Wednesday, April 6, 2011

Real Costs of Oil

Bike Shirt by paynehollow
Bike Shirt, a photo by paynehollow on Flickr.

Earth Day is a few days away.

The tragic anniversary of the BP Oil "Spill" is also days away.

It's a good time to try to consider the actual costs of oil and gasoline. I've said it before that I think the free market can be a relatively efficient way of managing our business, BUT ONLY if real costs are being paid.

To illustrate: If we have two widget factories producing widgets. Company A can make widgets responsibly - disposing of waste and cleaning up after themselves - at $10/widget and then sell them at a profit at $15/widget.

BUT, Company B discovers they can produce the widgets much more cheaply if they DON'T dispose of their wastes and clean up after themselves responsibly. By cutting corners, they can produce widgets at $5/widget and sell them at a profit for $10/widget, thus undercutting the "more expensive" widget company by Company A.

Additionally, Company B has paid lobbyists to get federal and state subsidies to produce their widgets, thus reducing their costs to $2/widget and allowing for even more profit.

Responsible Company A goes out of business due to the fact that Company B was NOT paying actual costs, nor were their consumers. Not paying actual costs can skew a responsible market.

Looking at just the gov't subsidy angle (what we'd call "welfare," if we were talking of assisting those in actual need) on gas prices, consider...

" examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry...

...Oil industry officials say that the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers...

...Jack N. Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs...

“We’re giving tax breaks to highly profitable companies to do what they would be doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American Progress, a liberal research organization. “That’s not an incentive; that’s a giveaway.”

Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes. Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights...

Over the last 10 years, oil companies have also been aggressive in using foreign tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations. American producers have also aggressively exploited the tax code by opening small offices in low-tax countries. A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999...

Despite the public anger at the gulf spill, it is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted even President George W. Bush — a former Texas oilman himself — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed."

NY Times

That article cites a $4 billion/year price for oil company subsidies. In This article (in the Rush Limbaugh Letter!) cites a Christian Science Monitor story that places the annual price tag for energy subsidies between $50-100 billion!, with ~$40 billion going to oil/gas companies.

There appears to be a problem in sorting out just how many billions of dollars are going to oil companies (coal companies, gas companies, etc). What counts? Does "free" military protection of oil sources overseas count? Does "free" drilling in public land count?

I'd be curious to know if anyone thinks they have a reliable source for a rough total annual subsidies going to oil and gas companies.

In the meantime, I hope we could agree that giving these sorts of billions of dollars to support an industry skews the cost of oil/gas to make it artificially cheaper than it actually is. Of course, that's not counting the many, even larger ways we under-pay in gas prices, which I'll save for another day (but that include environmental degradation, human costs, health costs, societal costs, etc).

We need a way of getting our prices in the fossil fuel industries to reflect something like actual costs in order to best let the Market do its magic. Ending corporate welfare for wealthy oil/gas industries would be a start.


John Farrier said...

There appears to be a problem in sorting out just how many billions of dollars are going to oil companies (coal companies, gas companies, etc). What counts? Does "free" military protection of oil sources overseas count? Does "free" drilling in public land count?

It'd be very hard to distinguish between legitimate defense needs and defense needs at the behest of oil companies. But yes, the free drilling on public land needs to end. We can do so by privatizing these lands and getting the federal government out of the land owning business except for functions of the enumerated powers.

And yes, end all obvious subsidies period: farm subsidies, oil subsidies, Social Security -- everything. Congress gets to enact nothing that is not among the enumerated powers.

Geoffrey Kruse-Safford said...

You're right, John. Let's stick with the enumerated power, which, when interpreted by any sensible person, pretty much permit Congress to do whatever it wants. That's the problem with the insistence that, in some manner, fashion, or form, Congress no longer adheres to the Constitution. The Constitution itself is broad enough, and vague enough, depending upon the whim of Congress, to permit it to do what it wants. The limitations placed upon some recent Congressional action - the line item veto, for example - are rare enough to prove the point. Apart from acknowledging violations of the Bill or Rights, as regards anything from federal land management to the income tax (and boy do I just love it when people claim it is unconstitutional when it has its own amendment), the Constitution lets Congress pretty much do whatever it wants.