Oil Change International

Exposing the true costs of fossil fuels

Senate Fails to Cut Favors to Big Oil, Once Again

Earlier today President Obama challenged Congress to either stand with Big Oil, or stand with the American people. A vote on legislation introduced by Senator Robert Menendez (D-NJ) that would have eliminated over $2.4 billion in annual tax deductions to the top 5 oil companies was subsequently defeated a few hours later.

Once again Congress has voted with the money over the many.

The dirty details:

  • The 47 Senators that voted against repealing subsidies for the five biggest oil companies have taken four times more money in campaign contributions from oil since 1999 than the 51 senators who voted for the repeal. (The vote was actually supported by a majority of the Senate 51-47 but required 60 to pass due to a filibuster.)
  • In the current Congress they took nearly twice as much from oil companies than the 51 who voted to repeal Big Oil’s subsidies.
  • On average, a Senator that voted against repealing Big Oil’s subsidies has taken 330% more from oil companies since 1999 and 220% more in the current congress.

Cutting $2.4 billion in subsidies annually to the biggest companies – BP, Chevron, ConocoPhillips, ExxonMobil and Shell – might seem like a solid initial step. But it’s just the tip of the iceberg. The oil and gas industry receives at least $10 billion annually in special favors.

“Independent” oil and gas companies not included in the Menendez bill aren’t exactly “mom & pop shops”. There ain’t no Christmas cookies coming your way for supporting the corner oil and gas industry. These are major outfits including Koch Industries, Occidental, Marathon, Murphy Oil and many more. The top five independent companies – none of which were targeted by today’s vote – are collectively worth $178 billion. Of the top 86 publicly listed independent oil industries, 56 had market capitalizations of over $1 billion in 2011. In 66 of these 86 companies the CEO’s salary was over $4.8 million in 2009. While efforts to start shaving off special benefits to individual actors might have some impact, we need to root this cancer out at the core.

We need to do much more than make symbolic gestures. It’s time for a real effort to cut the apron strings on an industry that’s doing just fine on it’s own. Consider these facts:

1. Big Oil makes money.
Subsidies make sense when they foster the growth of a new industry. They are intended to be a temporary crutch to enable companies to find their footing until they can be competitive on their own. With oil prices exceeding $100 per barrel, U.S. oil production is hugely profitable. The five biggest oil companies made $137 billion in 2011 alone. Most independently-owned companies that produce oil and gas in the U.S. have market capitalizations in the hundreds of millions and multi-billion dollar range. How is this a sector that continues to need taypayer support?

2. Subsidies don’t lower gas prices.
Our vulnerability to high gas prices has been a fact since the 1970s, and no amount of additional drilling or subsidies is going to change that. The global oil market, not the domestic industry, determines gasoline prices. The only way to end our vulnerability to high gas prices is to end our dependence on all oil, not just foreign oil. According to the Treasury Department, removing these domestic subsidies will reduce U.S. oil production less than one half of one percent, and will increase exploration and production costs less than two percent. Considering the price that the domestic industry receives for crude has more than doubled over the past several years, the industry should be able to afford that – without laying anyone off or jacking up the price at the pump.

So why are we debating half measures? It’s time to cut the ties between Big Oil and our decision makers, and focus on the transition to clean energy.

Find out more:

Comments (15)

  1. Grace Adams says:

    I am afraid that global warming is likely to kill agriculture and thus civilization if NOT mitigated, with a good start on mitigation by 2020, peak CO2 equivalent at less than 450 ppm by 2030 and CO2 equivalent back down to 350 ppm by 2050. Maybe some very rich persons with much to lose from global warming (big ag, insurance, big entertainers with great grandchildren they would like to have survive) could be persuaded to contribute something towards cleaning up the mess already there, but those making the mess need to be forced to do their share toward stopping making the mess.

  2. Earl Richards says:

    The oil industry is not a fragile industry, so there is no need for tax breaks. The oil price is determined by those who control the crude oil futures markets, namely, the ICE, ICE Futures Europe and the NYMEX and it is not controlled by OPEC and Saudi Aramco. Google the “$2.5 Trillion Oil Scam – slideshare.”

  3. Helen Hanna says:

    I would like to know the names of the 47 senators who voted with big oil. Where has this list been published? People who live in their states should be made aware of this!

