Navigant Research Blog

Ignoring Big Oil’s Subsidies

Richard Martin — November 16, 2011

In a Washington Post op-ed entitled “Before Solyndra, a long history of failed government energy projects,” Steven Mufson argues that the U.S. government’s dismal record of failure in backing alternative energy technologies proves that the feds should get out of the business of backing energy programs altogether.  Citing the Clinch River Breeder Reactor, the Synthetic Fuels Corporation, and other examples, Mufson asks a question much on the minds of free-market economists and conservative members of Congress these days: “Should the government even be in the business of promoting particular energy technologies?”

Essentially a re-write of a study by the libertarian think tank the Cato Insitute – which also mentions the Yucca Mountain nuclear waste repository ‑ Mufson’s essay joins a growing chorus of commentators calling for an end to all energy subsidies.  There are several flawed assumptions behind these arguments, including the fallacy of composition – the confusing of the parts for the whole.  In this case, opponents point to highly public failures like Solyndra and Beacon Power, which declared bankruptcy last month, and claim that all of federal loan guarantees and other forms of backing for advanced energy projects are inherently doomed. 

The major flaw, however, is that Leonard, Mufson, and other critics hardly ever point out the biggest energy subsidy of all: the $4 billion or so in “incentives,” tax breaks, and other taxpayer donations to big oil companies.  In 2009, Exxon Mobil, the largest American oil company, posted a record $45.2 billion profits and paid little or no income tax.  “The tax breaks for oil have a long history — the so-called percentage depletion allowance for oil and natural gas wells dates to the 1920s — and have withstood repeated efforts to kill them,” The New York Times reports.

Those efforts have included at least three attempts by President Obama, all of which have been blocked by bipartisan opposition in Congress.

It’s worth repeating the explanation familiar to all students of energy economics: by paying little to nothing in taxes and enjoying sizable federal incentives for new exploration and drilling projects, the oil and gas industry is shifting the social costs of fossil fuel reliance (global climate change, industrial disasters like the Deepwater Horizon oil spill, huge infrastructure projects, and public health costs) onto American taxpayers.

For free market commentators, though, that’s nothing compared to the $535 million in loan guarantees handed out to Solyndra – a company pursuing a technology that will unquestionably be critical to the post-oil energy economy of the 21st century, regardless of the fate of individual companies pursuing solar power.  

“An effort to eliminate all energy subsidies without instituting better alternative policies should be understood for what it is,” wrote Michael Levi, an energy analyst at the Council on Foreign Relations, in a recent blog, “a recipe for cementing the dominance of traditional fossil fuels against their competitors.”

2 Responses to “Ignoring Big Oil’s Subsidies”

  1. Craig says:

    You forgot to mention all the military dollars the US has spent protecting the foreign oil supply chain from the Middle East.

  2. BRAVO, Richard!

    Don’t forget the biggest single subsidy ever provided by the U.S. Government to the oil industry: the First (and possibly also the Second) Gulf War … !

    Thanks,
    PvH

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