Published on February 7th, 2013 | by Zachary Shahan9
Oil Subsidies & Natural Gas Subsidies — Subsidies For The Big Boys (Not For Society)
February 7th, 2013 by Zachary Shahan
Following up on my post earlier today on the subsidies given to coal, here’s a post covering oil and natural gas subsidies a bit.
Just as with coal, oil and natural gas cause a tremendous amount of pollution, which surely lands them sizable subsidies in the form of uncorrected externalities (read the post linked above if you’re unfamiliar with externalities). Unlike with coal, I’m unaware of any comprehensive studies that attempt to quantify all the health and environmental costs of oil or natural gas. If you are aware of any, feel free to drop them in the comments. (Or you’re a researcher in this field, that on that project!)
However, for now, there are plenty of documented effects and calculations to get the point across. Let’s start with natural gas.
Natural Gas Externalities
As Environment America writes, natural gas fracking has left “a trail of contaminated water, polluted air, and marred landscapes in its wake.” Here are some of the specific natural gas fracking costs and other findings that Environment America then mentions:
- “The National Institute of Occupational Safety and Health recently warned that workers may be at elevated risk of contracting the lung disease silicosis from inhalation of silica dust at fracking sites. Silicosis is one of a family of dust-induced occupational ailments that imposed $50 million medical care costs in the United States in 2007.”
- “Residents living near fracking sites have long suffered from a range of health problems, including headaches, eye irritation, respiratory problems and nausea – potentially imposing economic costs ranging from health care costs to workplace absenteeism and reduced productivity.”
- “Fracking and associated activities also produce pollution that contributes to the formation of ozone smog and particulate soot. Air pollution from gas drilling in Arkansas’ Fayetteville Shale region imposed estimated public health costs of more than $10 million in 2008.”
- “The clearance of forest land in Pennsylvania for fracking is projected to lead to increased delivery of nutrient pollution to the Chesapeake Bay, which already suffers from a vast nutrient-generated dead zone. The cost of reducing the same amount of pollution as could be generated by fracking would be approximately $1.5 million to $4 million per year.”
- “Gas operations in Wyoming have fragmented key habitat for mule deer and pronghorn, which are important draws for the state’s $340 million hunting and wildlife watching industries. The mule deer population in one area undergoing extensive gas extraction dropped by 56 percent between 2001 and 2010.”
- “Fracking also produces methane pollution that contributes to global warming. Emissions of methane during well completion from each uncontrolled fracking well impose approximately $130,000 in social costs related to global warming.”
- “The truck traffic needed to deliver water to a single fracking well causes as much damage to local roads as nearly 3.5 million car trips. The state of Texas has approved $40 million in funding for road repairs in the Barnett Shale region, while Pennsylvania estimated in 2010 that $265 million would be needed to repair damaged roads in the Marcellus Shale region.”
- “The need for vast amounts of water for fracking is driving demand for new water infrastructure in arid regions of the country. Texas’ official State Water Plan calls for the expenditure of $400 million on projects to support the mining sector over the next 50 years, with fracking projected to account for 42 percent of mining water use by 2020.”
- “Fracking can also pollute drinking water sources for major municipal systems, increasing water treatment costs. If fracking were to degrade the New York City watershed with sediment or other pollution, construction of a filtration plant would cost approximately $6 billion.”
- “The oil and gas industry has left thousands of orphaned wells from previous fossil fuel booms. Taxpayers may wind up on the hook for the considerable expense of plugging and reclaiming orphaned wells – Cabot Oil & Gas claims to have spent $730,000 per well to cap three shale gas wells in Pennsylvania.”
- “Fracking brings with it increased demands for public services. A 2011 survey of eight Pennsylvania counties found that 911 calls had increased in seven of them, with the number of calls increasing in one county by 49 percent over three years.”
- “A 2008 study found that Western counties that have relied on fossil fuel extraction are doing worse economically compared with peer communities and are less well-prepared for growth in the future.”
- “Fracking can affect the value of nearby homes. A 2010 study in Texas concluded that houses valued at more than $250,000 and within 1,000 feet of a well site saw their values decrease by 3 to 14 percent.”
- “Fracking has several negative impacts on farms, including the loss of livestock due to exposure to spills of fracking wastewater, increased difficulty in obtaining water supplies for farming, and potential conflicts with organic agriculture. In Pennsylvania, the five counties with the heaviest Marcellus Shale drilling activity saw an 18.5 percent reduction in milk production between 2007 and 2010.”
