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Question about Energy "Subsidies"

Kevin Drum and Alex Knapp write that there appears to be $20-$50 billion in federal energy subsidies each year going to the oil industry, and that this should be a target for elimination before any windfall profits tax.  I wrote in the comments:

I agree 100%.  Let's cut all the subsidies.

However, before you get too excited, my guess is that most of the money marked as "oil company subsidies" really in fact goes to non-oil projects like alternative energy. In the same way that a huge portion of federal "highway" funds don't go to highways but to silly politically correct failing transit projects, my guess is that, similarly, "oil industry" subsidies go for a lot of silly alternative energy projects.

I personally don't care where it goes. I am all for eliminating all of this subsidy mess, equally, whether it's for oil exploration or energy-from-donkey-poop or for CEO salary enhancement. But recognize before you make this the liberal rallying cry, much of this subsidy money may well be going to liberal pet projects.

Anyone have any better idea where this money goes that they are referring to?

Posted on May 5, 2008 at 01:32 PM | Permalink

Comments

I read your blog about once a week and am usually very impressed with your reasoning (even if I don't always agree). That's why I'm surprised you'd post something that is essentially built around a presumption; a 'guess'. You're usually the most well researched blogger I come across on any given day, but I suppose you can't look too deeply into every single issue. However, I would love to know if you were right. If these subsidies are indeed going to fund alternative energy research, a lot of people would be forced to change their tune.

Posted by: Adam | May 5, 2008 3:55:45 PM

How about we eliminate ALL subsidies to ALL individuals and groups (corporate or otherwise)?

Posted by: CRC | May 5, 2008 5:09:33 PM

The EIA publishes a definitive report of all federal energy subsidies. You'll find that solar and wind both receive sizable subsidies. Renewables and conservation together amount to about half of the total.

http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html

Posted by: Greg Decker | May 5, 2008 6:29:45 PM

great link greg.

the executive summary has some fascinating info in it:

http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/execsum.pdf

of about $8bn in increased subsidies from 1999 to 2007, roughly $6bn are associated with alternative energy.

much more telling is table ES5 showing the $/kwh of subsidy by energy type:

coal: $0.44/kwh
natural gas and petroleum liquids: $0.25/kwh
refined coal (processing to liquids etc): $29.81/kwh
solar: $24.34/kwh
wind: $23.37/kwh
nuclear: $1.59/kwh

alt energy is getting roughly 55 times the subsidy of coal and 100 times that of oil/gas.

table ES6 does the same for non electrical generation subsidies per million btu:

coal - $0.04
oil and gas - $0.03
ethanol - $5.72

so ethanol gets 143 times the subsidy of fossil fuels on a unit basis.

no wonder so many folks are anxious to get into the ethanol business...


Posted by: morganovich | May 5, 2008 7:44:58 PM

Yep, it comes out to a swangin $3.2 Billion vs Oil, and Gas's $1.9 Billion;

but, then I guess we have to add $150 Billion for Iraq in there somewhere, Don't We?

Don't We?

Posted by: Kum Dollison | May 5, 2008 9:24:09 PM

Errr. those numbers are per MWh, not kWh!

Interesting stuff.

I suspect, however, that one reason alternative sources are getting such sky high subsidies is that the money is for R&D, and the total actual production from those sources is low, hence the high ratio.

Note the refined coal subsidy - $29.81/MWh. If petroleum stays high, coal refining is one of the best alternatives (unless you are a global warmist). It wouldn't need any subsidy to be profitable.

Posted by: John Moore | May 5, 2008 9:28:30 PM

"but, then I guess we have to add $150 Billion for Iraq in there somewhere, Don't We?"

I'd say "yes," for at least part of that cost, but it is not only the cost of this war, but also the cost of trying to maintain stability in that region, which has been a cost for most, if not all, of my lifetime. As a student I was required to read an essay called something like "The Real Price of Oil" in which it was argued that the cost of keeping the 7th Fleet in the middle east should be factored in to the price of oil.

Posted by: mahtso | May 6, 2008 7:54:30 AM

Yes, great link.

The two "subsidies" that seem to account for most of the money that counts for oil would be the "Excess of Percentage over Cost Depletion" and "Expensing of Exploration and Development Costs".

My understanding is that at least one of these (Percentage depltetion) was eliminated for large oil companies in the 1970's. It may still exist for small independents.