  4. PLEASE PUBLISH THE NAMES OF THE SENATORS WHO voted against repealing subsidies.
    include their political party. The gas pump price will make a statement to each individual each occasion they pay for gas.
    At election time it would be most useful for candidates debating and those VOTERS WATCHING who argue, might pause to realize, OH OH, I THOUGHT THAT CANDIDATE WAS MY CHOICE AND HE/SHE VOTED,voted against repealing subsidies AND I BEEN PAYING MORE AT THE PUMP WHILE I HAVE BEEN SUBSIDIZING THEM WITH MY TAXES! HOW MANY OF US? THAT MANY DOLLARS TO THEIR PROFITS FROM OUR SO MANY POCKETS!

  5. GREED will win every time if you don’t watch every instant. As you have seen, they will never go back, All you can hope for is to keep them from advancing. Don’t even give them a maybe, as that means YES to them. GREDED is the strongest emotion you will ever see from BIG OIL. 1/2d

  6. Where is the shame, senators? Where is the fire in the belly, protestors? Why do the people (voters) not target those who vote to favor Big oil and gas? America is failing for the majority because it allows the minority to rule. Until the majority take to the streets and oil/gas fields, and corporate HQs, the minority will continue to rule and grow richer and more powerful. America’s 99% is too placid. Hence the 1% in America will always rule. Those that vote to support big oil and gas and the 1% are traitors to this nation and should be treated as such. The U.S. Congress is a disgrace. Reid does not have the energy to control the Senate. He should be replaced. The minority GOP in the Senate has the real power and until the Senate majority becomes clever enough to control the minority, the corporations, big oil and gas, the insurance industry, the pharmaceuticals and the medical profession will continue to rule America. They will eventually fail, but by then, so too will the nation. All is lost for the middle class. The less fortunate are already in a state of demise. Sheep. We are all sheep.

  7. Karen Showalter says:

    Hi Ed: You can find details on the vote here: http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=112&session=2&vote=00063. And yes we totally agree people on the ground should know and take action around this.

    And here are those who voted ‘nay’ – i.e. against repealing the subsidies:
    NAYs —47
    Alexander (R-TN)
    Ayotte (R-NH)
    Barrasso (R-WY)
    Begich (D-AK)
    Blunt (R-MO)
    Boozman (R-AR)
    Brown (R-MA)
    Burr (R-NC)
    Chambliss (R-GA)
    Coats (R-IN)
    Coburn (R-OK)
    Cochran (R-MS)
    Corker (R-TN)
    Cornyn (R-TX)
    Crapo (R-ID)
    DeMint (R-SC)
    Enzi (R-WY)
    Graham (R-SC)
    Grassley (R-IA)
    Heller (R-NV)
    Hoeven (R-ND)
    Hutchison (R-TX)
    Inhofe (R-OK)
    Isakson (R-GA)
    Johanns (R-NE)
    Johnson (R-WI)
    Kyl (R-AZ)
    Landrieu (D-LA)
    Lee (R-UT)
    Lugar (R-IN)
    McCain (R-AZ)
    McConnell (R-KY)
    Moran (R-KS)
    Murkowski (R-AK)
    Nelson (D-NE)
    Paul (R-KY)
    Portman (R-OH)
    Risch (R-ID)
    Roberts (R-KS)
    Rubio (R-FL)
    Sessions (R-AL)
    Shelby (R-AL)
    Thune (R-SD)
    Toomey (R-PA)
    Vitter (R-LA)
    Webb (D-VA)
    Wicker (R-MS)

