Oil overproduction

on Sep 23 in Oil Market, Politics tagged by Trevor Hicks

It is quite interesting that Alan Krueger, the Treasury department’s chief economist, testified before Congress that America has provided subsidies to the oil and gas industry that are too generous and have let to overinvestment in the sector and overproduction.  As a response, the Obama administration wants to impose $31.5 billion in new taxes on the industry.

I’m not much of a fan of government technocrats picking winners and losers in indsutry and so I’m not here to defend any subsidies for oil and gas production on their own merits.  However, the nation and world we live in are not always so simple. Not only are several forms of energy production subsidized in America, around the world oil markets are essentially never unadulterated by government interference.  So I support Obama’s call upon all nations to end subsidies for oil production, but basic fairness and common sense demand that one industry not be singled out amongst all the rent-seekers around the world competing for government pork. The article notes, quite uncritically, a recent study that the US government provides $72 billion in annual subsidies to the fossil fuels industry.

Robert Rapier also discusses this Environmental Law Institute study. Turns out that $22 billion is favorable accounting treatment rules for foreign profits and intangible costs. This is akin to calling the ability to capitalize software development R&D as a subsidy to Silicon Valley.

Another $7 billion is ELI’s estimate about how much the federal government undercharges in royalty collections.  This is pretty arbitrary, how do thye know there is surplus there to be captured? Would the loss of activity caused by higher roaylties actually lead to less overall revenue?  Difficult to say, again this would be like saying that the 39% income tax rate charged to the wealthiest Americans is a ’subsidy’ since the government could raise that rate and raise more revenue.  Maybe it could, but is ’subsidy’ really the proper word to describe that situation?

Then there is $6.5 billion to low income heating oil assistance programs. I suppose food stamps are now to be called subsidies for Big Agriculture? And the similar amount spent filling the SPR is again quite a stretch on the term. I think we can presume that the primary function of the SPR is not to prop up the domestic oil industry. Calling this a subsidy would essentially mean that all money spent by the government on anything is a subsidy for whatever entities may benefit either directly or indirectly. It makes the term meaningless.

All told there’s only about $16 billion that is really a direct subsidy, meaning a payment from the government to induce the industry to do things that would otherwise be uneconomic. Again, I’m not here to defend this or, in fact those other government policies that benefit the oil industry, but I think it’s important to be clear about who is paying for what. Is it necessary to also point out that the government routinely collects much more in oil and gas related tax and royalty payments than the oil industry books as profits? I guess my basic point is that the net of the policies of our government that relate to the oil industry do not necessarily amount to a benefit and furthermore, the US is quite possibly the most hostile government towards its domestic oil and gas producers of any of the significant oil producing nations in the world.

Fortunately we also have Geoffrey Styles to do some of the math (http://www.herold.com/blogs/blog_view.blog?b_id=12047) on the Obama administration claims. The bottom line is that there really is no level playing field, and the government is far too entangled in energy issues to pretend there can ever be one. So fine, add taxes to domestic production and cut subsidies and tax breaks. I just wish it were done more honestly.  Tell us you want us to pay more for fossil fuels so we will use less. It’s not that hard to do, but I guess if they did that it would make Washington’s complaints about price gouging seem even more stupid than usual when the easily predictable price increases caused by this policy shift occur.