Over on Daily Grist, we’ve given pretty extensive coverage to the story of how oil companies will manage to dodge some $7 billion worth of royalty payments over the next five years (up to $35 billion, depending on the outcome of a court challenge). What with Bush Scandal Fatigue, the story didn’t get the attention it should have. Oh, another $7 billion out of taxpayer pockets to subsidize the world’s wealthiest industry? Ho hum.

Anyway, there’s a fantastic piece in today’s New York Times that provides much-needed context.

Originally, the incentive program to persuade oil companies to drill in the Gulf of Mexico was supposed to cost taxpayers nothing. Then, you know, one thing led to another. Now it’s gonna run them $7 billion. How’d that happen?

The answer is a familiar Washington story of special-interest politics at work: the people who pay the closest attention and make the fewest mistakes are those with the most profit at stake.

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It is an account of legislators who passed a law riddled with ambiguities; of crucial errors by midlevel bureaucrats under President Bill Clinton; of $2 billion in inducements from the Bush administration, which was intent on promoting energy production; and of Republican lawmakers who wanted to do even more. At each turn, through shrewd lobbying and litigation, oil and gas companies ended up with bigger incentives than before.

Here’s a particularly exquisite bit:

Last April, President Bush himself expressed skepticism about giving new incentives to oil and gas drillers. "With oil at $50 a barrel," Mr. Bush remarked, "I don’t think energy companies need taxpayer-funded incentives to explore."

But on Aug. 8, Mr. Bush signed a sweeping energy bill that contained $2.6 billion in new tax breaks for oil and gas drillers and a modest expansion of the 10-year-old "royalty relief" program.

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Back in olden times (late 2004), I believe that was known as a "flip-flop."

The moral here, it’s safe to say, is that government really shouldn’t be in the business of trying to game the energy situation with targeted subsidies and tax breaks. Special-interest manipulation is inevitable. As I keep saying, just tax carbon and let the market sort out the best way forward.