Oil subsidies

March 19th, 2012 at 4:04 pm by David Farrar

The Herald reports:

President is calling anew on Congress to end tax subsidies for the and gas industry, saying America needs to develop alternative sources of energy in the face of rising petrol prices.

Obama said in his weekly radio and internet address that he expected Congress to consider in the next few weeks halting US$4 billion ($4.85 billion) in tax subsidies, something he hasn’t been able to get through Congress throughout his presidency. …

Industry officials and many Republicans in Congress have argued that cutting the tax breaks would lead to higher petrol prices, raising costs on oil companies and affecting their investments in exploration and production.

Obama is on the right side of this one. Just as I am against subsidies for bio-fuels (especially as they caused mass starvation with crops being converted to bio-fuels from grain), I am against subsidies for oil.

We should not shelter people from higher petrol prices. That is a market signal that supply is becoming more difficult, and will encourage investment in other technologies, plus encourage greater use of other forms of transport.

As for investments in exploration and production, you do not need subsidies for that. As petrol prices increase, then exploration of new reserves becomes economically viable.

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21 Responses to “Oil subsidies”

  1. dime (9,796 comments) says:

    Not sure why he is so obsessed with alternative energy.

    The yanks oil production is going through the roof.

    Oil production from privately owned land that is.

    Oil production from govt owned land has been halved under his watch.

    Obama wouldnt be an ideologue would he?

    but yeah – piss the subsidy off. They dont need it. Also, the 4 billion saving will go a huge way to reducing the debt obama has racked up…

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  2. tom hunter (4,705 comments) says:

    Also, the 4 billion saving will go a huge way to reducing the debt obama has racked up…

    $4 billion? Pfft.

    That would be $4 billion as opposed to the $4000 billion (and counting), that Obama, two years of Democratic Congress and one year of a GOP Congress has wracked up since Obama became president.

    I looked for the /sarc symbol, dime.

    For the record I’m against subsidies in any field. But have you or DPF (I already know the answer for the Huruld) actually looked at what Obama and the Dems defined as “subsidies”? From a year-old article:

    The tax subsidies, “loopholes,” to oil and gas companies are largely in three categories: 1) oil depletion allowance, 2) expensing indirect drilling costs, and 3) a tax credit for taxes paid to foreign nations during foreign operations (foreign tax credit).

    The first category is a favorite among independent producers (and similar depletion allowances are available for all mineral extraction, timber, etc.). The independent producers can pass the depletion on to individual investors. Since the mid-1970s, the allowance has not been permitted for integrated oil companies. The smaller producers will bitterly fight for this “loophole” and the larger producers will be blamed.

    The second category permits writing off indirect drilling costs in the year incurred rather than capitalizing them and writing them off over several years. Closing this “loophole” would only change timing of taking the expense, not total amounts of the so-called tax subsidy.

    The third category is available for all international companies. Closing this “loophole” would discriminate against oil and gas companies in favor of other international companies such as General Electric.

    Some “subsidy”. And note that it won’t be Exxon Mobil and the like that will get hit by this crap. Note also the presence of General Electic, Obama pal, alternative energy machinery supplier – and a company that paid zero tax last year.

    When I saw one commentator refer to this article this morning on the GD thread I was not at all surprised since he’s a lefty who’s more than willing to swallow editorial, soundbite, headline comments put out by a Presidential election campaign that’s gagging for wedge issues that appeal to dumb voters who leap at the sound of “Big Oil” – and steer discussion away from far larger alternative energy subsidies that are real subsidies.

    It’s worse to see right-wingers fall for this dog-whistle as well.

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  3. Adolf Fiinkensein (2,870 comments) says:

    David, do try and keep up. As far as I can tell, there are no subsidies for the oil industry. Just tax deductions for various expenses which are available to ALL INDUSTRIES.

    You must know that when Obama’s lips move, he’s lying.

    I bet he cheats at golf.

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  4. insider (1,028 comments) says:

    The Amreican tax system is so complex it wouldn’t be surprising if there were tax breaks for oil somewhere. But it’s not going to bring down the price of petrol because that price is set by a much bigger international market. The influence of tax breaks on that is negligible. They may have an effect on local gas production in terms of stimulating investment on marginal gas fields but that is because gas is largely a national pricing issue.

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  5. Elaycee (4,356 comments) says:

    Read it and weep: The price of petrol where I am at the moment, is the equivalent of NZD 0.59c per litre. And it’s cheaper still just over the border.

    Attendants do the filling for you – they take your money and give you change from a till… all at the pump. No waiting in a queue inside whilst someone is trying to pay for icecream and milk on an EFTPOS card that doesn’t seem to work…..

    It’s all rather civil, really…

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  6. KiwiGreg (3,234 comments) says:

    I’m opposed to the biofuels subsidies too but really “(especially as they caused mass starvation with crops being converted to bio-fuels from grain)”???? where exactly was this “mass starvation”? North Korea?