I think the same may be true of the expensing of Exploration costs. There are two methods. One requires you to amortize you expenses over all of your efforts (the "Full cost method", the other allows you to write off your dry holes immediately "successful efforts method".) I seem to recall that companies over a certain size are required to use full cost.

In any case, not being allowed to expense the actual cost of a dry hole is hardly what I'd call a "subsidy". At most, it's a timing issue -- when, not if, you are allowed to claim a legitimate deduction for money you actually spent.

I would add that in this country mosyt drilling is aimed at natural gas. If you tried to pull out the amount of these subsidies to oil production, the number would be very smnall.

Also, you would not be soaking Exxon by eliniating these deductions, you would be soaking smaller independent producers, generally. Who actually have a pretty strong lobby, and get themselves special loopholes.

Posted by: diz | May 6, 2008 9:15:11 AM

Oh yeah, and allocating military cost to oil is a crock.

We don't need to have a fleet in the middle east to buy oil. Qaddafi, Saddam, Ahmadinjead, Chavez, etc, are all quite willing to sell us oil. More than willing, even, since the existence of their governments depends on it.

I find it a lot easier to argue that our presence in the middle east artificially increases the cost of oil than vice versa.

Posted by: diz | May 6, 2008 9:19:37 AM

In the same way that some argue military expenses are an energy subsidy, aren't all government expenses a subsidy to something? The state keeps a police force and judicial system operating to enforce my voluntary contracts. That's just a subsidy to my productivity. My point, I think, is that arguing military as subsidy is either meaningless, or has a meaning far from what those who employ the rhetoric intend.

It seems the popular concept of “the oil industry” is decades--or maybe a century--out of date. The majors really are energy companies. When there is no more oil (never?), there will still be an ExxonMobil or a descendant. The newspaper industry is/was not about the commodity they moved around (paper), but what that paper enabled for the customer. Paper-based news is being out-competed due to changing resources prices, but the news business continues. Here my point, I think, is that oil industry subsidies are ultimately subsidies to the consumer of energy, not the producer.

Posted by: foxmarks | May 6, 2008 9:26:20 AM

Kum Dollison and mahtso,

Is a military presence in the Middle East is necessary for ensuring a stable supply of energy for the U.S.? Why?

Only 14% of crude oil used in the U.S. originates in the Middle East. Almost all the crude we use comes from North and South America.

Is the U.S. military protecting the interests of U.S. consumers? or is it protecting the the interests of global corporations that have invested so much in the Middle East?

If the U.S. military were not in the Middle East, would the Middle East oil continue to be sold to Europe and Asia? I think so. Regardless of who owns the oil, what are they going to do with it other than sell it?

Posted by: John Dewey | May 6, 2008 9:39:10 AM

"We don't need to have a fleet in the middle east to buy oil."

There is a long history of US foreign policy in the region that disagrees with you. The flow of Middle East oil has been deemed a national security issue ever since the Carter administration; our increase in military presence there over the past 25 years are no mistake. Any implication that the United States doesn't have a serious economic and military investment in the Gulf region, and in Saudi Arabia in particular, doesn't stand up to much scrutiny. Witness our rushing to the aid of Saudi Arabia in the first Gulf War, the slew of arms sales to them over the past 20 years and the recent pleading of our Vice President to increase oil production.

I certainly wouldn't call these military investments a 'subsidy' for the oil industry, but it's virtually impossible to understate the region's importance to our nation's energy situation/crisis.

Posted by: Adam | May 6, 2008 11:46:28 AM

Adam,

The national security issue of oil might have been justified 25 years ago when we were in the middle of a cold war. Political leaders were convinced the Soviet Union's influence in the region needed to be countered.

Our "rushing to the aid of Saudi Arabia" was part of a United Nations effort to enforce political boundaries. IMO, the U.S. in the post-Soviet era has spent too many resources - especially human lives - doing the dirty work for Europe, for Israel, and for our Middle East economic partners.

Just because our political leaders believe the U.S. economic interests are threatened by instability in the Middle East doesn't necessarily make it true.

Please explain how our military presence in the Middle East protects our flow of imported oil, which comes chiefly from Canada, Venezuela, Mexico, and Nigeria.

