Eliminating oil subsidies will have little if any effect on consumer prices, explains CAP’s Sima J. Gandhi in this cross-post.
Three weeks ago, the Senate rejected a proposal to eliminate about $35 billion in tax subsidies to oil companies as millions of gallons of oil spewed into the Gulf of Mexico. Sen. Bernie Sanders (I-VT) proposed using these funds to reduce the deficit and fund state energy efficiency programs. The Sanders plan to close these loopholes lost by a vote of 35-61, with every Republican voting against it.
The vote to preserve outdated subsidies that make rich oil companies richer while creating little benefit to the taxpayers who foot the bill was a victory for the oil industry and its lobbyists. They hailed the “vote to preserve a domestic manufacturing industry that is critical to our nation’s energy security and to the nascent economic recovery,” in the words of Charles T. Drevna, president of the National Petrochemical and Refiners Association.
Lawmakers must end tax subsidies to the oil industry. But the Senate’s action makes clear that doing so will require Congress to overcome lobbyist arguments that killing subsidies will harm the economy. Profitable and powerful oil companies, such as BP and ExxonMobil, pay lobbyists millions of dollars to scare lawmakers into believing that ending subsidies to oil companies will wreak havoc on the American economy. These arguments are advanced by trade organizations such as the American Petroleum Institute, and they suggest that eliminating subsidies “could mean less U.S. energy production, fewer American jobs,” and higher oil prices.
The evidence suggests otherwise:
- Tax subsidies for oil companies don’t decrease our reliance on foreign oil. Oil companies often argue that without subsidies, domestic production will decline and our reliance on foreign oil will increase. Yet U.S. production has steadily declined since its 1970s peak. We produce about the same amount of oil now that we produced in the 1950s despite billions in subsidies over the past 30 years, as seen in this graph.Subsidies do little to change the fact that limited domestic supplies contribute to the United States importing about 60 percent of its oil. In fact, the Treasury Department estimates that ending subsidies will affect domestic production by less than one half of 1 percent. If we’re serious about ending oil imports we need to transition away from oil as a fuel supply.
President George W. Bush himself noted in 2005 that the profit potential in the oil industry drives company behaviors and not the subsidies. “With $55 oil we don’t need incentives to the oil and gas companies to explore. There are plenty of incentives.”
- Oil subsidies don’t save jobs. Oil companies and lobbyists also argue that ending subsidies will kill jobs. But this doesn’t make sense since eliminating oil subsidies minimally impacts domestic production (as explained above).It’s also important to note that the oil and gas industry is about 10 times more capital intensive than the U.S. economy as a whole. Consequently, subsidizing oil industry production to create jobs isn’t a good use of taxpayer dollars. Any decrease in production will likely affect capital investment in machinery, not the number of jobs created.
- Oil subsidies don’t help consumers at the pump. Finally, oil companies are fond of saying that ending tax subsidies will cause disastrous price hikes. But the tax subsidies Sanders, the president’s budget, and other lawmakers propose for elimination pay companies to find and produce oil. Eliminating them will have little, if any, effect on consumer prices.A Joint Economic Committee report states, “the removal or modification of [one of these subsidies] is unlikely to have any effect on consumer prices for oil and gas.” The committee found that subsidies do not affect production decisions in the near term. And in the long term the Energy Information Administration explains that the major factors affecting oil prices include the production limits set by the Organization of the Petroleum Exporting Countries and global disruptions in supply. Moreover, the minimal impact of tax subsidies on domestic production (as discussed above) underscores that eliminating tax subsidies will have little, if any, effect on oil prices.
Thankfully, the Sanders amendment that the Senate voted down two weeks ago is not Congress’s last chance to act. Sens. Robert Menendez (D-NJ), Jeff Merkley (D-OR), and Bill Nelson (D-FL) introduced The Close Big Oil Tax Loopholes Act, S. 3405, which would eliminate nearly $20 billion worth of big oil tax subsidies while preserving subsidies for companies with less than $100 million in revenue. And Rep. Earl Blumenauer (D-OR) this week introduced the End Big Oil Tax Subsidies Act, H.R.5644, which would close big oil tax loopholes worth $30 billion over five years.
