then on the mineral that you removed from the land, the tax law allows you to deduct the value of the mineral you removed. Following me so far? Because of the complexity in administration and the difficulty of determining exactly how much of this or that mineral was on the property, the law allows you to deduct some percentage of the price you get for the mineral or so much per ton, yard, gallon or board foot. In the case of oil companies or individuals who have oil wells on their property, they are allowed to deduct as a depletion allowance some percentage of the value of the oil. Years ago it used to be about 15%. I don't know what it is now, but I think it is smaller. It can get more complicated when it involves a lease of mineral rights from the government where more or less oil is found or produced.
My point is that this dog and pony show has gone on long enough and we should end it and get on to solving the real problem and what is that? If drilling more wells will not bring down gas prices, why do it? Now you are talking. Let's say that we import 50% of our oil and have 80% of our people working. If we produce 10% more oil here and it ends up costing exactly the same as the oil we are importing, where do win? We have 5% more of our own people working to produce that oil so now we have 85% of our people working and producing wealth. We also will only be importing 45% of our oil and our trade balance with the rest of the world will better. The bottom line is not the cost of oil, it is our production of wealth which means that we earn enough to afford the oil. If you don't have a job or any money, it does not matter how low the price of gas gets and like wise, if you can afford it, it does not matter how much it costs.
The magician in the White House has most of you looking the wrong way while he is destroying the country. Wake up and open your eyes. It is happening faster and faster and when you finally realize what is going on it will be too late. That is how it works when an animal gets caught in a trap.
