By John W. Schoen Senior producer
msnbc.com
updated 11/10/2008 12:30:03 PM ET 2008-11-10T17:30:03

Readers this week weighed in on a long list of pressing issues facing President-elect Obama. Here are two: Should the oil industry get to keep tax breaks intended to spur more production? And why can’t the government just reset variable-rate mortgages back to the original rate that homeowners can afford?

We kept hearing from the presidential candidates about the taxes that the big oil companies pay. One side will give them more tax breaks and the other will increase their taxes one way or another.  With another round of record profits by Exxon and extremely high prices at the pump, why would the oil companies be getting a break on their taxes in the first place? 
Phillip H., Tampa, Fla.

The bulk of the tax incentives in question were part of the Energy Policy Act of 2005, the comprehensive legislation Congress enacted after years of debate and two failed attempts to reach a consensus. This $14 billion package (seems like such a small number these days) included a long list of tax incentives for nuclear power, “clean” coal, ethanol and other renewable fuels. Also included were several billion dollars in tax breaks and “royalty relief” for oil producers to encourage more drilling on federal leases — especially in deep water drilling leases in the Gulf of Mexico. At the time, the Bush administration’s basic solution to the energy crisis was to produce more oil, gas and coal.

After years of debate, the bill passed largely because it seemed to spread the goodies around to all forms of energy production and development. The bill invested relatively little on energy conservation or to promote efficiency.

When the law was signed by President Bush in August 2005, the price of oil was about $63 a barrel — after a sizable run-up that had roughly doubled prices in two years. That run-up in the market price helped push oil industry profits to then-record levels; when the cost of producing the next barrel stays about the same and the price goes up, the difference is pure profit. The week before the bill was signed, Exxon Mobil reported quarterly profits were up 32 percent to $7.8 billion.

When the 2005 law was passed, proponents argued that that oil companies would take some of the billions in tax breaks and “royalty relief” and spend it on developing new supplies of oil. That in turn would increase supplies and lower oil prices.

But as oil industry profits rose, it turned out that money wasn’t the problem. The reason it’s hard for Western oil companies to find new places to drill is that most of the places where you might expect to find oil are in parts of the world where those leases are controlled by governments or nationalized oil companies that aren’t all that eager to do business with U.S. oil companies.

Fast-forward to 2007, when the 110th Congress passed a new bill to revise the 2005 law, putting more focus on raising auto fuel efficiency and conserving energy, among other new provisions. Early versions included provisions to repeal the tax deductions and “royalty relief” for oil and gas producers, but those provisions didn’t make it to the final version approved by the House and Senate.

When President Bush signed that new bill, in December 2007, oil was at about $90 a barrel and headed for a peak of $147. That run-up continued to fuel big oil industry profits.

In the meantime, oil companies have had to look for someplace to stash all that cash. Many are buying up their own stock; in the past four years, Exxon Mobil has bought back roughly $100 billion of its own shares. That investment will help strengthen the company for the future. But it hasn’t produced a single new barrel of oil.

If variable-rate mortgages are the main cause of the economic distress we're facing now, why doesn't the government simply lower the rates that those mortgages are based on and then let the variable mortgages reset lower to the levels they were at when people could afford their payments?
John M.,Levittown, Pa.

There are number of people in Congress who have been proposing this approach since defaults and foreclosures began rising over a year ago.  At this writing, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp. — the fund that backs bank deposits — is still pressing for a large-scale effort to modify loans to include monthly payments homeowners can afford. In recent weeks, there have been reports that Bair and the Treasury were close to a deal to put $50 billion of the government lender bailout package toward this effort.

It seems like a simple idea. But even with aggressive government intervention, it’s unlikely that all homeowners would be helped. One reason is that some of the loans that were sold during the peak few years of the mortgage bubble were unsustainable from the very first month. The initial payments on these loans were set so low that you could pay it each month for 100 years, and you still wouldn’t pay off the balance. Why would anyone approve such a loan? Because Wall Street kept shuffling these hot potatoes into huge mortgage pools and selling them to investors who — like the homeowners who borrowed the money — didn’t bother to read the fine print.

In some so-called “pay option” adjustable laons, where you can choose from several payments each month, the difference between the lowest payment and what is needed to actually pay off the loan is simply added to the principal. So even if you’re “making your payments” the loan just gets bigger.

Finally, there are millions of homeowners — by one estimate as many as one in five — who are paying a mortgage that’s bigger than their house is worth. That means the lender — or group of investors who bought pieces of that hot-potato mortgage pool — will have to agree to give up some of the money they were counting on when they bought the investment. If you buy a CD from a bank, you wouldn’t exactly be thrilled if the banker came back and said: “Gee, we’re really sorry, but we made a lot of bad loans and we just don’t have the money. Would you mind taking 50 cents on the dollar?”

Take that conversation and multiply it by the thousands of investors in each mortgage pool containing your individual mortgage. How do you get all of those folks to agree to take less than they loaned? Now multiply that number by the holders of the hundreds of mortgages in that mortgage pool.

So far, efforts to unscramble this egg have relied on the voluntary efforts of lenders and investors. It hasn’t worked. Until a viable plan can be found, foreclosures will keep rising, house prices will keep falling and the economy will have a very hard time finding a bottom.

I've heard some rumors that the dollar will be replaced by the amero, and the dollar value will be like nothing. Is it that true?
Samuel P., Hickory, N.C.

No, Sam. That’s not true.

© 2013 msnbc.com Reprints

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.36%
$30K home equity loan FICO 5.08%
$75K home equity loan FICO 4.51%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.96%
10.86%
Cash Back Cards 16.48%
16.41%
Rewards Cards 15.99%
15.95%
Source: Bankrate.com