Archive for April, 2010

Unfair Subsidies for Big Oil?

April 15, 2010

Don B commented on my “Making Clean Energy Cheap” on the Linked-In group Management Consulting Jobs, asking for “… specifics of the tax and regulatory provisions that contribute to tilting the market in favor of fossil fuels.” Don’s is a fair and reasonable question that deserves a reasonable, rational answer.

First, there are direct subsidies. Perhaps the best example relates to ‘royalties’, the payments oil producers are obligated to make to owners of the land (technically, the owner to the rights to minerals below the surface) where the oil is found. Typical royalties paid to private owners in the US Gulf Coast area are in the range of 20-25% of the value of the oil. Royalties on oil from Federal lands and most offshore oil – resources that are owned by you and me and every other American – are only about 12-17%. That subsidy is worth about $8-10 per barrel at current crude oil prices. Beyond that, the government often allows collection of these royalties to be delayed or forgiven altogether. (See more here and here.)

Second – Only a fraction of the true cost of petroleum is reflected in crude oil prices or the price of gasoline and diesel we pay at the pump. The rest is borne by you and me and every other US taxpayer, resulting in a not-quite free ride for the oil industry, but a substantial discount paid out of your pocket and mine. What are some of these indirect costs of our oil appetite?

– The oil industry certainly invests a lot (and for the most part, very effectively) in reducing the environmental footprint of their direct operations, but the vast majority of environmental liabilities from burning fossil fuels are borne by society in general – either in public $$$ spent for clean up and remediation or in deteriorating health and quality of life.
– The oil industry thrives on crude oil imported from some of the world’s most remote and dangerous places. We the taxpayers pay for the military and diplomatic security that makes it possible for the oil companies to continue conducting their lucrative overseas business.
– Depreciation is an accounting tool that allows companies to, in a sense, put aside a little money today, tomorrow and the next day to reinvest – to replace the valuable assets that will eventually be used up. Oil-in-the-ground is our major energy asset, and the energy producers and users should be putting aside $$$ to replace the energy resources we use up.

Since it took God and geology 300 million years to make the oil we’re using now, replacing it in-kind is not an option. Prudence and good business says the oil companies and society ought to be reinvesting in new energy sources, but we aren’t. Everyone – consumers and energy companies alike are taking a free ride at the expense of the next generation.

There are, of course, many ways to look at and account for these hidden costs, and legitimate difference of opinion about who should bear them. See for example “The True Cost of Oil: $65 Trillion a Year?” and “True Cost of Oil” by G.R. Morton.

But the fact is that none of these direct or indirect subsidies are factored into the prices we pay at the gas pump or for electricity to our homes and businesses. And it matters because the new, cleaner and more geopolitically secure alternative energy technologies that are struggling to emerge must compete against these heavily subsidized incumbents.

Wow! Didn’t See that Coming

April 1, 2010

President Obama shocked just about everyone with his intention to lift the ban on offshore drilling along much of the East Coast, Alaska and the eastern Gulf of Mexico. But perhaps he’s doing something right. The New York Times offers some praise, tempered with an environmental admonition. Even in the reddest of the Red States, an editorial in The Daily Oklahoman has some good things to say about Obama’s plan, and executives in the reddest of Oklahoma’s industries are grudgingly optimistic.

No one, obviously, is entirely happy – the Left and environmentalist feel betrayed; many Repubs say he didn’t go far enough, chanting the predictable ‘too many taxes’ mantra.

Getting beyond the rhetoric, a rational assessment of the new policy must revolve around three questions:

Is it GOOD energy policy? Yes, it is good energy policy (and good economic and national security policy, too) provided that it supports, not substitutes for, an aggressive program to nurture and encourage non-fossil energy alternatives – wind, solar, bio-mass, etc, as well as nuclear. As I’ve argued before, the only practical route to a non-fossil energy future is through a prudent and responsible (and declining) use of natural gas, oil and coal.

Is it BAD environmental policy? No, probably not. Half a century of offshore drilling and production technology development have minimized the safety and environmental liabilities, and a half century of experience off the Texas and Louisiana coast has, on the whole, been good for residents, tourists and fishermen. And for those worried about the view, most of it will be too far offshore to see, the rest a faint structure on the edge of the horizon.

Is it good politics? Probably not, but the answer will depend on how successfully the Obama administration can sell the first two propositions. They’ll likely invoke the analogy of Pres Nixon opening up relations with Communist China 40 years ago. Obama’s problem is that, unlike Nixon (who had a long history of stringent anti-communism) he lacks a solid track record on the environment to cement his green credentials and protect his back with the Democratic base.

Bottom line – The new offshore drilling policy will be a clear winner, IF is part of a comprehensive, aggressive plan to transition from fossil fuels to greener energy sources. Stand-alone, however, it looks like a cynical (but not significantly detrimental) sellout to Big Oil politics.