    And those who voted for the repeal:
    YEAs —51
    Akaka (D-HI)
    Baucus (D-MT)
    Bennet (D-CO)
    Bingaman (D-NM)
    Blumenthal (D-CT)
    Boxer (D-CA)
    Brown (D-OH)
    Cantwell (D-WA)
    Cardin (D-MD)
    Carper (D-DE)
    Casey (D-PA)
    Collins (R-ME)
    Conrad (D-ND)
    Coons (D-DE)
    Durbin (D-IL)
    Feinstein (D-CA)
    Franken (D-MN)
    Gillibrand (D-NY)
    Hagan (D-NC)
    Harkin (D-IA)
    Inouye (D-HI)
    Johnson (D-SD)
    Kerry (D-MA)
    Klobuchar (D-MN)
    Kohl (D-WI)
    Lautenberg (D-NJ)
    Leahy (D-VT)
    Levin (D-MI)
    Lieberman (ID-CT)
    Manchin (D-WV)
    McCaskill (D-MO)
    Menendez (D-NJ)
    Merkley (D-OR)
    Mikulski (D-MD)
    Murray (D-WA)
    Nelson (D-FL)
    Pryor (D-AR)
    Reed (D-RI)
    Reid (D-NV)
    Rockefeller (D-WV)
    Sanders (I-VT)
    Schumer (D-NY)
    Shaheen (D-NH)
    Snowe (R-ME)
    Stabenow (D-MI)
    Tester (D-MT)
    Udall (D-CO)
    Udall (D-NM)
    Warner (D-VA)
    Whitehouse (D-RI)
    Wyden (D-OR)

  8. robert moeller says:

    We had a wake up call many years ago in the 70s when gas was rationed, odd number license plates meant odd day purchases and so on. Here it is 2012 and we are still on the stuff.

  9. Rose says:

    I don’t understand – if 51 voted to end the subsidies, and 47 voted against ending them, how come ending subsidies didn’t win? As I see it, ending subsidies had 4 more votes.

  10. David Swimmer says:

    The author has a fundamental misunderstanding of the nature of the term “subsidy.” It doesn’t mean simply a handout for a fledgling industry; this is far too narrow a perspective. Instead, a subsidy can be better understood as an incentive provided by a government for industries, companies, or even individuals to make investments that they otherwise wouldn’t make. So for example, the city of Los Angeles might provide subsidies for the film industry to induce them to shoot more films in LA rather than elsewhere, as has been the trend in recent years. This incentive might be in the form of a tax break that makes their movies marginally more profitable, but enough so to sway them to film at home. No matter how wealthy a producer is, he’s not going to spend more than he needs to, and he’s not going to invest money in a project that he thinks might be unprofitable. Not even Bill Gates will invest in a project he thinks will lose money.

    Therefore the author misses the point entirely. In the case of the domestic oil industry, the government may wish to incentivize increased domestic oil production. The “subsidies” (actually a tax deduction provided for most US companies to spur domestic investment and hiring) are meant to to make more projects economically viable. Every company has an inventory of wells or development projects ranging from very profitable to marginal. Without subsidy, these marginal projects will not be carried out. With the subsidy, some of them will. Like Bill Gates, now matter how much profit Exxon makes, it’s not going to invest in a project it thinks is unprofitable. US policy is designed to spur these types of investments. It is not designed to give help to a needy oil industry.

    So in that sense, point #1 “Big Oil makes money” is irrelevant and beside the point. While these companies are very profitable now (but are middle of the road performers in such indicators as P/E ratios and ROS, according to Yahoo Financial), they aren’t going to make investments on marginal projects that they think will lose money. If an incentive is provided in some form, some of those marginal projects will become profitable, and they will be done, creating jobs, reducing the US trade deficit, injecting cash into local economies, and providing increased tax revenues. Without the incentive, nothing is done. This is the economic reality. The author’s ideological approach is not useful.

    It’s really quite simple. Is the subsidy worthwhile? Is this US investment of $2.5 billion paying off? The author quotes the Treasury in saying that the subsidies have led to a 0.5% increase in US production. At current rates, this is 28,500 barrels of oil per day. Current oil industry A&D activity suggests a market price for a corporate takeover of about $80,000 per barrel of oil produced per day. This would make the 28,500 barrels worth about $2.3 billion on the market. It’s also creating jobs, tax revenues, and keeping about $1 billion in the US, rather than sending it abroad to buy foreign oil. So do the math. Is the subsidy a good deal for the US? If so, keep it. If not, scrap it. We should all abandon ideology and just do what’s best, and what makes sense. We need oil, and will continue to do so for decades. Renewables should be subsidized and investment is pouring in, but they are not quite on the radar when it comes to a complete transportation fuel replacement. As Obama has said, we need both for the foreseeable future. If we abandon fossil fuels now, we can’t can’t be sure that we’ll have a replacement by the desired date that well-intentioned politicians and planners wish. Who is going to suffer if oil becomes far more scarce because our planning scenarios didn’t pan out as hoped? It’s probably not going to be the wealthy.

