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Is Oil Worth a Trillion Dollar Subsidy?

June 27, 2012

           

By Ronald H. Miller, Managing Director and co-founder of Prisma Advisors, LLC, a management advisory firm specializing in advance biofuels. Mr. Miller has over four decades of energy experience, including CEO of a Fortune 1000 producer of biofuels and food products from agriculture.
In these difficult economic times, a recurring question is who should get help and who should stand on their own.  With people it's the middle class vs. the 1%.  In the corporate world, the question is whose government support should be cut.  Recent failures by Solyndra and others, make "green energy" subsidies a favored target.  But what about Big Oil?  Isn't it time to address their subsidies? Most Americans don't know it but there are 12 permanent provisions in the U.S. Tax Code that provide subsidies to the oil and gas industries.  Twelve!  Depending upon your calculations these subsidies cost the American taxpayer anywhere from 12 to 50 billion dollars per year.  Even the lower number, reported by the Organization for Economic Co-operation and Development (OECD), represents a significant shift of wealth to companies that are already wealthy.  Interestingly, efforts to remove even a small portion of these subsidies have been stopped cold in Congress. Globally, the situation is worse.  World oil subsidies are pegged at $775 billion with some estimates ranging as high as $1 trillion per year.  Greater transparency would permit more precise accounting.  Last week the G20, meeting in Rio, had the opportunity to address these subsidies but failed to do so.  Like in the U.S. Congress measures to level the energy playing field have been stopped cold.  Why?  Well let's Follow the Money. These subsidies are critical for the fossil fuel industries.  Theirs is a finite industry and costs are continuing to rise as new oil is more expensive to find and produce.  There is some relief on the natural gas side with new fracking technology but that is temporary at best.  The new competition from alternatives; wind, solar and biofuels; while initially expensive are getting cheaper with commercial scale and ever improving technology.  What's more renewables are sustainable while fossil fuels are not.  We have converging cost curves with fossil fuels going up and renewables coming down. Monarchies and dictatorships whose livelihood depends upon oil revenues need subsidized markets to prevent a shift to alternative energies for as long as possible.  In the U.S. the situation is different.  The federal government does not necessarily need oil revenues to survive although some members might.  The fossil fuel industry, foreign and domestic, has billions and trillions at stake and has billions to spend to preserve the status quo.  While the eventual outcome is not in doubt, the timing of a massive shift to alternatives is.  The more money spent today means a longer curve of transition away from oil and gas. Therefore the next time you hear a raging debate about government subsidies, ask yourself, "Is Oil Worth a Trillion Dollar Subsidy or can that money be better spent elsewhere?"