Oil industry subsidies for dummies

January 5, 2007 by Dallas Kachan, Cleantech Group

Wonder how big oil got big? Here's an insider's look at fossil fuel subsidies, how they've worked until recently, and what cleantech industries might expect in America soon if the newly-Democratic U.S. Congress gets its way. By the Cleantech Group's Dallas Kachan.

On news this week that the newly-elected U.S. Democratic congress is considering playing Robin Hood, and taking at least some money previously allocated for oil and gas and reallocating it to renewable energy, we thought it'd be useful to look into fossil fuel subsidies and how they work.

First - how much money are we talking about?

Figuring out exactly, or even roughly, how much oil companies receive in subsidy turns out to be a complicated challenge.

Greenpeace believes Europeans spend about $10 billion or so (USD equivalent) annually to subsidize fossil fuels. By contrast, it thinks the American oil and gas industry might receive anywhere between $15 billion and $35 billion a year in subsidies from taxpayers.

Why such a large margin of error? The exact number is slippery and hard to quantify, given the myriad of programs that can be broadly characterized as subsidies when it comes to fossil fuels. For instance, the U.S. government has generally propped the industry up with:

Construction bonds at low interest rates or tax-free
Research-and-development programs at low or no cost
Assuming the legal risks of exploration and development in a company's stead
Below-cost loans with lenient repayment conditions
Income tax breaks, especially featuring obscure provisions in tax laws designed to receive little congressional oversight when they expire
Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods
Giving money to international financial institutions (the U.S. has given tens of billions of dollars to the World Bank and U.S. Export-Import Bank to encourage oil production internationally, according to Friends of the Earth)
The U.S. Strategic Petroleum Reserve
Construction and protection of the nation's highway system
Allowing the industry to pollute - what would oil cost if the industry had to pay to protect its shipments, and clean up its spills? If the environmental impact of burning petroleum were considered a cost? Or if it were held responsible for the particulate matter in people's lungs, in liability similar to that being asserted in the tobacco industry?
Relaxing the amount of royalties to be paid (more below)

While it's easy to get bent out of shape that the petroleum industry "probably has larger tax incentives relative to its size than any other industry in the country", according to Donald Lubick, the U.S. Department of Treasury's former Assistant Secretary for Tax Policy, remember that subsidies are important across all sectors of the energy industry. Even yours (I'll bet you work in cleantech/greentech!)

For instance, nuclear power wouldn't be viable without subsidies - most governments pay between 60 and 90 percent of the cost of construction of new plants. Solar wouldn't be what it's become without significant German, Californian, U.S. federal and other incentives. Ethanol and biodiesel in the U.S. enjoy large subsidies (details, if interested, here), but let's resist getting into the rat-hole of agricultural industry subsidies.

Subsidies, per se, aren't a bad thing.

How does the oil industry defend its substantial incentives?

Energy security - The fossil fuel industry has, rightfully, long pointed to the strategic nature of a company's oil and gas supply. Theirs is an industry that can't afford to go away, they argue.

Environmental compliance - Far from being big beneficiaries, some oil companies claim they are net victims. They point to gasoline taxes and environmental regulations, such as fuel-efficiency standards for new vehicles.

Bolsters domestic production - Supporters of drilling incentives say they make sense for a country that wants to reduce its dependence on foreign oil and whose biggest untapped reserves are in water just offshore, albeit thousands of feet deep.

Defense requirements - Some have suggested that the demands of defending Middle Eastern oil fields added (pre-Iraq war that is) between $10 billion and $20 billion a year in subsidies to the true cost of oil.

Which begs the question - even if America greatly reduced its imports of oil, would it necessarily reduce its military activity in the Gulf region?

It's not really that much money - A few years ago, Ronald Sutherland, an energy economist affiliated with the Cato Institute, a think-tank in Washington, used statistics from the Department of Energy to argue that oil actually gets rather little at the end of the day. All told, after subtracting this and allowing for that, he suggested oil receives less than a billion dollars in subsidies, in all.

Critics of oil subsidies in America, however, maintain that:

Subsidies don't increase domestic production - A few weeks ago, a U.S. Interior Department report obtained by the New York Times suggested that the billions of dollars American oil companies stand to benefit from as incentives for drilling in the Gulf of Mexico (royalties they wouldn't otherwise have to pay the government) wouldn't add appreciably to any increase in production. Says an analyst who worked on the report, "if they took that money, they could buy a whole lot more oil with it on the open market."

The U.S. gives far too much away - Industry analysts who compare oil policies around the world say the United States is much more generous to oil companies than most other countries, demanding a smaller share of revenues than others that let private companies drill on public lands and in public waters.

In the U.S., the government’s take - royalties as well as corporate taxes - works out to be about 40 percent of revenue from oil and gas produced on federal property, according to Van Meurs Associates, an industry consulting firm that compares the taxes of all oil-producing countries. By contrast, according to Van Meurs, the worldwide average government take is about 60 to 65 percent.