    The second point the author makes is that “subsidies don’t lower gas prices.” This is a trite and naive statement, amounting to the old trick (intentional or not) of setting a false goal and then, by demonstrating that the goal is unachievable, believing that the proposition has been proven. As misguided as the GOP’s $2.50 gas claims are, Obama’s move to eliminate these incentives are equally cynical. He and his staff know full well that increasing taxes on an industry is not going to increase its output. This is meaningless political theater on both sides of the aisle. Ideologues flock to the side they prefer. I prefer real world problem solving.

    First, the point of increased drilling is not just to lower gas prices to some arbitrary target. There are also other objectives that I’ll repeat again: job creation, reducing the US trade deficit, injecting cash into local economies, and providing increased tax revenues at state, federal, and local levels.

    Second, the objective is not to reach some arbitrary price: the objective is to increase supply, thereby putting incrementally more pressure on prices. Oil (and therefore gasoline) prices are highly volatile, and like all other commodities depend on a lot more than just what the current rates of consumption and production are. The concept of supply and demand also incorporates the notion of anticipation of future supply and demand. When a drought is forecast, the price of grain will rise that day. Buyers don’t wait around for the drought to happen; they buy now to protect themselves against a future supply crisis.

    Here’s how you should look at the second point. In 1969, oil was selling for about $3 per barrel. Some groups protested drilling in Alaska, and suppose this price argument was an important part of their platform. By the 1980′s Prudhoe Bay accounted for 25% of US production, and global oil prices reached the high $30′s. The question you need to ask is not “will discovering a Prudhoe Bay bring prices down” but “what would prices have been without Prudhoe?” What would the price of oil have done in the 1980′s if 2 million barrels were removed from the market?

    When it comes to subsidies, you need to think incrementally, not simply how big or profitable a company is. And you need to consider all of the costs and benefits the subsidy in question brings to the table. Do the costs outweigh the benefits? Then get rid of it. If not, it could well be a sound investment. When it comes to prices, you need to think incrementally, not according to some arbitrary and essentially meaningless goal.

  11. Lorne Stockman says:

    Thank you for your comments David. I think that you misunderstand us in certain aspects of this and in others you overemphasize economics over politics and ideology. Unfortunately, these are not so easily separated despite it seemingly making sense to run the world on purely economic principles. The fact is that without ideology, we would probably all still be laboring under the Roman empire or at least, the British empire.

    Firstly, we understand very well what a subsidy is and in this we seem to be in agreement. Any incentive provided by the government for a private entity to invest or do business is a subsidy. We tend to use the WTO definition which we have highlighted here http://shiftthesubsidies.org/.

    The question is whether a particular subsidy is of benefit to society or not. We did not intend to define subsidies by referring to subsidies being appropriate for fledging industries but were merely proffering an example.

    We have to put our hands up here and confess to being ideologues because we do believe that subsidies to the oil industry are not in the interest of society. In a world that is failing to address its most pressing existential threat, global climate change, economic policies that encourage further production and consumption of fossil fuels are not in society’s interest. This is even more the case if we include future generations, which we would include in a definition of society seeing as most of us have an interest in having children and continuing the survival of the species.

    Ideology aside, we think you’re wrong about the value of these subsides as far as encouraging the production of oil in the United States. At prevailing oil prices, just about any form of oil production is profitable. Most fracked (tight) oil is profitable at $50 a barrel, the deepwater oil mostly at $60-70. The fact of these companies’ enormous profits is a salient issue as it points to how much profit there is in the industry suggesting that reducing that profit by a tiny increment would not adversely affect productivity. However, the public purse could put $2.4 billion a year to good use in other areas.

    The Treasury study as well as a number of other studies on this issue show that production and prices would not be substantially affected by removing these subsidies. Most of the jobs and revenue would remain. The other part of the analysis you don’t mention is what could be done with that public money for the public good? The Menendez bill, while not perfect from our point of view, proposed using the money to support the development of efficiency and alternatives to oil. These come in many forms, not only renewables. Our view is that if oil is the problem then reducing the use of oil is the solution. Investment in transit infrastructure and research and development into technologies that will either enable much more efficient use of oil (lightweight materials, hybrid systems, advanced engines etc.) or alternatives to oil (advanced biofuels, electrification etc.) are overwhelmingly in the long term interest of society.