Posted by: John Dewey | May 6, 2008 12:44:50 PM

john-

oil has a world price. it it stops flowing in the middle east, it goes up everywhere. if the suez and the gulf became non navigable, costs for our oil would spike too...

whether that is a likely scenario is and can be a matter of real debate, but if saudi oil shipments were disrupted, we would pay through the nose even if we weren't buying that particular oil.

Posted by: morganovich | May 6, 2008 2:28:04 PM

morganovich: "if saudi oil shipments were disrupted, we would pay through the nose even if we weren't buying that particular oil."

That's a good point, and one that I understand very well. But a higher price for crude oil does not constitute a "national security issue" - certainly not, IMO, a justification for putting soldiers at risk in the Middle East. Even if oil prices doubled - which they have anyway since the Iraq War started - the U.S. would still get enough oil from everywhere else to keep its economic engine running. I think Americans would adjust their petroleum consumption fairly quickly.

The main point, though, is that if the war and military presence in the Middle East is being justified based on a need for lower oil prices, then everyone who benefits from lower oil prices should be supplying that military presence. That means Europe and China and India and the Africa nations as well as the U.S. I doubt that those nations believe a military presence is necessary to ensure Saudi oil flows. Why do so many in the U.S. buy that line?

Posted by: John Dewey | May 6, 2008 3:25:04 PM

There is a long history of US foreign policy in the region that disagrees with you. The flow of Middle East oil has been deemed a national security issue ever since the Carter administration; our increase in military presence there over the past 25 years are no mistake. Any implication that the United States doesn't have a serious economic and military investment in the Gulf region, and in Saudi Arabia in particular, doesn't stand up to much scrutiny. Witness our rushing to the aid of Saudi Arabia in the first Gulf War, the slew of arms sales to them over the past 20 years and the recent pleading of our Vice President to increase oil production.

I don't place much faith in what politicians say or do.

Tell exactly why we need to have military in the middle east to get people to sell their oil. (The oil doesn't even need to be sold to us, so long as it is sold on the world market.)

What exactly do you think would happen if we had no military presence over there that would result in middle eastern oil not being sold to the highest bidder?

Posted by: diz | May 6, 2008 3:41:06 PM

If someone told me we need a military presence in the Middle East to reduce the chance of war between Arab states and Israel, I would believe that. But the costs to prevent such a war is not a subsidy to gasoline prices in the U.S.

Posted by: John Dewey | May 6, 2008 4:26:57 PM

I believe the issue is stable world oil supply at market prices.

Subsidies make no sense, none. They simply pervert the market to attempt to achieve some political goal, and generally fail miserably. If there were a cheaper alternative to oil, it would be on the market. The free market is the most efficient method known to mankind.

Price too high, increase supply. Works every time it's tried.

Posted by: bill-tb | May 6, 2008 6:26:35 PM

If diz is right and that's what they are talking about, then those aren't subsidies, they are tax breaks.

If one's point of view is that everything belongs to the government and it is only by their graces that you can keep some scraps, then yes, tax breaks are subsidies.

But if one thinks, as do most people, that subsidies are what happens when you tax someone's hard earned money and give it to someone else, then it is fibbing to say that accounting tax breaks are a subsidy.

If we ran a sane government then we wouldn't have a corporate income tax at all, noting that one way or another all corporate taxes are paid by consumers in higher prices or by employees in lower wages due to lesser demand for their labor.

Posted by: happyjuggler0 | May 6, 2008 6:52:48 PM

re: u.s. military in the middle east. A good argument could be made that the Germans lost world war II because the allies controlled most of the oil. In _any_ future large scale war, whoever controls _usable_ energy (oil, right now) will eventually come out the victor. It might look pretty peaceful right now, but then it looked pretty peaceful in 1930 too.

Posted by: bob r | May 6, 2008 10:56:30 PM

Bob r,

World War II and today are entirely different eras. Any advantage a hostile nation enjoyed by possession of oil fields could be wiped out in a few days with 21st century weapons.

Again, the U.S. has more than adequate supplies of oil for any strategic military needs right here in the Western hemisphere, north of the equator.

Do you really think a trillion dollar military presence in the Persian Gulf can be justified based on some imagined threat of global war some time in the future? If that's the case - which I reject, of course - then why do all the nations of Europe and Asia allow the U.S. to do their police work?

