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How Oil Money Might Help Reduce Inequality In Brazil

By Andrew Breiner  

"How Oil Money Might Help Reduce Inequality In Brazil"

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Brazilian President Dilma Rousseff

Brazilian President Dilma Rousseff

Brazilian President Dilma Rousseff is celebrating a new law, passed Monday, that will direct all profits the government receives from oil drilling to education and health spending. The law was passed in response to the mass protests that rocked the country in June, demanding increased spending on public goods.

It’s an approach that fits with the focus on economic equality that has characterized Rousseff’s presidency, which has seen steadily diminishing levels of inequality. Her approach is a marked contrast to the U.S. system of royalties, which go into general government treasuries, and to repair and conserve drilling-damaged land.

Energy companies pay royalties to the government when they extract oil, gas, or coal out of the ground on publicly-owned land. They are taxpayers’ resources, so companies are expected to compensate taxpayers for what they’re taking, in the form of a percentage of what they extract. They can also help account for the true costs of drilling, so companies pay appropriately for the environmental degradation and carbon pollution it causes.

But in the U.S., for example, just $12 billion went to the federal government and $2.1 billion to states during fiscal year 2012. Considering the environmental damage and strain on infrastructure that drilling imposes, governments need that money just to cope.

Federal and state governments direct a portion of fossil fuel revenues to environmental cleanup and preservation at the location of drilling, directly connecting the impacts of drilling with their mitigation. Still, the federal royalty rate would have to increase sharply for energy companies to be paying their fair share.

A report from the Center For American Progress explained that current royalty rates in the U.S. are low, especially at the federal level. The federal onshore royalty rate for oil and gas has been 12.5 percent since the 1920s, but “oil- and gas-producing states in the west charge between 16.67 percent and 18.75 percent,” with Texas the outlier at 25 percent.

While energy companies like to say increased royalties would discourage drilling, that’s just not true. According to a report from the Center for Western Priorities, “…states with higher oil and gas taxes are not placed at a competitive disadvantage.” Other factors determine where and when companies drill, like “resource price, technology and geology.”

Brazil’s revenues could stand to be larger as well, with only $800 million expected over the next year, a tiny addition to total spending on the nation’s social safety net. While linking oil revenue and social spending comes from the idea of having companies pay the people back for their resources, it doesn’t have the same clear connection as having oil pay for its own ill effects.

And getting energy companies to pay even those low rates can be a struggle. A recent investigation by ProPublica found that energy companies use a wide range of tactics to cut down royalties owed to the government and private leaseholders. The federal government has recovered $4 billion in unpaid fees over the last three decades. Private leaseholders recover far less of what’s owed to them.

Mining companies have even come under scrutiny for international trade practices that could let them avoid some royalty payments.

Expecting royalties from energy companies is makes sense, as does building schools and hospitals. But linking the two could mean trouble.

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