Quite simply, most of the costs will forever rest on the backs of citizens. Environment America adds:
- “Existing legal rules are inadequate to protect the public from the costs imposed by fracking. Current bonding requirements fail to assure that sufficient funds will be available for the proper closure and reclamation of well sites, and do nothing at all to ensure that money is available to fix other environmental problems or compensate victims. Further, weak bonding requirements fail to provide an adequate incentive for drillers to take steps to prevent pollution before it occurs.”
- “Current law also does little to protect against impacts that emerge over a long period of time, have diffuse impacts over a wide area, or affect health in ways that are difficult to prove with the high standard of certainty required in legal proceedings.”
Regarding the issue of global warming emissions, James Coan of the Center for Energy Studies at the James A. Baker III Institute for Public Policy, writes:
The government must continue to fund studies looking into methane leakage from shale gas. According to a 2012 Proceedings of the National Academies of Sciences report, if fugitive methane leakage from shale formations is greater than 1 percent, there are no immediate climate benefits of using CNG from shale gas in heavy-duty trucks relative to diesel. Considering that CNG fuel has lower carbon intensity per unit energy than LNG, concerns that LNG will exacerbate climate change are very possible.
Those are all subsidies. Society subsidizes the natural gas industry in those various ways. If you ignore that when discussing energy subsidies, you get an automatic fail.
Of course, most of those points above also apply to oil. However, oil has been documented as having several additional health and environmental effects that cost us a large amount more. Additionally, there are tremendous military costs to protecting oil supplies (in the trillions and trillions) and keeping shipping lanes open.
Here are some numbers and facts regarding the oil–health connection or other matters:
[D]iesel emissions have been linked to an increased risk of heart attacks in healthy adults by researchers at the University of Edinburgh (as reported by sister site Gas2). They’ve also been positively correlated with lung cancer, according to a recent study backed by the U.S. federal government (which has been handing out subsidies for fossil fuels for decades). Participating in the study were the National Cancer Institute (NCI) and the National Institute for Occupational Safety (NIOSH).
The two-part study focused on non-metal miners — it focused on miners because much of the equipment in mines runs on diesel and exhaust concentrations build up within the enclosed areas, and focused on non-metal because that more or less eliminates exposure to other carcinogens such as radon, silica, and asbestos. It’s the first study to positively correlate diesel exhaust and lung cancer based on estimates of quantitative historical exposure.
The first study focused on overall mortality rates. The basic numbers it came away with were that workers with lots of diesel exposure had five times the rate of lung cancer as those with very little. The second study focused only on deaths from lung cancer, collecting detailed information on other risk factors (think smoking, employment in other high risk jobs, or a history of respiratory diseases).
The numbers came back to say that the miners had three times the risk of lung cancer overall, with heavily exposed workers showing up to five times the mortality rate. Nonsmokers deserve a special note — the more they were exposed to diesel exhaust, the more likely they were to die.
Here are some additional notes from the Union of Concerned Scientists:
Carbon monoxide is a gas formed as a by-product during the incomplete combustion of all fossil fuels. Exposure to carbon monoxide can cause headaches and place additional stress on people with heart disease. Cars and trucks are the primary source of carbon monoxide emissions.
Two oxides of nitrogen–nitrogen dioxide and nitric oxide–are formed in combustion. Nitrogen oxides appear as yellowish-brown clouds over many city skylines. They can irritate the lungs, cause bronchitis and pneumonia, and decrease resistance to respiratory infections. They also lead to the formation of smog. The transportation sector is responsible for close to half of the US emissions of nitrogen oxides; power plants produce most of the rest….
Hydrocarbons are a broad class of pollutants made up of hundreds of specific compounds containing carbon and hydrogen. The simplest hydrocarbon, methane, does not readily react with nitrogen oxides to form smog, but most other hydrocarbons do. Hydrocarbons are emitted from human-made sources such as auto and truck exhaust, evaporation of gasoline and solvents, and petroleum refining.
The white haze that can be seen over many cities is tropospheric ozone, or smog. This gas is not emitted directly into the air; rather, it is formed when ozone precursors mainly nonmethane hydrocarbons and nitrogen oxides react in the presence of heat and sunlight. Human exposure to ozone can produce shortness of breath and, over time, permanent lung damage. Research shows that ozone may be harmful at levels even lower than the current federal air standard. In addition, it can reduce crop yields….
Production, transportation, and use of oil can cause water pollution. Oil spills, for example, leave waterways and their surrounding shores uninhabitable for some time. Such spills often result in the loss of plant and animal life….
Our nation’s fossil fuel dependence means that, to ensure our supply, we may be forced to protect foreign sources of oil. The Persian Gulf War is a perfect example: US troops were sent to the Gulf in part to guard against a possible cutoff of our oil supply. Although the war is over, through taxes we are continuing to pay for protecting oil supplies with our armed forces. Not only were billions of dollars spent in protecting the oil, but lives were lost as well.
