- Tax credits are often confused with tax deductions. A deduction is a reduction in the amount of income to which taxes can be applied. A credit, by contrast, is a reduction in a taxpayer's total tax burden. Therefore, credits are more valuable to companies, as a credit can help them save money on taxes -- money that can be put back into the company or paid out to investors. In some cases, credits issued one year that go unused can be rolled over and used another year.
- To produce gasoline, jet fuel and other liquid fuels, crude oil must be refined in a refinery. Because crude oil is a finite resource in great demand, new wells of oil must be continually found and drilled. Thus new lands must be explored by oil companies. Exploration is both expensive and risky; it can only be undertaken with significant financial resources. By providing tax credits for oil exploration, a government is offsetting some of this financial risk.
- Governments subsidize oil exploration for many reasons. The government may be helping its national oil companies reap profits by discovering oil wells and tapping them. Secondly, the government may believe that by increasing the supply of oil, it will lower the oil price for consumers, thereby stimulating the economy and aiding businesses. Thirdly, encouraging national oil companies to explore for oil can create jobs, as people must be hired to conduct the exploration -- and, in the event of a discovery, to drill the oil.
- Although tax credits are intended to increase exploration, they do not always work. According to the financial website Seeking Alpha, some critics charge that oil companies would engage in the same exploration that is being subsidized even without the tax credits. Therefore, the credits represent a taxpayer funded addition to the companies' bottom line. Yet oil companies often state that much of the exploration that occurs would not happen if it were not partially subsidized through credits.
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