    We believe the Menéndez bill did not go far enough. The real figure for subsidies to the oil and gas industry is much higher. Climate change, public health and energy security suggest that redirecting these funds to solutions to our oil dependence is a far more appropriate use of government subsidy.

    So we agree that an analysis needs to be made of the costs and benefits of subsidies or their removal. But that analysis must look at all aspects of the issue. What is lost by maintaining these subsidies to oil production? Once we have that analysis then we can make an objective economic judgment. If the losses include foregoing an opportunity to support forms of energy that will enable sustaining the climate system of the planet, that needs to be compared with the economic benefits you discuss. While valuing a healthy, functioning climate system should be part of an objective economic analysis, unfortunately, in today’s world this has become an ideological battle. One we cannot afford to lose to narrow, short term self-interest.

  12. Lorne Stockman says:

    Rose. The vote needed 60 to win. You’re right that the majority of voting Senators (2 did not vote) voted for removing these subsidies. But a Republican filibuster (see http://uspolitics.about.com/od/usgovernment/a/filibuster.htm ) ensured that 60 votes rather than a simple majority was needed in order for the bill to pass.

  13. John Fedoriska says:

    Earl Richards comment above holds true. All others are ignoring the real source of the oil malady.

  14. David Swimmer says:

    Lorne,

    Let me address your comments below. You do have some very fundamental misunderstandings of petroleum economics and the concept of the marginal investment, or at least you’re not communicating an understanding of these concepts.

    But first, I don’t claim that there is no place for ideology. When I reference ideology, my meaning is that the author’s commentary seems to stem from an emotional, ideological dislike of the oil industry, as if the people in that industry are somehow ethically bad as compared to, say, those in the home appliance industry. It’s this kind of mindset that drives much of the public discussion on fossil fuel energy policy: many take as an axiom that oil industry employees are wicked people bent on despoiling the earth, and that the industry conspires to raise prices. It’s untrue, unfair, and not helpful to sound energy policy. It forces politicians to cater to energy illiterate voters and leads to bad decisions. Ideology in the sense of a political philosophy is something different in my view. I recognize that there can be many views on how best to transition to renewables. But you can’t disagree on facts, and that’s what many ideologues do on the right and left. Thus, we have oil companies conspiring to fix prices (they don’t), or some Obama scheme to destroy the oil industry (he’s not trying to).

    Also I think you do misunderstand the design of a subsidy. If someone says that an industry, or a company, or an individual, is too rich to deserve a subsidy, as the author did, then they clearly don’t understand what it’s designed to achieve and how.

    “In a world that is failing to address its most pressing existential threat, global climate change, economic policies that encourage further production and consumption of fossil fuels are not in society’s interest.”

    So here is where your ideology steps in. I agree with you that ending the fossil fuel era is a desirable and even necessary goal. The difference between us is one of pragmatism and realism. This view of yours makes for poor policy, I believe, for two reasons.

    1) It ignores the reality of present and projected fossil fuel demand, and replaces that with aspiration. Aspiration can be a good mission statement, but it is never a good planning tool. What if we stop fossil fuel production tomorrow, but a viable replacement fuel isn’t found for decades? Billions would suffer needlessly (how will their food and medicine be delivered to them, and at what cost?). Now, if we knew for certain that one more year of fossil fuel consumption would destroy the planet as we know it, then yes of course, there is no alternative. But we don’t know this for sure. The problem is somewhere in the indefinite future, perhaps not too far away, but still an unknown. So we can, and should, and are, deciding for some hybrid policy. The problem is, no one knows the magic year when the breakthrough will come, or, if change will be slowly incremental (as I believe), how long it will take. To just abandon our only known transportation fuel, and the source of 80% of our electricity supply, on a wing and a prayer, is in my view irresponsible. It leads society down a dangerous and risky path that may lead to great hardship, a path that could have been avoided by more prudent policy. I understand and appreciate your ideology, but ideologues who aren’t capable problem solvers or realists can cause tremendous destruction, no matter how well meaning and sincere they might be.

