Loophole gives synthetic fuel makers billions in tax credits

| 3/6/2006

Some fuel makers are getting a big discount on crude oil from the U.S. government. The bad news is that it will never translate into savings at the pump.

In fact, according to a Time magazine article, the only ones who will benefit from it are a handful of well-connected manufacturers of synthetic fuel.

The idea for synthetic fuel first came about during the oil crisis of the 1970s. At the time, Congress enacted tax incentives designed to spur the development of synthetic fuels that would help alleviate our dependence on foreign oil.

The idea was to develop technology to transform coal into synthetic natural gas and oil.

The trouble is, it never happened. By the 1980s, oil prices had dropped and Washington lost interest in the projects, and most of them went by the wayside. But the tax breaks remained.

Cut to the 1990s, when a group of entrepreneurs came across the tax breaks and saw an opportunity. Time reported that, in creating “synfuel,” these companies take newly mined coal and spray it with diesel, pine-tar resin, limestone, acid or other substances. In some cases, they mix coal-mining waste with chemicals, coat it with latex and blend it with untreated coal to create briquettes.

Either way, the result is a far cry from the state-of-the art synthetic fuels envisioned when the tax breaks were created.

The upshot of all of this, according to Time, is that there are now 55 companies using these processes to collect billions of dollars in tax credits for very little benefit to the American public.

For example, Progress Energy of North Carolina reported synfuel production losses from 2002 to 2004 of $400 million, then turned around and claimed a tax credit of $852 million.

From 2003 to 2005, Time estimated that these companies took in $9 billion in tax credits, which means they cut their tax bills by that amount.

As long as the price of oil remained below $50 a barrel, the companies could claim the full credit. But the amount they can claim goes down as the price goes up. With oil prices skyrocketing, these companies have banded together to lobby Congress to try and keep their tax breaks, Time reported.

The tax credit is set to expire in 2007, but a lobbying group called the Council for Energy Independence is fighting to keep that from happening.