Reliance on Middle East oil also creates a danger of fuel price shocks or shortages if supply is disrupted. Today, about one-third of our oil comes from the Middle East. By 2030, if we do not change our energy policy, we may be relying on Middle East oil for two-thirds of our supply.
Again, these are subsidies. These are large, societal subsidies. With these alone incorporated into the price of oil, I’m positive that electric cars powered by wind and solar power would already be very widespread.
Other Oil & Gas Subsidies
Of course, there are also direct subsidies to oil and gas. According to a study conducted by DBL Investors, annual averages based on historical subsidies have put oil and gas at $4.86 billion a year compared to $0.37 billion a year for renewables (in other words, oil and gas have received over 13 times more government money).
Furthermore, simply looking at “the first 15 years” of energy subsidies for each source, oil and gas received about 5 times what renewables got, in total inflation-adjusted dollars and relative to the country’s federal budget. Here’s a look at how much each got as a percentage of the federal budget during their first 15 years:
And here are a couple lines from the “What Would Jefferson Do?” report:
- “As a percentage of inflation-adjusted federal spending, nuclear subsidies accounted for more than 1% of the federal budget over their first 15 years, and oil and gas subsidies made up half a percent of the total budget, while renewables have constituted only about a tenth of a percent. That is to say, the federal commitment to O&G was five times greater than the federal commitment to renewables during the first 15 years of each subsidies’ life, and it was more than 10 times greater for nuclear.”
- “In inflation-adjusted dollars, nuclear spending averaged $3.3 billion over the first 15 years of subsidy life, and O&G subsidies averaged $1.8 billion, while renewables averaged less than $0.4 billion.”
Even during the Great Depression, oil and gas subsidies were greater than renewable energy subsidies at a comparable time:
And subsidies continue today for these excessively mature industries. Herman Trabish of Greentech Media writes:
“The oil and gas industries have Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs), [DBL Investors Managing Partner Nancy Pfund] said, two low-capital-cost ways of financing infrastructure now rapidly expanding in the financial services world. Neither is available to renewables investors, Pfund said, and both cost less than the tax equity funds derived from solar’s Investment Tax Credit (ITC) and wind’s Production Tax Credit (PTC).”
We subsidize oil injection, extraction, exploration, drilling, injection, manufacturing, pricing, and inventory valuing, by creating price floors, offsetting foreign taxes, providing generous credits and deductions, offering tax shelters, and allowing the valuation of inventories at deeply discounted prices.
The Congressional Research Service and the Joint Economic Committee have confirmed that cutting these subsidies will not raise gas prices. Because oil prices are set on the global market and U.S. production is relatively low, subsidies provided by U.S. taxpayers serve mainly to increase oil company profits rather than reduce retail prices. For instance, according to filings provided to the Securities and Exchange Commission, the average cost to produce a barrel of oil in 2010 for the 5 largest oil companies was $11 while the average sale price for a barrel of oil was $72. Today, prices are considerably higher, while the cost of production has not appreciatively changed.
Referencing the DBL Investors study mentioned above (from where the bar charts came) and expounding on the matter, Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress Action Fund, writes:
The oil and gas industry has been the most heavily subsidized energy source over the past 100 years according to “What Would Jefferson Do?” a study by the venture capitalist firm DBL Investors. It determined that the oil industry received a total of $446 billion in government subsidies from 1918-2009. Meanwhile, the renewables industry received $5.5 billion over past 15 years. Taxpayers invested $80 in oil for every $1 invested in clean, renewable energy.
Big Oil companies are eligible for special tax breaks designed specifically for them. For instance, a tax provision dating back to 1916 permits independent oil companies to “expense” certain costs associated with drilling oil wells. This means they can take immediate deductions for these costs rather than spreading them over the useful life of the wells, which is the normal tax code rule for other types of investments. Taking deductions immediately means the companies lower their tax bill in the first year, in effect getting an interest-free loan from the government.
Another example of a special break for Big Oil is their inclusion in a 2004 law that gave the beleaguered manufacturing sector a special tax break designed to discourage outsourcing of jobs. But for a number of reasons—including the capital-intensive nature of oil production, the relative mobility of investments, and the level of profitability—there are vast differences between the oil industry and traditional U.S. manufacturing. As Sen. Bob Corker (R-TN) explained, “Congress was trying to solve a manufacturing issue in this country” by enacting the deduction and included oil producers “almost inadvertently.”