    2) You view the choice of fossil and renewables as an either or decision. It is not. Both need to be pursued, and both are being pursued. Renewables are a main destination for US venture capital, and are heavily subsidized around the world. This is a good thing. But developers of wind turbines or solar systems are not going to make their business decisions based on what Exxon does, which helps explain why wind energy has been growing at about a 25% annual rate for the last decade, with oily Texas the nation’s #1 wind energy producer. This growth occurred despite the billions of dollars of capital investment that Exxon and its competitors have made in the same time frame. The incentives for a viable, commercial renewable replacement for fossil fuels is huge (how would you like a patent that takes OPEC’s market share, and to be declared a hero to boot?), and the quest will continue regardless of some nominal US subsidy for domestic oil exploration. So this is a false choice.

    “Ideology aside, we think you’re wrong about the value of these subsides as far as encouraging the production of oil in the United States. At prevailing oil prices, just about any form of oil production is profitable.”

    Here you reveal a fundamental lack of appreciation as to the complexity of oilfield investment.

    Which of the following drilling projects do you think would be profitable?

    1) 100 barrels of oil 20,000 feet below the seafloor, the oil flows at 10 barrels per year for 10 years. The well costs $150 million.

    2) 10,000 bbls at 6,000 feet well requiring a 3,000 foot horizontal leg because there is no surface access. The mineral rights owner has a 25% royalty. You have agreed to pay ? of the well cost to your JV partner. Flow rates in the area vary from 5 to 300 barrels per day with a 50% water cut. About 1 in 13 wells are failures on this trend.

    3) 100,000 bbls in a new discovery 50 miles northwest of Prudhoe Bay. Wells can only be drilled in winter, limiting cash flow. The reservoir flows at 700 barrels per day initially, but declines exponentially and requires an expensive secondary waterflood program to drain the rest of the oil. The well will cost $4,000,000, and about $15 per barrel to maintain flow. The life of the well is expected to be about 25 years. You will need to build a 50 mile pipeline to Prudhoe.

    4) 10,000,000 bbls at 500 ft depth. The well will cost $100,000 and pay out in 2 weeks.

    Do you see my point? It’s meaningless to say “all projects are profitable” because in the geological and economic spectrum of opportunities, there is a vast continuum of profitability, from very high to negative. Nature is indifferent to political debates on oil field size distribution and depth and reservoir quality. Project #1 will never get done. Project #4 will always get the green light. Projects 2 and 3… let’s see your cash flow model and how risk averse you are, and what your oil price forecast looks like. So there is the concept of the break-even rate of return, and the concept of risk. At the national level of collective project inventories, there are going to be many projects below the threshold. If the government steps in and says “We’ll sweeten the pot because we want additional production (and jobs, etc.),” then at least some of those marginal projects will now pass the threshold. Some companies will gamble on the marginal projects. How can it be otherwise? With about 14,000 oil companies in the US, there are literally tens of thousands of such projects at the national level. And what if oil prices collapse, as they did in 1986, 1998, and 2008. In 1981, companies were drilling wells assuming $100 oil. In 1986, oil fell to $10 and stayed below 1981 prices for 23 years. You are assuming $100 prices forever. That’s what we thought in 1980 as well.

    So your claim that just about all projects are profitable at today’s prices is, unfortunately, a very naive comment, I’m sorry to say.

    “Most fracked (tight) oil is profitable at $50 a barrel, the deepwater oil mostly at $60-70.”

    Again, overly simplified to the point of being meaningless. Let’s consider wells in these two examples. What is flow rate? What drill depth, and what water depth? What will the fracture treatment cost, and how many frac stages over what interval, and what proppant are you using? Are you drilling through salt? Is the formation over pressured? At what rate will the oil flow, and what is the decline rate? Is there political risk? What is the drainage radius and the cumulative reserves per well, on average? What is the risk of a non-commercial well? What is the royalty rate? How much seismic did you have to buy to drill the well in the first place? Does the well also produce a lot of water, and if so, how much, is it fresh or briny, and how and where will you dispose of it? Is there a pipeline? What about natural gas? Many if not most oil wells also produce some natural gas. You can’t flare it, so what do you do with it and at what cost?

    So you see, well economics has many, many, variables. To say that subsidies are not necessary because of some averaged cost per barrel is equivalent to saying that welfare isn’t necessary because the average American household makes $50,000 per year. The point of welfare policy is not to enrich the average earners: it’s a safety net for marginal earners. And so average cost of oil is irrelevant, what matters is the cost of the marginal barrel: whether it’s low enough to warrant the marginal investment. Reduce that cost, and you incentivize more production. Your statement tells me that your staff really does have a very basic misunderstanding of the purpose of the subsidy you criticize. You continue to say “they’re too rich.”