Why do so many smart Americans buy into this obselete idea of strategic military presence?

Posted by: John Dewey | May 7, 2008 6:46:39 AM

If diz is right and that's what they are talking about, then those aren't subsidies, they are tax breaks.

I believe the old school percentage depletion rules allowed you to deduct more costs than you actually incurred.

Standard depletion calculations work kinda like this: You drill a well for $1,000,000 and you estimate that well will produce 1,000,000 barrels of oil. With each barrel you produce, you are essentially allowed to depreciate $1.00 - that is you get to expense the cost of the well as the oil is produced, on whatever schedule it is produced. At the end of the life of the well, you will have received deduction = 100% of the cost of the well. This is more-or-less the oil & gas industry's equivalent of depreciating capital costs. If anything, since other industries get to use MACRS, which is allows far faster depreciation than the useful life of the asset, this is the opposite of a subsidy if the general tax code is the baseline.

With "percentage delpletion" you are allowed to deduct a percentage of your revenue each year. If, for example, you are allowed to deduct 22% of you revenue each year for 10 years, it's possible you may actually end up having deducted an amount far in excess of your actual well cost. Particularly if its a good well. I don't object to this being termed a subsidy, because these losses can be used to offset other income one would have to pay taxes on under the code. Cash is cash, and and act that allows you to keep more of it is a subsidized act.

The important thing to note about percentage depletion is that big oil companies can't claim it since the 1970's. I think you have to produce less than 5000 barrels per day, not be a refiner, and not be an importer. But it's surprisingly difficult to get actual facts.


Posted by: diz | May 7, 2008 8:02:41 AM

"Why do so many smart Americans buy into this obselete idea of strategic military presence?"

I suppose you're referring to the Department of Defense. I have a hard time understanding how strategic military presence is 'obselete'. Our ability to strike virtually anywhere in the world at any time, and our expenditure of massive amounts of politcal capital in order to increase that capability (most recently in the Czech Republic and the Caspian Sea area), has been a major focus of our foreign policy over the past 25 years. In short, I guess most smart Americans buy into the idea of strategi military presence because of their observation of the lengths their own country will go to in order to secure it presence; but then again, that's just my guess.

"Tell exactly why we need to have military in the middle east to get people to sell their oil. (The oil doesn't even need to be sold to us, so long as it is sold on the world market.)"

We need military in the Middle East in order to secure a stable environment for that exchange to take place. As the primary military and economic power in the world, and not to mention the largest consumer of petroleum, our interest lies in keeping that flow as uninterrupted as possible. We police it because we are the only power fully capable of doing so and to ensure if worst comes to worst, we are the ones in the most secure position.

Posted by: Adam | May 7, 2008 9:57:40 AM

"Please explain how our military presence in the Middle East protects our flow of imported oil, which comes chiefly from Canada, Venezuela, Mexico, and Nigeria."

It's been known for some time now that the Gulf region, which contains a large majority of the remaining proven oil reserves on Earth), will have to play a vital role in supplying the future energy needs of the planet. Without Saudi oil in particular, there is simply no way for the United States to function economically under current capabilities. The US has a long committment to our petroleum-based economic system and given the chance the adapt to dwindling supplies and instability in oil producing nations, we've chosen to do otherwise and make even greater committments to that system. If you want to wade through this: http://www.whitehouse.gov/energy/National-Energy-Policy.pdf, Cheney's Task Force report from 2001, I think you'll get a good idea of how important they consider these efforts to be. The bottom line is, US efforts in this region simply don't make any sense unless you factor in the overwhelming strategic importance of oil.

Sorry to ramble about this topic, but I consider energy security by far THE most important issue facing the United States in the 1st half of the 21st century.

Posted by: Adam | May 7, 2008 10:06:06 AM

We need military in the Middle East in order to secure a stable environment for that exchange to take place. As the primary military and economic power in the world, and not to mention the largest consumer of petroleum, our interest lies in keeping that flow as uninterrupted as possible. We police it because we are the only power fully capable of doing so and to ensure if worst comes to worst, we are the ones in the most secure position.

You are simply reaserting your position, not supporting it.

Let me ask again. If we pulled all of our military out of the middle east would the middle eastern oil stop flowing?

If you think it would stop flowing, what evidence do you have to support that belief?

Posted by: diz | May 7, 2008 10:33:28 AM

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