    [DPF: Africa. It has been well documented]

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  7. campit (467 comments) says:

    The price of petrol where I am at the moment, is the equivalent of NZD 0.59c per litre.

    So is that subsidised?

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  8. Fletch (6,256 comments) says:

    A volatile global food supply is deepening the humanitarian catastrophe in the Horn of Africa, the World Bank warns in a new report.

    Shortages and near-historic prices for staples such as corn, wheat and sugar have magnified the impact of the drought now ravaging the Horn of Africa, the Food Price Watch report said.

    “While the emergency in the Horn of Africa was triggered by prolonged droughts, especially in areas struggling with conflict and internal displacement such as Somalia, food prices that are near the record high levels seen in 2008 also contributed to the situation,” the bank said in a statement.

    More than 12 million people are in urgent need of humanitarian assistance in the Horn of Africa, the report said. In some areas of Somalia, more than 40% of children under five are suffering from acute malnutrition.

    The report also warned that production of biofuels – specifically America’s production of corn ethanol – was contributing to rising food prices.

    In global terms, food prices last month were on average 33% higher than a year ago, the report warned. Corn, or maize, has risen by 84%; sugar 62% and wheat 55%.

    http://bit.ly/opDmTQ

    Soaring food inflation is the result of “immoral” policies in the United States which divert crops for use in the production of biofuels instead of food, according to the chairman of one of the world’s largest food companies.

    Peter Brabeck-Letmathe, the chairman of Nestle, lashed out at the Obama Administration for promoting the use of ethanol made from corn, at the expense of hundreds of millions of people struggling to afford everyday basics made from the crop.

    Brabeck-Letmathe weighed in to the acrimonious debate over food price inflation to condemn politicians around the world who seem determined to blame financial speculators instead of tackling underlying imbalances in supply and demand.

    “Today, 35 per cent of US corn goes into biofuel,” the Nestle chairman told the Council on Foreign Relations in New York yesterday.

    “From an environmental point of view this is a nonsense, but more so when we are running out of food in the rest of the world.

    “It is absolutely immoral to push hundreds of millions of people into hunger and into extreme poverty because of such a policy, so I think – I insist – no food for fuel.”

    Corn prices almost doubled in the year to February, though they have fallen from their peak in the past few weeks. Anger at rising food prices contributed to protests across the Middle East, and rising commodities costs were among the factors pushing British inflation to 4.4 per cent in February, figures yesterday showed.

    US exports account for about 60 per cent of the world’s corn supply.

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10714537

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  9. wat dabney (3,709 comments) says:

    American Petroleum Inst.

    The U.S. oil and natural gas industry does not receive “subsidized” payments from the government to produce oil and gas…U.S. oil and natural gas companies pay considerably more of its profits in taxes than the average manufacturing company.

    http://www.api.org/policy-and-issues/policy-items/taxes/the-facts-about-taxation-and-subsidies.aspx

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  10. dime (9,796 comments) says:

    tom – you didnt get the sarcasm??

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  11. wat dabney (3,709 comments) says:

    The facts and figures in easy charts

    http://www.api.org/statistics/earnings/upload/earnings_perspective.pdf

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  12. BlairM (2,314 comments) says:

    David, you really don’t have any idea on this issue. There are no subsidies – they are tax breaks. In a perfect world we should have a simpler tax system, but the oil companies do not receive taxpayer money. They simply get to keep more of their profit than they would if stricter rules were applied to them.

    I’d rather even out the rules for everybody and cut the corporate tax rate (9-9-9?) than make life harder for oil production than it already is, even with the tax breaks.

    This is another populist dodge from a President who refuses to cooperate with the House and cut expenditure, and a Senate Majority Leader who has not delivered a budget in three years. It’s a distraction, one of many you can expect this year. Don’t play his little game by giving him support just based on what you read in the Associated Press and other associated Obama Fanzines.

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  13. Elaycee (4,356 comments) says:

    “So is that subsidised?” [In response to 'The price of petrol where I am at the moment, is the equivalent of NZD 0.59c per litre']

    No – not at all, it is still taxed. Across the UAE the price is NZD ~0.57 – 0.59c per litre (or AED 1.70). It’s cheaper again in Oman (less tax).

    In fact, in Saudi Arabia it’s actually cheaper than water – it works out at around 2.0 dirhams per gallon (4.5 litres) and the exchange rate to NZD is approx 3:1 so that means its around NZD 0.66 cents for 4.5 litres or NZD 0.15 per litre…

    Remember that next time you fill the Holden or the Landcruiser…. and then shed a tear! :D

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  14. cows4me (248 comments) says:

    Elaycee, I have millions of litres of fresh water, would a trade be out of the question? :-)

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  15. Griff (7,389 comments) says:

    http://www.rtcc.org/energy/the-anatomy-of-us-energy-subsidies/

    The Congressional Budget Office (CBO) listed $24bn in subsidies. This was made up of $3.5bn in Department of Energy spending, half of which went on renewables, and $20.5bn on “tax preferences” or tax credits.