Senate Majority Leader Harry Reid (D-NV) indicated that the Senate will debate clean energy, oil disaster, and pollution legislation in July. This is a golden opportunity to eliminate subsidies to oil companies, which are some of the most egregious tax expenditures (shadow spending programs run through the tax system) that in total amount to over $1 trillion in spending this year alone. Lobbyists and oil companies will undoubtedly continue fighting for the status quo with false arguments. Congress must fight back with hard evidence. Political courage is priceless with American taxpayers footing the billion-dollar bills.
Sima J. Gandhi is a Senior Policy Analyst at the Center for American Progress.
For more on this topic please see:
- Ask the Expert: Why Do We Give Oil Companies Such Large Subisides? by Sima J. Gandhi
- The Big Oil Discount by Sima J. Gandhi
- Eliminating Tax Subsidies for Oil Companies by Sima J. Gandhi
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Good post, except for a little naivete: Oil company lobbyists don’t frighten Congressmen with stories about lost jobs and economic damage. They scare them with threats of withholding campaign cash, and post Congress lobbying jobs. And we don’t even know how much cash is changing hands here- this is not just a Minerals Management Services phenomenon.
The Republican Party and some Democrats have been purchased by oilmen and bankers (whose favorite clients are the oil companies). The remaining Democrats with integrity need to raise this issue publicly, instead of apparently being too worried about offending their Blue Dog wing. If they do this successfully, the Right will sputter and squirm, since they really have no counterargument here. This kind of movement to take back our country could end up making the Tea Partiers look like a tiny splinter group.
I would think that a study that shows that ending subsidies doesn’t not have an effect on prices at the pump may be missing a few modeling variables, especially if at other times the oil industry has been accused of ‘price gouging’. I think losing $35 Billion on one side of the balance sheet would force the business sector to attempt to make it up on the other somehow (because not doing so is stupid for a profit-based venture).
So, even if the economics of who sets prices and what factors into a decision to boost production would seem to be unaffected by the subsidies, the balance sheet of the oil company would be. I’m sure some of these subsidies are complete give-aways to big oil, but simply put, after removing them (even if it’s not ‘right’ that they be there), those same companies will enact decisions internally that would seek to recoup those losses, whether it be with overhead, outsourcing, the trimming back of some activity that benefitted from the subsidization, cutting corners on workplace safety (seems like that happens regardless), and perhaps even passing the ‘cost’ artificially to the consumer. It may be true that production and drilling decisions may not be appreciably influenced by the subsidies, but there are other potentially significant considerations that probably would be affected.
I don’t think there’s a way to legally make businesses absorb a cut like that and force it to not change a single business practice or investment activity. Even if the entire cost can be absorbed into the net profit of the company, that still isn’t going to be an acceptable solution to a for-profit business entity.
It probably is silly, though, to keep a subsidy in place simply to preserve the status quo, for fear of what might happen otherwise, but, in a different context, we’ve also been stuck in a vortex of farm subsidies for ages.
There are no subsidies mentioned in this article. It is an unsupported assertion.
[JR: That's what links are for!]
For a list of studies on this subject check out Bruce Bartlett’s blog: http://www.capitalgainsandgames.com/blog/bruce-bartlett. Bruce is an interesting guy. You might remember his book from a few years ago: “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy”.
@ BB – Oil is a commodity sold in a pretty efficient market. As a result, the price is set by market demand, not cost of production. So, a well lifting oil at $15/barrel will not stop pumping if that cost is increased to $17/barrel when the market is paying $80/barrel. Supply will not be affected, and costs will not rise.
OTOH, cutting subsidies will reduce production from marginal wells. Given the US demand of about 20 million barrels/day, it seems unlikely that stopping production at these wells would reduce supply enough to cause a measurable increase in oil prices.
I don’t have the data to prove it, but I suspect eliminating these subsidies will do nothing more than reduce oil company profits, and not by very much.
@EricG
…I suspect eliminating these subsidies will do nothing more than reduce oil company profits, and not by very much..
