Wednesday, June 4, 2014

Oil and Gas Subsidies - What's the Story?

There is a lot of inaccurate, incomplete, and simplistic information about this subject on the internet and floating around social networking sites.  I'd read posts that complain about huge subsidies that the oil companies get. I got curious as to what the real story is behind the huge differences in gasoline prices around the world and exactly what and how big the subsidies to the oil companies are. The devil is in the details and, if there is a problem, understanding its details is the first step toward coming up with a solution.

The United States has lower gasoline prices than much of the rest of the world. This is because of subsidies.

There are two kinds of energy subsidies: subsidies to oil and gas producers, and subsidies to the consumers of oil and gas products.

Subsidies to Oil Companies

The subsidies to U.S. oil companies, totaled approximately 40 billion dollars in 2009. The top three subsidies were:

1. Foreign tax credit ($15.3 billion)
2. Credit for production of non-conventional fuels ($14.1 billion)

3. Oil and Gas exploration and development expensing ($7.1 billion)

The Foreign Tax Credit is available to any U.S. company that pays income tax to another country in which it is operating. The company does not get taxed twice (once in the foreign country and again in the U.S.) by claiming the Foreign Tax Credit. It is not specific to oil companies and does not seem like an unreasonable credit to me.

I did not find out what the production of non-conventional fuels means. What are these fuels? Why is there a tax credit for their production? I don't know. Perhaps someone out there can shed light on this. It's a pretty big credit.

Oil and Gas exploration and development expensing looks like a direct subsidy to fossil fuel companies. The other two are tax credits.

40 billion in subsidies seems like a big number to me but "big" is relative. The total annual revenue the U.S. oil companies got that year was about 1.3 trillion dollars. $40 billion amounts to 3% of the total revenue which isn't a large percentage. If these subsidies were removed, the price of gas would only have risen by about 10 cents per gallon. (figured at $3.50/gallon)

Subsidies to the Consumer

I was surprised to find that most of the subsidy for fuel in the US goes directly to consumers via under-taxation, not to the oil companies.

Here's an interesting page. This shows where the money goes when you buy a gallon of gas in the U.S. It also shows that the tax portion of the total cost has been shrinking over the last dozen years as crude oil prices have gone up. The difference in gas prices from state to state is because each state can levy taxes. Also the distance from refineries affects the price.

Gas Prices in the Rest of the World

I found this site that tracks average gasoline prices around the world. The lowest is 5 cents a gallon in Venezuela to almost $10 a gallon in Norway. USA prices are low compared to most of the world. You can adjust the chart to read litres or gallons and see the prices converted to various currencies.

Many countries have steep taxes on fuel. The difference in prices between countries is mostly taxes.,_2010..png

In the chart above you can see that the U.S. has the second lowest fuel taxes of the OECD countries. Mexico shows a negative tax. How can this be? Mexico's government has price controls on fuel to keep it cheap. Since Mexico is the 6th largest oil producing country and their petroleum industry is a government-run monopoly, cash from exports subsidizes lower gas prices for its own people. The info I found on this is a few years old. One of the articles mentioned that Mexico was considering phasing out the subsidy. I don't know if that happened since these articles were written.

Taxes added to the price of gasoline average a bit over 50 cents per gallon in the U.S. In AZ it's 37 cents and in CA it's 71 cents. Most of this is state tax. Only 18.4 cents is federal. Most of this money goes to pay for maintaining highways and bridges. Some goes toward reducing air pollution. The rest goes to earmarks, which could be anything really. The amount of tax is a fixed amount, not a percentage.

Right now, in AZ the total fuel tax (Federal plus state) amounts to somewhere around 10%. Since the tax is a fixed amount, the percentage of tax has been going down as crude prices have gone up. Contrast this with the average fuel tax in Europe - about $3 per gallon.

I  stumbled across this paper created for the International Monetary Fund. The IMF paper shows just how f-ed up the whole energy subsidy thing is and how bad it is in other countries, particularly oil exporting countries. There is really a lot in here. It's about energy subsidies and how they are bad for the world. The data is international and it covers oil, gas, coal, and electricity production.

So the main reason our gas is cheaper is not because money is being given to oil companies. It is because our taxes are unusually low. Too low in my opinion. Not enough money is being generated to pay for highway maintenance. Increasing the fuel tax could be beneficial. It can go toward public transportation, subsidizing renewable energy and more efficient use of energy, reduce air pollution, and to better maintain and repair our highway infrastructure. An added benefit to the higher prices that would result, is that consumption would likely decrease and public pressure for more efficient vehicles and alternative energy would increase.

The down side would be an increase in prices not only for fuel, but for just about everything. But good education, social services, clean air, and progress toward a cleaner energy future is important, at least to me, and it will cost money to provide these services. If we want these services and benefits we have to pay for them. Increasing fuel taxes is one way to do this.