Greasing Their Alms

Umbra on oil subsidies 3

Dear Umbra,

Grist keeps mentioning that the U.S. government gives large subsidies to oil companies, but doesn't go further into what these subsidies are. I can't make a good argument against the government's subsidizing Big Oil if I don't know more about it: Are the subsidies tax breaks, and if so, for what? Are the tax breaks larger than for most other large companies? How biased is our treatment of Big Oil?

Christine
Hillsboro, Ore.

Dearest Christine,

Just as an aside, I'm not sure such a being as Wee Oil exists.

Can we get you anything?

The word subsidy finds its origins in the Latin verb sedere, to sit, so imagine a comfy chair given only to certain groups or persons. Thinking about a chair is certainly easier than understanding the tax code, "passive loss limitation," and all that.

Oil and gas companies do benefit from a lower corporate income tax, and they'll reap billions in tax breaks thanks to the recently passed energy bill, but Big Oil is not alone. According to a 2004 report [PDF] from the Institute on Taxation and Economic Policy, bigger breaks from 2001 to 2003 went to the aerospace, transportation, industrial and farm equipment, telecommunications, and electronics industries. Here's some context: on a scale of corporate tax rates from 0 to 29 percent, aerospace paid a measly 1.6 percent; oil weighed in at 13.3; and -- oh, just to randomly pick one -- publishing was taxed at 23 percent.

The government also has other tricky ways to support certain industries or people: selling construction bonds at low interest rates or tax-free; running a research-and-development program at no cost to the industry it benefits; assuming the legal risks of exploration and development in a company's stead; offering below-cost loans with cherry repayment conditions; and ancillary other tactics that overwhelm my pea brain. (As usual, you need not rely entirely on me: Earth Track is a site devoted to explaining energy-related subsidies.)

My chair metaphor may seem a bit distant from these financial ideas, but it gets apter as we look at how the government absorbs the "externalities" of oil. In a true open market, oil prices would reflect all the costs of production, transport, use, and disposal. In our current situation, state and federal governments say, "Oh, you look tired, Big Oil. Drilling and selling must be hard. Just rest here while we make sure there are no remaining barriers to the dominance of your product." Then they take care of the highway system; tax gas at a lower rate than other consumer products; and protect the domestic oil supply by providing fire, police, and Coast Guard services. As for the global supply, well, we know where most of our military personnel are currently located.

Imagine what oil would cost if the industry had to pay to protect and clean up its own shipments. If the environmental impact of burning petroleum were considered a cost. If Big Oil were held responsible for the particulate matter in our lungs. In my personal opinion, the main positive result of the anti-tobacco decade is a blueprint for going after Big Oil, and for punishing automobiles and their advocates as one big destructive, greedy death machine.

There. Now aren't you glad you asked?

Ungently,
Umbra

Yours is to wonder why, hers is to answer (or try). Send your green-living questions to Umbra.

Umbra Fisk is Grist Research Associate II, Hardcover and Periodicals Unit, floors 2B-4B.

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  1. Vince Daliessio Posted 12:31 am
    05 Aug 2005

    Greasing Their AlmsUmbra correctly identifies government subsidy as the evil influence it is in the energy industry. However she squanders this insight by hoping aloud that the same strategy used to "go after" Big Tobacco will now be used to go after "Big Oil". This is nuts. Why would you want to cartellize the oil industry even more than it is now, make billionaires of amoral scumbags like Peter Angelos and Bill Lerach, and raise prices and regulation all around, all while shortchanging the actual "victims"? Why is this considered a good thing?

    I have an alternate suggestion. Simply cut all subsidies and regulations on the industry, and substitute a real property rights solution, i.e., make them answerable in court for trespassing with their pollution (for this to work, we also have to get rid of opt-out class actions, but that is another issue). Once out from behind the shield of the EPA, the oil industry will have to act more responsibly to keep themselves solvent and out of court. If this increases costs, this will also benefit the environment, because more costly oil will cause consumers to consume less and look for alternatives. The regulatory and litigitory approaches have failed utterly. Pollution continues to increase, while we waste time tinkering with regulations. Why not try free markets?

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  2. Bureaucrat Posted 11:39 am
    10 Aug 2005

    Umbra On PetroleumUmbra is wonderfully enlightening on so many topics. On the subject of domestic petroleum production,Umbra should be assured that"wee oil" (as opposed to "big oil") exists. There are nearly 400,000 small oil wells in the United States, and about 360,000 small natural gas wells in the US. These wells are called "marginal" or "stripper" wells and produce less than 10 barrels of oil a day (a barrel is 42 gallons) and the equivalent of natural gas. These wells are owned by very small producers, often a one-person operation. Large multinational companies and large domestic companies do not operate small wells.These people are just like small family farmers, but don't enjoy nearly the subsidies of farmers. The small wells are in 34 of the 35 states that have production (only Alaska has no small wells because it is just too expensive to produce in that state for a small operation).  The small oil wells average 2.18 barrels of oil a day, and the small gas wells average 15,500 cubic feet of natural gas a day. Fifteen percent of all of the oil produced in the lower 48 states comes from these wells, and 40% of all the oil we use is produced in the US (85% of all of the natural gas we use is produced in the US, with 14% coming from Canada and the rest by ship in the form of LNG).

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  3. Vince Daliessio Posted 2:11 am
    17 Aug 2005

    Greasing Their AlmsThe continuing problem I have with many people in the environmental movement is an unconscious, or even a studied resistance to simple economic concepts. Those small domestic producers receive almost none of the benefits of the massive subsidy regime (and are especially harmed by the military subsidization of Middle-East crude), yet they would be the ones harmed the most by Umbra's proposed "harrass and sue" policy. Why not cut all subsidies, including phony EPA "standards", and our current massive "World Invasion", and let the chips fall where they may? So what if gasoline prices rise to $10 a gallon - isn't that a good thing for the environment?

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