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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

Adam,

I'm not a fan of Democrats, but can you explain how the Republican-led build up of U.S. military presence in the Middle East in the 21st century has changed the flow of oil from that region? From what I've read, the instability introduced by the U.S. the past 5 years caused much of the speculation in crude markets. That speculation resulted in higher gasoline prices for consumers.

The military presence in the Middle East in the 1990's was designed not to improve oil flow, but to curtail Saddam Hussein. Hussein was eager to sell his oil. It was the U.S. working through the United Nations that prevented him from doing so. How did restricting the export of Iraqi oil "secure a stable environment for that exchange to take place"?

Posted by: John Dewey | May 7, 2008 11:29:55 AM

Oil is expensive because Democrats won't let us drill. Food prices are high because we are burning food in our cars (thank the liberals).

I think removing nukes from Libya was a good thing. So was removing Saddam's chemical and biological weapons. So was stopping Saddam's plans to gear up his nuke program again. So was stopping Pakistan's mad nuke scientist from further spreading nuke technology. All were the result of the war in Iraq.

Killing vast numbers of AQ operatives, discovering the sources of their international cash, seizing large quantities of their assets, and discovering their networks of sources in govts around the world are all good things. Isolating Iran and demonstrating to the world that the Iranians are actively undermining the will of the Iraqis in creating their democracy is a great thing. Developing millions of fans of the USA among common folks in Iraq, Lebanon and other mideast countries will pay huge dividends for many years.

The benefit/cost analysis is overwhelming.

Posted by: stan | May 7, 2008 11:45:36 AM

stan: "I think removing nukes from Libya was a good thing. So was removing Saddam's chemical and biological weapons. So was stopping Saddam's plans to gear up his nuke program again. So was stopping Pakistan's mad nuke scientist from further spreading nuke technology. All were the result of the war in Iraq."

I agree. Those are good arguments for the removal of Saddam Hussein. If one wants to justify military presence in the Middle East for those reasons, and also for preventing further Arab-Israeli conflict, then fine. But I do not agree that such military presence was necessary to ensure the flow of oil from that region. So I do not agree that the cost of that military presence is a "subsidy" to the petroleum industry, as Kum Dollison and mahtso and Adam have argued.

Posted by: John Dewey | May 7, 2008 1:10:48 PM

Stan basically has it right, along with morganovich: you need to take into account the opportunity cost of not doing anything (or at least not what we did).

Ousting Saddam has all kinds of potential benefits down the road, specifically that he won’t be a troublesome neighbor or lob missiles at Israel or stuff like that. He had a well documented history of doing those things, and in that part of the world, we in the investment biz like to go against the standard disclaimer: past performance is most definitely an indicator of future returns (or behavior in this case).

What is the net benefit of all this? We’ll never truly know, because we don’t know what happens in the parallel universe where we did nothing, but it’s pretty safe to say that even this “war premium” that has supposedly built into oil prices would have been much larger with several nuke-seeking maniacs in close proximity in the least stable part of the planet.

Many of the people (mostly on the left) saying we shouldn’t have invaded Iraq/we shouldn’t be in the Middle East would be the ones making the exact opposite argument right now had we done nothing.

Posted by: Mesa Econoguy | May 7, 2008 4:07:53 PM

"If we pulled all of our military out of the middle east would the middle eastern oil stop flowing?"

Again, just judging from statements and actions that come directly from the United States government, and I am in no way in support of all of these activities (more on this later), our country believes this to be the case. The case being made by the DOD, DOE and others has been that without a military presence in the Gulf, there is an increased chance of destabilizing developments such as infrastructure attacks, etc that have the potential to drive up world oil prices and severely disrupt the US economy. US military presence in the Gulf, especially around the Strait of Hormuz, has increased somewhat proportionally to our dependance on foreign oil (which topped 55% or something in that neighborhood in the past several years). According to the Congressional Research Service, from 1995 to 2002 our arms deliveries to Saudi Arabia were six times greater than those to Isreal. Why? Well to make sure that the Saudi royalty are strong enough to prevent the types of uprisings and social unrest that creates problems for worldwide oil production in other places (Nigeria at the moment to name one example).

Now will oil stop flowing if we take our fleets our of the Gulf? Probably not entirely. But the point is as we go forward there simply is not enough oil for worldwide demand, and only one place on this planet can hope to increase production, Saudi Arabia and the rest of the Gulf. For those who say we don't need the Gulf or Saudi Arabia because of Mexico, Canada, Venezuala, etc you should really look at global proven reserves and the ability of those countries to increase exports (beyond their own increase in consumption). Mexico's fields, for instance, are declining as their consumption is increasing; in terms of proven reserves, Canada doesn't even make the top 14 worldwide. The bottom line is we need every single drop we can get since we simply don't have alternatives.