    “The fact of these companies’ enormous profits is a salient issue as it points to how much profit there is in the industry suggesting that reducing that profit by a tiny increment would not adversely affect productivity.”

    And you said it again… a misunderstanding of the notion of the incremental investment. I’ll repeat it again. No company in any industry is going to make an investment that it thinks is unlikely to make money. No matter how profitable it is. If the tax code is altered to make a project become commercially viable, then a least a few companies will make that investment. It’s very straightforward. This again is the rationale behind oil industry subsidy. But, as in this column, you will never hear it in this way: you will always hear it quoted as a handout to the rich. They don’t need the handout, but they do need better tax rules for some of their opportunities if you want them to execute. This is basic economics and applies to all industries, companies, and individuals. It’s a big reason why we give as much as we do to charities.

    Additionally, the profits are huge for the large companies, but not so huge for most of the other 14,000. The #30 oil company in California, for example (at about 700 barrels per day), makes about as much income per year as your average 30 homerun first baseman.

    Profits are not so huge in years when oil prices are low, like for example the 23 years between 1981 and 2004, when the conspiracy theorists mysteriously disappeared. Many companies concentrating on natural gas are struggling right now.

    But profit itself is only a measure of how big a company is. Should we also penalize Wal-Mart, Apple, GE, and Microsoft, each of which makes more profit than all but two or three US oil companies? What you should be considering is the profitability, ROS or ROE for example. And by those measures the oil industry has been a mediocre performer. See, for example, where oil ranks in ROS, ROE, and P/E in Yahoo Finance’s Industry Browser:
    http://biz.yahoo.com/p/sum_conameu.html
    If oil companies are so fantastically wealthy and profitable, you might want to ask yourself why they rank almost squarely in the middle in P/E ratio. What are knowledgeable investors telling us, do you think? Sure, big make big profits. But they also have huge expenses and capital investment programs. How often do you read that in the papers?

    “However, the public purse could put $2.4 billion a year to good use in other areas.”

    Yes it could, possibly. But wouldn’t it be a more responsible approach to see what we’d be giving up first? I have never seen anyone publish an estimate on what there subsidies return in terms of investment. I hear calls to remove them many times daily. This to me is astonishing.

    And couldn’t we also make the same claim about LA’s subsidies to there film industry? Couldn’t we make it for just about any budget item? If someone can make a convincing case that an alternative investment is better, then let’s go for that. There may be better uses, but increasing domestic production is a legitimate policy target, not a handout, and it’s irresponsible to report it to the general public as such..

    “The Treasury study as well as a number of other studies on this issue show that production and prices would not be substantially affected by removing these subsidies.”

    On price, it’s irrelevant, as I indicated. Was Alaska exploration a failure because oil didn’t drop back down to $3 per barrel?

    On production, you quoted a 0.5% increase. Maybe that’s worthwhile, maybe it isn’t. Shouldn’t we analyze this before just writing it off? Personally, I think almost 30,000 barrels per day for $2.5 billion is probably a good deal. I regularly see oil fields and or companies selling for more than that per barrel produced. To dismiss production gains as small, relatively speaking, is to neglect the point that the investment is also small, relatively speaking.

    “The other part of the analysis you don’t mention is what could be done with that public money for the public good? The Menendez bill, while not perfect from our point of view, proposed using the money to support the development of efficiency and alternatives to oil.”

    Again, maybe you’re correct here. I don’t want to get into a capital budgeting discussion. My reason for posting here was to dispel the mistaken impressions so many people have about the oil industry and the role of subsidies.

    In fact I’m not necessarily advocating that we should keep these subsidies in place. I’m saying that we need to assess their value in a sober and objective way. But the allocation you suggest sounds suspect to me. The government has not proven especially capable in alternatives investment (e.g. Solyndra?). There are already hundreds of billions of dollars out there in R&D. Try googling “US , or Spanish, or German, etc renewable subsidies” Will $2.5 billion help or will it be squandered? Will it be too small to have any significant impact, and therefore be subject to your same argument against oil subsidies?

