By Timothy Gardner and Deborah Charles

WASHINGTON (Reuters) - Democratic U.S. Senators introduced a bill on Tuesday that would repeal tax breaks enjoyed by the five biggest oil companies, freeing up $21 billion over a decade to ease budget deficits.

Reducing tax breaks for oil and natural gas companies is also a goal of President Barack Obama, who has been keen to tack the blame for soaring gasoline prices on oil companies as he gears up for the 2012 election.

Senators Robert Menendez, Sherrod Brown and Claire McCaskill, who face tight races in next year's elections, introduced the bill as U.S. gasoline prices hovered just under $4 a gallon, about 14 cents off a record hit in 2008.

The bill will likely draw opposition among Republicans, who have said such measures will only make gasoline even more expensive.

But the bill's Democratic sponsors said it would save taxpayers about $2 billion a year, adding that oil companies have made $1 trillion in profits over the last decade.

Exxon Mobil Corp and Chevron Corp, the two biggest of the companies, have made large profits on the soaring oil prices. Exxon posted a profit for the first quarter of $10.65 billion and Chevron posted a $6.2 billion profit. BP Plc reported $5.5 billion in profits despite setbacks from last year's massive oil spill in the Gulf of Mexico.

FOREIGN TAX CREDITS TARGETED

The Menendez bill is a departure from a plan aired by Senator Max Baucus, who would have used some of the savings to promote renewable energy.

It would modify foreign tax credit rules that companies use to lower their U.S. tax payments. It would also limit deductions of income attributable to oil and natural gas production, and eliminate domestic manufacturing tax deductions for the companies.

In addition, it would deny the companies the option of expensing some drilling costs and require them to be capitalized.

UPHILL BATTLE

Republicans, who control the House of Representatives, have opposed curbing oil company tax breaks, saying that this will push up gas prices as the companies simply push the added costs onto consumers.

The bill also will have to win over several Democrats in the Senate, such as Jeff Bingaman, who recently voted down a similar bill. Even if the bill passed in the Senate, it would likely be blocked in the Republican-led House of Representatives where many lawmakers prefer shrinking the federal deficit through cuts in government programs.

The oil industry also said the Menendez bill unfairly targets only five companies and leaves the rest of the economy enjoying big tax breaks.

"Is it a noble cause to penalize one individual segment of an industry?" said Charles Drevna, the president of the National Petrochemical & Refiners Association. "If you are going to tackle deficit spending the entire tax code needs to be addressed."

Analysts said the bill has slim chances of passing but signals a wider discontent from both political parties with windfall big oil company profits that could grow as high prices persist.

"The bill in its own right isn't necessarily a viable proposal, but it's a real signal of a real prospect -- the five largest companies are in the crosshairs," of politicians hearing from consumers angry over prices, said Kevin Book, an analyst at ClearView Energy Partners in Washington.

(Reporting by Timothy Gardner and Deborah Charles, editing by David Lawder)