"From what I've read, the instability introduced by the U.S. the past 5 years caused much of the speculation in crude markets. That speculation resulted in higher gasoline prices for consumers."
"The military presence in the Middle East in the 1990's was designed not to improve oil flow, but to curtail Saddam Hussein. "

These two comments are related. As to the first Gulf War, I think the reason we wanted to curtail Saddam Hussein was because of his major threat to large scale oil production. Remember, he invaded Kuwait to seize their oil fields. There are plenty of small scale invasions like that take place across the world, but we don't send 150,000 to these places mainly because they have little strategic importance. You're correct about the UN in the 1990's, but the main reason for Iraq's lack of production was the extremely destructive war with Iran, mentioned previously, and Saddam's reluctance to allow foreign (i.e. American) investment that would increase production. To separate Saddam and the 1st Gulf War from oil production doesn't seem feasible on any scale.

As to the first comment....the answer is that the US has done a poor job. That's why we should all be upset. Our 'Republican-led' efforts over the past several years, designed to ultimately provide greater stability in the world's most important energy producing region, have not done much to help skyrocketing oil prices (which are mainly due to increased demand from India and China). Essentially, we pursued an energy strategy that forces us to depend on extremely unstable and frequently hostile countries for our national economic security. I would say this is somewhat of a poor choice.

Posted by: Adam | May 7, 2008 4:36:12 PM

Those asking whether or not the flow of oil from the Middle East would stop if the US were to eliminate its military presence in the region are asking a question with little value in my view. Almost certainly the flow would not stop. But that does not mean that it would continue at the current volume.

Although each (rational) oil producer might want to keep selling at the maximum price, all these producers are not necessarily in league (i.e., by way of a question: do you think the Iranian government would prefer that Iraq maximize oil production or be shut down?). And there are others that have no production who may wish to limit world oil supplies (would [name your favorite anti-Western terrorist group] prefer that Iraq keep producing oil of be shut down?).

Since WWII the US has considered the Middle East to be of national interest because of its oil, although the perceived threat(s) to the region may have changed (and more than once). As pointed out above, the Carter Doctrine made this explicit.

If, as some posters argue, the money spend was not required to protect our interest in oil, then of course that money cannot possibly be considered a subsidy. And even if the money was necessary to maintain a secure supply of oil, it is not a subsidy in the strict sense of the word. But in a discussion about energy policy and government subsidies and tax incentives used in shaping that energy policy, I believe that consideration of the money being spent to police the Middle East, whether foolishly or necessarily, is a valid consideration.

To the extent that I may be too cynical: I think that the reason the UN supported Kuwait when Iraq invaded was because of the oil at risk and a collective desire to keep it out of Saddam’s hands; it is primarily oil that drives the interest in that region of the world.

Posted by: mahtso | May 7, 2008 9:14:51 PM

"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."

That's the key phrase as far as I'm concerned. GE is the richest corporation in the world. They don't need my money to subsidize photo-voltaic solar cells. Archer Daniels Midland is also a Forbes 500 corporation receiving millions in taxpayer money to produce ethanol. Bulls**t! If there's money to be made in these products, let GE and ADM figure it out themselves. If they can't make money at it, then it's a pretty good bet that it's economically (and environmentally) unsound to waste scarce resources promoting the production anyway.

Posted by: brotio | May 8, 2008 12:19:25 AM

Mesa Econoguy: "but it’s pretty safe to say that even this “war premium” that has supposedly built into oil prices would have been much larger with several nuke-seeking maniacs in close proximity in the least stable part of the planet."

You and I generally agree, but not on this point.

Mesa Economguy: "Many of the people (mostly on the left) saying we shouldn’t have invaded Iraq/we shouldn’t be in the Middle East"

Just to be clear, I am not arguing that we shouldn't have invaded Iraq, only that:

1. securing the flow of Arab oil did not require a military presence in the Mideast;

2. if I am mistaken about 1, then it should be clear that Europe and not the U.S. should have provided the military presence;

3. a lower price for oil does not justify, IMO, the thousands of U.S. military lives we have sacrificed and will sacrifice.

Posted by: John Dewey | May 8, 2008 7:07:51 AM

Yes, here's the only thing I am trying to argue in this thread:

1. securing the flow of Arab oil did not require a military presence in the Mideast;

If a military presence in the middle east is not required for the oil to flow, then the military can't be said to be subsidizing the oil market. It's really that simple. Regardless of the rhetoric people use when discussing the middle east.

I just don't think a compelling case canbe made that a US military presence is required for the oil to flow.

It's not as if we have troops guarding the oil fields in Saudi Arabia.

It's not as if people like Ahmadinejad, Saddam Hussein, Qaddafi, the Ayatollah Khomeini and that ilk are pro-American. The problem is they need to sell oil to survive. Not selling oil is an existential threat for these regimes. It's their source of power. The oil gives them all the money they need to protect the oil themselves. Saddam attacking Kuwait "de-stabilized the region" but Saddam wanted Kuwait so he could sell more oil, not less.

Taking Iran's 3,000,000 barrels per day off the market would represent a loss of 3.5% of world oil supply. Our lives wouldn't have to change that much to use 3.5% less oil. The Iranian regime would lose 80%+ of its revenue.

They need to sell oil far, far more than we need to buy it.

Posted by: diz | May 8, 2008 8:17:42 AM

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