These and other special breaks will cost the Treasury $24 billion over the coming decade, according to the Congressional Joint Committee on Taxation. And economists have recognized that there is no meaningful difference between tax expenditures and programs that spend money directly. President Ronald Reagan’s chief economic advisor, economist Martin Feldstein, noted that:
These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. If Congress is serious about cutting government spending, it has to go after many of them.
Moreover, contrary to claims by Big Oil lobbyists, the big three publicly owned U.S. oil companies—ExxonMobil, Chevron, and ConocoPhillips—paid relatively low federal effective tax rates in 2011. Reuters reports that their tax payments were “a far cry from the 35 percent top corporate tax rate.” Their effective federal tax rates in 2011 were: ExxonMobil, 13 percent; Chevron, 19 percent; and ConocoPhillips, 18 percent. Yet they were also the first-, second-, and 13th-most profitable public U.S. companies in 2011, respectively, according to Fortune.
Perhaps the most implausible claim is that removing these tax breaks “would result in less capital available” for domestic oil production. The big five oil companies used one-third of their 2012 profits to buy back their own stock, thereby enriching their biggest shareholders. In addition, these companies have $60 billion in cash reserves available to invest in oil production. Yet despite all this cash, these same companies actually produced 6 percent less oil in 2012 compared to 2006. Eliminating these tax breaks for these Big Oil companies would have little impact on their production.
Yet while the $2.4 billion in annual revenue from these tax breaks is paltry to the big five oil companies, investing the same $2.4 billion in education or clean energy would make a huge difference to middle-class families. For instance, these funds could pay for 500,000 Pell Grants for college students, 36,000 teachers’ salaries for public schools, or solar panels to provide clean electricity to 67,000 homes.
Scott Sklar, President of The Stella Group, Ltd & Adjunct Professor at GWU, adds notes on those above tax breaks and more (edits made for formatting):
The fossil industry receives nearly $25 billion of yearly incentives. Oil reporter Todd Neeley compiled a list:
- Exception from passive loss limitations for oil and gas — $27.1 million annual, http://dld.bz/…;
- Domestic manufacturing tax deduction — $1.73 billion annual,http://www.americanprogress.org/…;
- Exempt from passive investments — $1.8 million annual, http://www.americanprogress.org/…;
- Percentage depletion allowance — $1 million annual, http://www.americanprogress.org/…;
- Deduction for tertiary injectants — $6.7 million annual, http://www.americanprogress.org/…;
- Accelerated depreciation on equipment — $4 billion annual, http://dld.bz/…;
- Worldwide U.S. government subsidies through favorable lending — $1.3 billion annual, http://dld.bz/…;
- Credit for production of nonconventional fuels — $2 billion annual, http://dld.bz/…;
- Oil and gas exploration and development expensing — $1 billion annual, http://dld.bz/…;
- Foreign tax credit — $2.2 billion annual, http://dld.bz/…;
- Oil and gas excess percentage over cost depletion — $771.4 million annual, http://dld.bz/…;
- Credit for enhanced oil recovery costs — $224.3 million annual, http://dld.bz/…;
- Exclusion of alternative fuels from fuel excise tax — $49 million annual, http://dld.bz/…;
- Expensing liquid fuel refineries — $23.4 million annual, http://dld.bz/… ;
- Sulfur regulatory compliance incentives for small diesel refiners — $15.6 million annual, http://dld.bz/…;
- Northeast home heating oil reserve — $7.1 million annual, http://dld.bz/…;
- Commuter benefits exclusion from income — $3.9 billion annual, http://dld.bz/
- Public liability in BP Gulf spill — at least economic damages capped at $75 million — $2.425 billion annual, http://dld.bz/…;
- Strategic petroleum reserve — $882.9 million annual, http://dld.bz/….
The idea that energy is a level playing field for which renewable energy and energy efficiency could compete in a transparent market is fantasy. Having many decades of subsidies give traditional energy sources market dominance which, in effect, keeps out options. If the USA wants an “all of the above” energy market, national energy policy needs to reflect that. Traditional energy subsidies have to be dropped so that the energy market can be truly competitive. Once the traditional energy sources and applications tax subsidies are dropped, incentives for the younger energy efficiency and renewable energy technologies and applications need to be ramped down over a 15 year period to zero, so that the domestic market becomes truly level and competitive. What has happened since the Reagan Administration, is that the renewable incentives get dropped on this pretext and the fossil and nuclear subsidies somehow remain. It is time that the policy makers from both political parties step up and stop being apologists for the traditional industries.