I presume to a large degree that you are correct. My point remains that these oil companies will react to these measures by attempting to recoup these ‘losses’, whether it be through laying off American employess, securing more tax havens, laxing more expensive safety provisions, price gouging, or some other means (nefarious or not).
So, it’s not all roses and berries that these subsidies end, in terms of the economy and/or business. And, I suspect that this business (or any other sector for that matter) will pull back on investment/spending ventures until they see the smoke clear on what the new rules are and what they can expect for subsidies, which also has a negative effect in the near-term.
I suppose using this subsidy reduction as an offset that will be applied to another sector as a net gain could be a balancing agent, but they would both have to have their impacts felt in the same term, measurably positive and negative together. One company laying off 1000 employees and 1000 others are hired in 2015 isn’t exactly going to do the trick. Deep federal budget deficits already present nothwithstanding.
I think that the case for removing tax subsidies for oil companies needs to be qualified a little. For example:
If taxation is increased on oil companies, this will reduce the amount they will bid in oil lease auctions, which will offset some of the revenue gains to government (I don’t know by how much).
Some of the foreign tax credits are aimed at levelling the international playing field for US-based companies compared to foreigners. Certainly, Exxon, Occidental et al would lose if the credits were to be removed but it result in a net competitive benefit to, for example, Shell, Total and (gasp) BP.
There probably is a good argument to be made for reforming the tax code for producers of carbon-based fuels (most of it revolves around the rate at which capital costs can be expensed) but it would be a stronger case if proponents acknowledged that each tax action has a corresponding reaction.
In any case the, er, burning issue is not increasing taxes on domestic production of carbon-based fuels but, rather, increasing taxes on the domestic consumption of carbon fuels, wherever in the world those fuels happen to have been produced.
To deal with climate change effectively we’ll have to hurt “consumers at the pump”, politically inconvenient though that will be.
Back @ BB
Point taken.
Subsidies distort economies. They are bad. Economists from Adam Smith and Milton Friedman, to George Will and the Cato Institute speak with one voice on this.
Subsidies for burning fuels that will wreck your nice home are doubly bad.
A US Senate that votes 61-35 to keep this double bad subsidy is horrifying.
No need to argue over details here.
“…will have little, if any, effect on oil prices.”
Joe, there are many people looking for ways to reduce costs and create jobs in this down economy. Your suggesting keeping things the same or making them a little worse. Suggesting sacrifices shouldn’t hurt us too much, you place yourself on the wrong side of the argument. How about dropping your cause for a moment and helping ‘the folks’ out?
Michael W asks:
“How about dropping your cause for a moment and helping ‘the folks’ out?”
Because subsidizing anything is bad, and because subsidizing self-destruction is worse. But don’t worry Michael, 61 senators want to continue this subsidy!
No mention here of the hidden subsidy of our massive military interventions in Iraq which are 95% motivated by securing oil supply. These are probably the biggest subsidy of all for oil. The USA can hardly afford another such intervention in the next 20 years. So we can expect an increase in the probability of rogue opportunists or terrorists attacking oil fields and export installations in the middle east and creating serious global supply disruptions.
No matter how you slice this issue, we have got to seriously reduce consumption of oil no matter what.
Mark Shapiro, I can agree with you in principal, government subsidies are bad. But do you really believe in no subsidies? What about subsidies for housing, transportation, agriculture, energy, green energy, education, healthcare, arts, etc?
Ben Sills writing for Bloomberg reports the chief economist of the International Energy Agency identifying one half trillion dollars per year for (consumer only?) global fossil fuel subsidies.
Of three types of subsidies (direct, indirect and externalized) the externalized category (war, cost to public health, etc.) may be an order of magnitude larger than the types of subsidies the senate continues.
A topic I’ve been reading this past year is on the issue of societal collapse: political, economic and ecologic. The US seems to be on the precipice of fiscal collapse, as in “end of empire.” By the way, oil is not an “energy resource.” Thus we live under the myth of fraudulent “economics,” and the senate is a cesspool of graft and corruption.