The gas tax you don't even know you're payingApril 23, 2012: 12:22 PM ET
President Obama wants to make it easier for Big Oil to drill in federal lands. But why are the oil companies still paying 1987 rates to do so?
By Leah McGrath Goodman
FORTUNE -- With the Senate recently voting down a measure to eliminate billions of subsidies for Big Oil – funded by U.S. taxpayers – even as the nation's taxpayers suffer from sticker shock at the pump, Americans may well be wondering, do they have any leverage anymore?
In fact, they do. Americans hold a trump card many of them don't even know about.
More than one-third of U.S. oil comes from taxpayer-owned lands and federal offshore territories. These are areas owned by the public and leased out to the oil majors, which pay royalties back into the nation's coffers based on how much oil they produce and sell.
Between 2007 and 2010, more than 70% of the increase in U.S. oil drilling took place on federal territories, representing 3.5 million barrels a day, according to the nonpartisan Congressional Research Service. Since then, oil drilling in the U.S. has climbed higher, topping 6 million barrels a day in March for the first time since 1999. The appeal of drilling in the U.S. has grown in recent years, as oil companies develop new technologies to capture energy resources locked in North America that were previously seen as out of reach. Big Oil also has grown tired of the legal and financial uncertainties that often plague their drilling activities in more exotic and restive regions, such as Venezuela and Nigeria, North Africa and the Persian Gulf.
Yet Americans might be shocked to learn how much the oil companies are paying for the privilege to drill on taxpayer-owned territories. As of this writing, the starting bid for leases on parcels of land that allow an oil company to drill for 10 years is $2 an acre. And it's been that way since 1987. It is as though oil prices haven't budged from $20 a barrel. According to the Bureau of Land Management, the U.S. agency in charge of land leases, there are no plans to revise the lease pricing system anytime soon.
If a company succeeds in producing oil from the territory it leases, it pays Uncle Sam an annual royalty rate of 12.5%, based the amount of money it makes selling that oil on the open market. Royalty rates are set by the Secretary of the Interior and remain fixed, even when oil prices soar. Offshore, the royalty rate for a producing well is 18.75%, raised from 12.5% in 2007. The newer, higher offshore rate only applies to leases granted since 2007, which means most of the money flowing back to the U.S. Treasury still reflects the older, lower rate. According to a study conducted by the Government Accountability Office in 2008 – the year that oil hit record highs near $150 a barrel – the U.S. ranked "93rd lowest of 104 oil and gas fiscal systems evaluated" on a global scale.
Efforts to renegotiate or adjust royalties based on the past decade of oil price spikes have met with fierce resistance from the Supreme Court and Congress, despite the GAO's strong urging of a wholesale reassessment, noting that failure to do so could result in "billions of dollars of foregone revenue." In effect, this loss to Americans is like getting slapped with a third tax on top of the gas tax and subsidies to Big Oil they're already paying.
Last year, U.S. oil royalties leapt to a record high with the uptick in drilling, but the total monies collected for both onshore and offshore activities came to only $6.3 billion.Meanwhile, ExxonMobil (XOM), which counts half its resource base in the Americas, reported 2011 earnings of more than $40 billion.
Earlier this month, the Obama administration announced plans to expedite the approvals process for leasing and drilling federally owned lands by introducing an automated permitting system. The move comes as Big Oil pushes for greater access to energy-rich U.S. territories, particularly out West and in the Gulf of Mexico. What has not been acknowledged is that oil majors already hold more than 76 million acres of oil and gas leases (about half onshore and half offshore), but have neglected to explore nearly 50 million acres of it.
Why the rush to lock in yet more leases? Perhaps it has something to do with the BLM's stated interest in raising its long-depressed royalty rate of 12.5% for the first time since 1987.
Rather than rushing to appease the oil industry, President Obama may want to pull America's trump card and force Big Oil back to the negotiating table for a rate upgrade. After all, it is no longer the 1980s. With oil companies so eager to claim the bulk of America's energy wealth, perhaps it is finally time to share it.
Leah McGrath Goodman is the author of "The Asylum: The Renegades Who Hijacked The World's Oil Market."