Do Oil Companies Really Need $4 Billion per Year of Taxpayers’ Money?

Saturday, August 06, 2016


By Eduardo Porter, New York Times


What would happen if the federal government ended its subsidies to companies that drill for oil and gas?


The U.S. oil and gas industry has argued that such a move would leave the United States more dependent on foreign energy.


Many environmental activists counter that ending subsidies could move the United States toward a future free of fossil fuels — helping it curtail its emissions of heat-trapping carbon dioxide into the atmosphere.


Chances are, it wouldn’t do much of either.


In a new report (pdf) for the Council on Foreign Relations, Gilbert Metcalf, a professor of economics at Tufts University, concluded that eliminating the three major federal subsidies for the production of oil and gas would have a very limited impact on the production and consumption of these fossil fuels.


Metcalf’s analysis is the most sophisticated yet on the impact of government supports, worth roughly $4 billion a year. Extrapolating from the observed reaction of energy companies to fluctuations in the price of oil and gas, he models how a loss of subsidies might curtail drilling and thus affect production, prices and consumer demand.


Cutting oil drilling subsidies might reduce domestic oil production by 5 percent in the year 2030.


As a result, he thinks, the worldwide price of oil would inch up by only 1 percent. He assumes it will hardly be affected because other countries would increase production as the flow of U.S. crude slowed. Demand would hardly budge, as the price of gasoline at the pump would rise by at most 2 cents a gallon.


Natural gas is a slightly different story. It is not as much a global commodity. A decline of 3 percent to 4 percent in U.S. production would raise prices by as much as 10 percent. In response, demand for natural gas would most likely fall 3 to 4 percent. At most, the average household’s monthly electricity bill would rise by $7.


In terms of carbon emissions, nothing much would happen at all, he concludes. An earlier study concluded that eliminating subsidies would have reduced CO2 emissions between 2005 and 2009 by less than 1 percent. Metcalf argues that this “overstates the emissions reduction potential of tax reform.”


And still, these modest findings could give some political muscle to those fighting climate change. They may not mobilize Republican politicians to join in the battle. But they help to undermine the case made by energy companies that drilling for fossil fuels merits federal support.


One study commissioned by the American Petroleum Institute, for instance, suggested that cutting some federal subsidies would reduce domestic production of oil and gas by 15 percent in 2023. Almost a quarter of a million jobs would be lost by 2019, the study said, and the United States would be at the mercy of foreign oil.


Metcalf’s conclusions suggest subsidies could be eliminated without causing much pain. And if the United States cuts its supports, it will have better standing to demand the same from the many countries that provide big consumer subsidies encouraging the consumption of fossil fuels.


The United States’ subsidies “impair its ability to coax major developing countries to roll back fossil fuel consumption policies,” Metcalf writes.


To Learn More:

The Impact of Removing Tax Preferences for U.S. Oil and Gas Production (by Gilbert E. Metcalf, Council on Foreign Relations) (pdf)

Big 6 Oil Companies Complete a Trillion-Dollar Decade (by David Wallechinsky, AllGov)

Petroleum Industry Claims Cutting Its Tax Breaks is “Discriminatory” (by Noel Brinkerhoff and David Wallechinsky, AllGov)

Senate Retains $2 Billion in Annual Tax Breaks for Big 5 Oil Companies (by Noel Brinkerhoff and David Wallechinsky, AllGov)


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