Oil Change International

Exposing the true costs of fossil fuels

Oil Subsidies Propping Up Profits & Polluting the Climate

Guess who’s responsible for about half of all the oil that will be produced in the United States?

You.

A new study by SEI and EarthTrack, building off Oil Change International’s work calculating fossil fuel subsidies, reveals that at current oil prices of around $50 per barrel, 45% of production depends on government handouts to make it profitable.

That means taxpayers are footing the bill for some of the most wealthy and powerful companies to survive and prosper – and trash the planet and our democracy in the process.

Here’s how researchers figured it out.

First, they identified more than 800 oil fields that have been discovered across the United States, but are not yet developed – and so aren’t producing any oil. Then they looked at how a set of twelve production subsidies (everything from corporate tax exemptions to lowering the price of insurance for oil spills and accidents) would increase the attractiveness of investing in each field on a case-by-case basis.

By taking an investor perspective, the study provides a more precise view than was previously available about when a company might decide to sink a new well in any particular oil field.  Where exploration, extraction, processing, and transport are profitable, the analysis expects that companies would put money in, and pump oil out.

It turns out that about half of U.S. oil isn’t a good investment – until state and federal governments sweeten the deal with corporate giveaways. Then, about 20 billion barrels of crude are pushed from uneconomic to economic, and become ripe for development.

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Sweetening the Deal

Subsidies are things like tax breaks or liability loopholes that lower the cost of doing business.

They can release companies from paying royalties on the oil and gas they extract and sell, transfer the cost of cleaning up abandoned wells to the public, and allow fossil fuel companies to make special deductions on their taxes that no other sector enjoys, among many other things. In all, the oil and gas industry receives more than $17 billion in federal and state handouts each year.

Subsidies themselves are not necessarily a bad public policy tool. They have an important role in society, like making sure that everyone has housing that they can afford, lowering the cost of health care, even giving new technologies that serve the public good – like renewable energy – a leg up in the market.

But the U.S. government has been propping up the oil industry with public money for more than 100 years. And producing more oil isn’t a public good any more. In fact, it’s a recipe for climate disaster.

Reaching the Sky’s Limit

In the Paris Climate Agreement, countries pledged to hold global warming to “well below 2C” from pre-industrial temperatures, and to do their best to aim for no more than 1.5C of warming. A recent report from Oil Change International showed that if we burn the oil, gas, and coal already under development around the planet, we will go far beyond the 2C threshold.

That means that we can’t expand fossil fuels – no new coal mines, no new fracking, and definitely no new drilling for oil. In other words, we can’t afford the greenhouse gas pollution that U.S. oil production subsidies incentivize.

Burning the additional 20 billion barrels of oil that subsidies make possible would release 8 billion tons of CO2 into the atmosphere. That’s like building 100 new coal fired-power plants and running them for 23 years. The climate pollution released would eat up 1% of the entire world’s carbon budget.

Energy policy that includes oil production subsidies – and promotes the ongoing exploration, extraction, and development of fossil fuels – clearly fails the climate test. It is simply not aligned with the best available climate science or the interests of the American public.

Dangerous for Democracy

Oil subsidies are aligned, however, with the interests of one very powerful group – the oil and gas industry. And they spend a lot to defend their handouts.

According to data available from the Center for Responsive Politics and our own calculations, the oil and gas industry spent more than $247 million on congressional campaigns and lobbying during the last election cycle alone, while receiving roughly $35 billion in public finance and federal subsidies. That’s a 14,000% return on investment. Not bad!

This is the heart and soul of the dirty energy money cycle. Cash flows into Congress as contributions and lobbying, and flows out as subsidies back to the oil companies.

Here’s the kicker – and a sign of their political influence: even when drilling for oil would have been profitable without public support, subsidies are still forked over to the industry. At that point, subsidies are basically a $6 billion deposit into corporate coffers, swiped from everyday Americans.

Ironically, the higher the price of oil rises, the more profitable production becomes, and the more government giveaways simply go to lining oil company pockets. SEI and EarthTrack report that if oil reaches $100 per barrel again, 98% of production subsidies will end up as “extra” profits.

With all that money, the oil and gas industry is well positioned to rig the rules in their favor even without having to hold public office.  After all, even with a relatively low oil price, oil and gas companies sent an army of 686 lobbyists to the Capitol in 2016. That’s more than one lobbyist for each member of Congress. Now it looks like they might not only buy the government, they might be the government, too.

Separating Oil and State

So what can be done to break the dirty energy money cycle and separate oil and state?

First, Congress can reject Exxon lifer and CEO Rex Tillerson for the job of Secretary of State – along with the rest of Trump’s climate denying, fossil fueled corporate cronies for Cabinet seats (Pruitt for EPA, Perry for Department of Energy, and Zinke for Interior Secretary).

No matter who ends up running the State Department, the American public and responsible policy makers will have to help keep his feet to the fire to honor our international promises. That includes staying in the Paris Climate Agreement, and promoting foreign and domestic actions that wind down our fossil fuel dependence. It also means keeping on track with a less well-known U.S. agreement among G7 countries (the world’s top 7 wealthiest economies) to phase out fossil fuel subsidies by 2025, and bringing the G20 along.

There is also a pitched battle in Congress over tax reform looming on the horizon. If policy makers who pride themselves on cutting wasteful spending want to put their money where their mouths are, fossil fuel subsidy removal is a good place to start. At the very least, they should get behind a move to phase out these century-old government handouts at least as quickly as key wind and solar tax incentives wind down. With 90% of oil and gas contributions flowing to Republicans in the last election cycle, it might be naïve to look to them for leadership.

Ultimately what will disrupt the cycle of oil money into our political system, corporate goodies out, is campaign finance reform and an end to dark money polluting our democracy. It might be a long-term battle, but it’s one that the American public can start waging today.

Comments (1)

  1. Guy Marsh says:

    Can you give me the breakdown on the “… $17 billion in federal and state handouts each year” that the oil and gas industry receives? What subsidies and how much for each one were used in calculation $17 billion?

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