The United States has even increased some of its incentives in recent years, while dozens of other countries demanded a bigger share of their oil producers' revenue. This is the low hanging fruit Democratic lawmakers are eying.

In 2004, the then-Republican Congress passed a manufacturing tax cut that critics said gave unnecessary incentives to the oil industry. Democratic leaders this week said they want this rolled back, and want to capture lost royalties from companies drilling in the gulf coast. They're also considering rolling back the Energy Policy Act of 2005, according to the Washington Post, an act supported by many Democrats.

While the Democratic U.S. Congress says it wants to change the historic ratio of the flow of subsidies for fossil fuels vs. that of renewables, don't expect government floodgates to open immediately for greentech/cleantech companies.

There's no clear consensus even among Democrats as to how the new funds should be used. Some lawmakers want public hearings to figure out how the money should be divided. It will likely be set aside in the short term while the government determines how to put it to use.

One thing is certain, however. While the fat lady, as they say, hasn't quite sung - and likely isn't even practicing scales, yet - this week marked the first steps on a long road to reshaping American petroleum policy. And, at the same time, potentially infusing renewable greentech energy sectors with a vigor that would have been only a dream a year ago.

Dallas Kachan is managing director of the Cleantech Group. The closest thing he ever got to a subsidy was a sandwich shop in Iowa.

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Comments

Sources of Accurate Information for Energy Source Subsidies

Submitted on January 26th, 2007 by InterestedReader

I would like to get the names of reports/studies on accurate information of subsidies for the various sources of energy currently used or under consideration. This is an area where most material seems to be advocating (and exaggerating) data to support a point of view. Although that is impossible to remove entirely, there still can be some facts that are knowable. Even if I or someone else may not agree with the inclusion of some component, I would love to see a very long list and some quantification. There are also items that are morphing from one thing to another such as highways. At present and in the past, they may be seen as a subsidy for gasoline or diesel, but it is also a subsidy for transportation and commerce in general which could be fueled in another way. Not that it will ever be, but if all cars/trucks were electric and the electricity came from solar, wind, biofuels, hydro, or other renewables, then the subsidy shifts. Also there is a huge impacts of certain fuels on health of people (air pollution) as well as impacts of CO2 generation and climate change. The Cato Institute may feel climate change is a hoax and leave it out of a study but others think that is crazy. However even if it is real (which I believe), there is still no direct $ subsidy unless there is a carbon tax or other system to make it visible. Same goes for a military tax to protect resource availability. This could be meaningful or impossible depending on the location of the resource and our current foreign relationships with the countries of origin. If we can have a CPI, we could have a RPTI (Resource Protection Tax Index): Oil from US, Canada, Mexico and North Sea may have a very low RPTI. Oil from Iraq and Saudi Arabia has a high RTPI. And since oil is a fungible resource, how much does it cost to protect oil from Iran, Russia and Venezuela?

If a company buys a fuel (gas, electricity, natural gas) that it consumes, it can deduct the expense as a business expense, lowering it's cost. If the same business invests in efficiency or a renewable energy system and makes it's own energy, then it can't deduct the value of that energy. There's a sneaky subsidy in there.

So the studies I seek need to be a combination of conventional accurate facts, plus components that are not so clear or agreed to, and ones that fit emerging, yet real arguments.

Any help is appreciated.

Information on Energy Subsidies

Submitted on November 7th, 2008 by A.Lee (not verified)

I note this is a very old posting but if you are still there and interested I may be able to offer some information you ask about. Please acknowledge if you are still there.

Shell President interview

Submitted on March 26th, 2008 by Unregistered user (not verified)

I just heard the PBS [Charlie Rose] interview of Shell President John Hofmeister.
"In America, we subsidize NOTHING"

Surprised? I was. He talked about how every other nation on earth has "nationalized natural resources" except America, and why that would be a good idea for America.

He didn't actually say that the USA government should take over the job of finding, producing, refining, distributing, and selling oil and gas and gasoline - I am sure he didn't mean that.

One thing he did mention specifically is that he wants government to help with setting up coal gasification so they can stop doing coal pulverization. I would agree with that one. Gasification is a much cleaner and more efficient way to get energy from coal. However, the huge corporate profits should used [maybe be demanded by government regulations] to use the 'cleaner known methods' of getting energy from coal. Or, have penalties for dirty processes.

I believe that 'socialized energy' could solve a lot of problems of the economics of addressing global warming and high prices of gasoline - Venezuelans pay 10 cents a liter for gasoline, and it is 50% ethanol from cane sugar. Venezuela could do a lot better with emissions I suppose. Maybe they will - they have no excuse like shareholder demands not to spend on cleaner technologies.

The thing is that global warming emissions are caused by the fossil fuel industry's main products, and so the oil and gas corporations should start to pay for the negative effects of their dirty product like any other producer of goods does when they produce products with negative consequences. Instead, they get subsidies... despite earing record profits . Hofmeister says all of Shell's big profits went back into 'capital spending on projects'. Not much went into solar and wind power though, but they did spend about $2B of the $26B budget on wind.