Brooke Coleman, Executive Director of the Advanced Ethanol Council, makes another good point about parity in direct subsidies:
The issue with the oil and gas subsidies discussed above is not that they exist for oil and gas, but that they exist for oil and gas and no one else. Even worse, subsidies for renewables expire (creating further investment uncertainty) while those for fossil fuels do not. The result is more fossil fuel dependence, less innovation and alternative fuels, and the loss of economic opportunity to other countries that do not have the parity problem. That is not a good outcome for Americans, because the innovation economy is a huge source of jobs.
The first step to getting out of this box is to stop framing this debate the wrong way. There are a lot of policymakers out there who would get behind a parity message (or alternatively, would have difficulty opposing one), but are turned off by those making this all about oil company profits or ecological filth. So let’s stop making our political challenge bigger and get back to the message that is more American than profit itself: same rules for everyone.
Additionally, while the US government is helping to make solar and wind power cheaper through various subsidies, it has already done the same with oil and gas. Drilling methods hugely beneficial to the natural gas and oil industries were largely developed by the US government. “The U.S. government has also played a huge role in subsidizing natural gas infrastructure and technology,” Pfund noted. “The combustion turbine was developed for aircraft and heavily subsidized. It was later reapplied to the gas sector.” Furthermore, the method of hydraulic fracturing that has resulted in the shale gas and oil boom was largely a result of government research and funding.
Today, subsidies for oil and gas are essentially money thrown into the bank accounts of the world’s richest. Oil and gas companies are making record profits in the billions of dollars. Meanwhile, the price of oil continues its long rise, and the price of natural gas is projected to start rising soon.
To the contrary, subsidies for renewables have resulted in tremendous price drops for solar panels and wind turbines. And, with the prices coming down enough to compete with entrenched energy options, installation numbers have boomed. Here’s one more chart from the DBL Investors study documenting this fact:
Why throw away money on billionaires when you can use it to spur on a clean energy revolution that will benefit society?
Getting back to the tax breaks for one last quote, Oceana Campaign Director Matt Dundas nails the crux of the matter with this extended comment:
If nothing changes, major tax breaks for oil and gas companies will celebrate their 100th birthday in 2016. For most of that history, these tax breaks have been a burden on the economy, so much so that high-level U.S. authorities have been calling for their dismantlement since as early as 1933. In the present era, as lawmakers from all sides call for economic stewardship and a renewed emphasis on balanced budgets, an industry that achieves record profits nearly every quarter should not receive $10 billion in annual gifts from the U.S. taxpayer. These subsidies are outdated and counterproductive, as they reward the richest among us for polluting everyone else’s air and water, and inducing climate change and ocean acidification.
If anything, they should be paying us $10 billion a year, not the other way around. It’s common sense: these subsidies must go.
Ironically, the unprecedented success enjoyed by this industry in the last 96 years, which was partly facilitated by these tax breaks when they were new, quickly resulted in just as unprecedented power in Washington, D.C. So much so that oil companies have been able to convince lawmakers not to undo these indefensible tax breaks for nearly 100 years. In the present day, a less worthy industry could hardly be found. In the past, it wasn’t much different.
In 1937, President Franklin D. Roosevelt’s intrepid Treasury Secretary, Henry Morgenthau, Jr., sent a letter to the president outlining examples of egregious tax laws that were holding back the American economy. In it, he declared that the subsidies to the oil industry were “perhaps the most glaring loophole in our present revenue law”, adding that he “recommended in 1933 that this provision be eliminated but nothing was done at that time; and it has since remained unchanged”. Sorry to break it to you Hank, but it’s now 75 years later and guess what? Still no change in the policy.
While the policy has not changed, the subsidies actually have: they’ve grown! In 2005, President George W. Bush thought his oil buddies weren’t getting enough of our money to pollute the climate and oceans, and extended the tax breaks to their current level of $10 billion a year.
Big oil companies were the victors in 1933, 1937, 2005, and every year in between and since, for the simple reason that they invest heavily in lobbying and campaign contributions, and as a result see the election of many of their most ardent supporters. Some things never change, but in the end, common sense should win out.
It’s common sense that the most financially successful industry in the history of the world doesn’t need additional help from the U.S. taxpayer. Add to that the incalculable cost of climate change and ocean acidification (a recent forecast by the Stockholm Environment Institute said the cost of the damage to the oceans alone will reach $2 trillion a year by 2100), and one can only conclude that we are senselessly subsidizing our own demise.
It has been said before and it merits repetition. It’s common sense: subsidies for oil and gas must go.
Should we mention subsidies when discussing the price drops of solar and wind power? Sure. But contrary to what many confused commentators seem to think, that simply puts renewable energy on an even more attractive level.
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