    Personally, I think it might be used to educate Americans about energy. The current populist view of mean oil conspirators is very damaging to US energy policy (read some of ignorant the posts to the essay). It forces politicians to make bad decisions to appease ignorant voters. It encourages everyone to think they’re oil industry experts and spread uninformed messages. It’s also uniquely American. Having lived abroad twice and travelled extensively, no other countries I’ve visited have the oil industry obsession and false perspective that the US public has. Some countries, Brazil for example, are proud of their oil industry and what’s it’s done for their country’s economic development and prestige. Politicians and the media need to come clean about this ridiculous state of affairs. How did it get to this point? In my view, it’s the same mindset as racial prejudice.

    “These come in many forms, not only renewables. Our view is that if oil is the problem then reducing the use of oil is the solution. Investment in transit infrastructure and research and development into technologies that will either enable much more efficient use of oil (lightweight materials, hybrid systems, advanced engines etc.) or alternatives to oil (advanced biofuels, electrification etc.) are overwhelmingly in the long term interest of society.”

    I would support all of these. Why not? But we have to be realistic about their cost and to what extent, and by when, goals are achievable. You can’t just buy, let alone legislate, technical progress. And who is going to allocate the money? Are they sufficiently knowledgeable?

    “So we agree that an analysis needs to be made of the costs and benefits of subsidies or their removal. But that analysis must look at all aspects of the issue.”

    Of course. It’s not simply a spreadsheet exercise. The spreadsheet just gives you the point of reference you need. In much the same way as salary is in a job change decision, it’s an important piece of the puzzle, but not the only one. My read on the media is that no one is interested what the salary of the new job is. They just want the job, no questions asked. The job change may not be in the best interests of the children.

    “What is lost by maintaining these subsidies to oil production? Once we have that analysis then we can make an objective economic judgment. If the losses include foregoing an opportunity to support forms of energy that will enable sustaining the climate system of the planet, that needs to be compared with the economic benefits you discuss.”

    I fail to see how these oil subsidies would impact the CEOs of Vestas or GE in setting his or her renewables capital budget. Apart from the remote possibility of new and truly massive finds that cause a global collapse in the price of oil, the modest gains the Treasury quoted will have no impact on renewable R&D spending if it has as you say no impact on price. It will however, increase production, jobs, tax revenues, etc. The either/or choice is a false logic, practically speaking. Renewable R&D will continue despite these industry subsidies. The real questions we need to worry about are 1) when and how long will the transition period be, 2) how much will it cost, and 3) will we have enough fossil fuels to take us across the bridge? You argue, yes I think we will, or at least you hope so. I’m not so sure.

    “While valuing a healthy, functioning climate system should be part of an objective economic analysis, unfortunately, in today’s world this has become an ideological battle.”

    Yes, ideology appears everywhere, on the right and left (witness the left’s needless panic over fracture stimulation and its oil industry conspiracy theories). Ideology is good for setting long term goals and objectives, but it’s not good for nearer-term pragmatic planning that will affect the well being of lives and nations. Let’s set our long term goals, but stick to legitimate science, facts, and pragmatic problem solving to get us there. We need these goals to be achievable and we need to do it without needless suffering to the global economy and therefore individuals.

    Finally, I appreciate your level-headed response. Too often on the internet we see only irrational posts and name callers. Such people are not going to help solve any problems. Only through rational discussion and a desire to get to the bottom of issues will we make the decisions that are best for everyone.

  15. David Swimmer says:

    Just one more thing.

    You made two statements: “firstly, we understand very well what a subsidy is and in this we seem to be in agreement ” and “so we agree that an analysis needs to be made of the costs and benefits of subsidies or their removal.”

    Here you imply that yes, you understand that the subsidy in question is an incentive for oil companies to develop oil reserves that would otherwise be left in the ground, and further that a study of whether the subsidies are worth the costs.

    Why then, the title of the essay?
    “Senate Fails to Cut Favors to Big Oil, Once Again”
    Clearly, your staff, or at least Showalter, does NOT understand what the nature or intent of the subsidy is. If it’s found that the subsidy generates more wealth for the US government (which would take about 50% of the revenues in the form of tax and royalties, and we haven’t yet got to trade deficit, savings on unemployment, individual tax payments, and the multiplier effect of additional cash being pumped into an economy), who exactly is getting the favors, and why is it called a “favor” in the first place if it’s a government incentive? Are you getting an undeserved “favor” when you deduct a charitable contribution?

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