Removing Subsidies will not raise gas prices

Submitted on August 2nd, 2008 by Michael David (not verified)

We just proved the removing subsidies will not raise gas prices. To say that is to say that oil companies control the price not the market. However, we just recently (July 2008) witnessed the demand destruction and price reduction caused by overpricing gasoline. Do Exxon's subsidies come to $12+ billion per year? Not likely. So now, subsidies have become an entitlement as a minimum oil company profit. Subsidies need to work for the American tax payer and limited to qualified and verifiable alternative energy research that yields production by the end of a fixed period - else the subsidy goes away.

Just the facts please...

Submitted on August 16th, 2008 by Simple Joe (not verified)

I believe that there are a lot of "simple joe's" out there like me that are sick and tired of generic party rants with the Democrats saying that Oil company profits are obscene and we need to stop subsidies, and Republican's saying that we need to do more drilling. Neither opponent is providing the basic facts that support their arguments so that us "simple joe's" can work our way thru the arguments (fact and fiction) and evaluate the probable cause and effects ourselves. I know that the numbers can be skewed, but I suspect we can smell the right one's given a chance. I don't want to hear party line debates any more. It is getting to be like two deaf people in a room back to back talking into the air and repeating the sale worn statements all the while ignoring what the other person is saying. Just give us the facts so that we can understand what the issues are and decide what solutions we are willing to buy.

I was open-minded when I

Submitted on August 23rd, 2008 by JMR (not verified)

I was open-minded when I began to read this article, not being particularly fond of oil companies in general because of their lack of consideration for the long term. However, what is used in the above article to define subsidies is very debatable and borders on misleading. Apparently, the article/Greenpeace cannot point at an actual example where the government gives money to oil companies. Until the clean-energy community abandons hype and hysteria and works with real facts, they are only going to make the move to alternatives more difficult because they taint the overall credibility of the alternative-energy community.

I was open minded

Submitted on August 29th, 2008 by Unregistered user (not verified)

I really appreciate what JMR had to say. I agree that the above article just listed a bunch of generalities. Where did the author get his info? Also the actual amount of subsidy the oil company's receives has to include the federal income tax payments the the industry generates by employing it people as well as any corporate tax it may pay. In other words All tax payments made by oil company's(individual/corporate) - the tax subsidy = actual tax break. That is the real subsidy. We cant look at what they receive without looking at what they pay. I would guess that oil company's generate billions of dollars in tax revenue. That being said I came here to find the truth about tax subsidy's for oil companies and it still seems to allude me. No one seems to be able to point to one. I have learned a lot about what a tax subsidy is but not so much on what it actually is when it comes to oil company's.

Sales tax breaks

Submitted on November 12th, 2008 by Titans 9-0 (not verified)

"For instance, the U.S. government has generally propped the industry up with:

Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods"

According to the government at:
Gas Taxes for Federal and State Governments

anyone can see that while there is no national sales tax in the USA, there is an $0.18 federal gas tax. This doesn't count the additional $0.08 to nearly $0.40 per gallon tax by the states.

So this line in the list of subsidies is not actually a subsidy in the United States.

Higher Taxes = more imports

Submitted on November 24th, 2008 by Rob (not verified)

America is its own worst enemy. The highest costs by far to the oil industry is in its upstream exploration and production. It is also where royalties are applied. The higher the royalties the less money there is for exploration and production. The oil companies could shut down there entire upstream operations and import 100% of their oil for their midstream refinery operations. At the midstream level margins are only about 2 1/2 %. The loss of course would be to millions of jobs and lost investment.

SOME FACTS
Investment and Other Uses of Cash Flow by the Oil Industry
Today's oil and natural gas industry earnings are invested in new technology, new production and environment and product quality improvements to meet tomorrow's energy needs. A new Ernst & Young study shows the five major oil companies had $712 billion of new investment between 1992 and 2007, compared to net income of $705 billion during the same period. The industry overall, which includes 41 of the largest U.S. oil and natural gas companies, had new investments of $1.17 trillion over the same period, compared to net income of $974 billion and cash flows of $1.74 trillion. High oil and gas prices in recent years increased oil and natural gas companies’ cash flows from operations and net income, which facilitated record levels of investment spending.

If we're going to be giving

Submitted on January 9th, 2009 by nickfromavvo (not verified)

If we're going to be giving money away to oil companies, it should be to provide incentive when the price of oil drops.

The problem right now is that when the price of oil is high, oil companies do all sorts of new exploration, new technology research, etc. And then the price of oil drops and they stop it all.

Why not use the government to give oil companies a consistent, long-term incentive to explore alternative ways to find more oil? I think this would be more productive than randomly throwing money at oil companies depending on domestic politics.

subsidies

Submitted on May 22nd, 2009 by Unregistered user (not verified)

what does all this mean in simpler terms. What are the issues surrounding government subsidies for oil companies?