    Looking at these figures gives a very different story than the headline attached to the report.

    Of that $20.5bn, it lists just $2.5bn as designated for fossil fuels, compared to $12.9bn for a variety of renewable energy initiatives. This includes payments to small and medium sized businesses for generating their own power, to tax credits for investment in larger renewable infrastructure.

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  16. tom hunter (4,705 comments) says:

    Obama is on the right side of this one.

    DPF – any chance you might update this thread with some of the links and material that commentators have introduced, to do what this blog often does, which is to not allow the MSM to simply and brainlessly repeat leftist political propaganda?

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  17. kiwi in america (2,428 comments) says:

    David
    I’m with Tom and others on this. A tax credit by way of an accelerated tax write off is not in the same category as the massive direct payments, grants and loans made to the alternative energy sector – they merely delay the tax take from oil industry not reduce it. Furthermore the difference is not only in type of assistance but differs in the sheer size of the assistance – $4 billion vs $20 billion

    This from the Science and Environment Policy Project http://www.sepp.org/twtwfiles/2011/TWTW%202011-4-30.pdf

    “Number of the Week: $4 Billion. This the amount that Mr. Obama claims to be the tax subsidies extended to the oil and gas industry. It is not clear how the amount is calculated. By contrast, in an article referenced in last week’s The Week That Was, the Department of Energy announced it has given $21 Billion in (not tax) subsidies to the alternative energy industry in the form of loan guarantees. … Since the stimulus bill of 2009, direct subsidies to alternative energy producers have increased dramatically by orders of magnitude, but for the US these subsidies are not centrally compiled as far as SEPP has been able to determine. …
    The tax subsidies, “loopholes,” to oil and gas companies are largely in three categories: 1) oil depletion allowance, 2) expensing indirect drilling costs, and 3) a tax credit for taxes paid to foreign nations during foreign operations (foreign tax credit). The first category is a favorite among independent producers (and similar depletion allowances are available for all mineral extraction, timber, etc.). The independent producers can pass the depletion on to individual investors. Since the mid-1970s, the allowance has not been permitted for integrated oil companies. The smaller producers will bitterly fight for this “loophole” and the larger producers will be blamed.
    The second category permits writing off indirect drilling costs in the year incurred rather than capitalizing them and writing them off over several years. Closing this “loophole” would only change timing of taking the expense, not total amounts of the so-called tax subsidy. The third category is available for all international companies. Closing this “loophole” would discriminate against oil and gas companies in favor of other international companies such as General Electric. “

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  18. tom hunter (4,705 comments) says:

    I guess people do not read upthread.

    And to that … sorry dime. Sarcasm is damnably difficult to pick up in a thread.

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  19. campit (467 comments) says:

    @Elaycee effectively the Saudis convert oil to water through their desalination plants. Some 1.5m barrels a day are burnt producing water and electricity. The cheap price for petrol in Saudi Arabia won’t last forever, and they will be kicking themselves for selling it so cheaply. By about 2028 Saudi Arabia’s internal demand could well have overtaken all export capacity so by then it will be a net importer of oil (assuming some other oil producing nation actually has oil for export as well).

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  20. Scott Chris (6,036 comments) says:

    Boils down to a very simple question:

    Should the United States government be fostering the development of the renewable energy sector?

    If you say “yes” to this question, then you will also probably understand that the generation of renewable energy is relatively expensive compared to energy generated by fossil fuels, so in order to compete in the market place the renewable energy sector requires assistance. Another consideration is that oil companies are hardly doing badly at the moment with crude oil fetching around $US120 a barrel.

    If you say “no” to this question then perhaps a consolation lies in the fact that a weaning off dependence on foreign oil can only be good for the American balance of payments in the long run and will lead to the creation of more domestic jobs.

    I agree that biofuel is a dog, and would rather see their subsidies extended to the nuclear power generation industry.

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  21. PaulL (5,947 comments) says:

    Part of me likes the creation of markets for renewable energy. I’m all for new forms of energy, and market based mechanisms are usually better. But, in the case of artificial markets (like carbon prices and artificial subsidies on energy production of the “right” sort) what actually happens is that people find a way to rort them. Solar plants with gas backup…..sold as renewable energy. Carbon credits from dodgy schemes that don’t save half as much carbon as they claim. No, I think we’re actually better to directly subsidise research. Not commercialisation, but pure energy research like some countries used to. Thorium reactors, more efficient solar cells, combined heat and power plants from concentrating solar.

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