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April 24, 2012

Energy Subsidies: Not What They Seem

Farrell Keough

It has recently been in vogue to claim our fossil fuel producers are rolling in profits due to government subsidies. While our nation faces serious fuel cost increases, the solutions don’t lie in proposals to increase costs.


For instance, natural gas prices are falling, yet speculators are not being blamed – following the current propaganda, this would be price manipulation.


But, let’s consider how much these corporations pay.


Oil companies have an effective corporate tax rate well above 40%. And they operate within one of the highest-taxed industries in America. According to the Tax Foundation, for more than 25 years, oil and gas companies have sent more tax dollars to Washington and state capitals than they earned in profits. That’s a fact.” Larry Kudlow [New York Sun]


Over-taxation is not the main issue in this discussion – although if these corporations were taxed at a lower rate, that would translate to lower prices across the board – but I digress.


Subsidies are the issue – where are these so called subsidies going?


But on the subject of subsidies, so-called renewable-energy subsidies (think Solyndra) are 49-times greater than fossil-fuel subsidies, according to studies by the Congressional Research Service. The Congressional Budget Office says renewable green energy received 68% of energy-related tax preferences in fiscal year 2011, while fossil fuels got only 15%. Additionally, oil, natural gas, and coal received 64 cents per megawatt hour in subsidies, while wind power alone received $56.29 per megawatt hour. That’s 100-times what fossil fuels got.


By the way, the so-called subsidies that [President Barack] Obama is talking about are really depreciation write-offs for investment. Oil companies get a 6% deduction from income. Most manufacturing industries get 9%.” Larry Kudlow [New York Sun]


So, how do our current energy sources compare with respect to subsidies against the various alternative energy sources?


If crude oil were subsidized at that same rate as wind energy, the oil companies would receive $50 for every barrel of oil produced (given Brent Crude’s current price of $125 per barrel). How does that compare to the actual subsidies received by the oil industry?


The most repeated number is $4 billion per year. But, Heritage’s Nick Loris and Curtis Dubay make clear that this number is way bigger than the actual subsidy. However, even that overstated number works out to only $0.60 per barrel, or barely 1 percent of what wind receives relative to market prices. A more honest estimate of the oil subsidies would be closer to a nickel per barrel, which is one-thousandth the subsidy given to wind.David Kreutzer, Ph.D. [Heritage Foundation]


Now the real kicker – none of the above situations are subsidies, they are tax deductions. A subsidy is an actual payment, while a tax deduction is common business world and household finance mechanism – a mortgage deduction for instance. Petroleum and natural gas companies get depreciation just as all businesses do.


So, are there actual subsidies going to our current forms of energy? As noted by Heritage’s Nick Loris and Curtis Dubay, there are a few that could be removed or altered from their present form.


Government Research & Development: The Department of Energy (DoE) has spent taxpayer dollars on oil research and development, including funding for unconventional oil, gas, and coal.


Enhanced Oil Recovery (EOR) Tax Credit: Oil producers receive a 15 percent tax credit for costlier methods and technologies, such as injecting liquids and carbon dioxide into the earth.


Marginal Well Production Credit: Marginal wells produce 15 or fewer barrels of oil per day, produce heavy oil, or produce mostly water and fewer than 25 barrels of oil per day.


Section 199 Deduction: This tax deduction, under Internal Revenue Code Section 199, goes to all domestic manufacturing… Removing oil and gas production eligibility for this tax break is not removing a subsidy or closing a tax loophole but imposing a targeted tax hike. In fact, Congress already imposed a tax hike on oil and natural gas companies by freezing the deduction at 6 percent when other manufacturers receive a 9 percent deduction.


Foreign Tax Credits and Deferral of Foreign Income: The foreign tax credit and deferral are two critical features of a worldwide tax system that prevent the U.S. corporate income tax from double taxing—and further crippling—the international competitiveness of U.S. companies. The President has proposed cutting deferral and limiting the applicability of the foreign tax credit. This would significantly increase taxes paid by U.S. businesses, subjecting more U.S. foreign income to double taxation and severely undermining the ability to compete abroad and grow at home.


The Department of Energy has an horrific record for research & development – this department was created during the Carter Administration and has yet to show any benefits. Removal of this subsidy could save almost $400 million. The two credits following the Department of Energy Research and Development subsidy may well be replaced with amortization on new technology. The Section 199 Deductions and Foreign Tax Credits will likely need to be continued – but, like so many other aspects in this discussion, these are not subsidies, but rather tax deductions and deferrals.


As we can see, these claims of tremendous government subsidizing are both false and purely political propaganda; if anything, our current rush towards green alternatives has far greater government financing. If an alternative energy source can truly compete in the market further government subsidies would be unnecessary.


But most importantly, these erroneous government positions harm both our national security and our economy. For instance, our nation’s natural gas market has so many existing and possible sources, we may well see an overabundance. Allowing new resources to be explored would give us the ability to export. We are currently the largest exporter of coal – there is no reason to prevent exporting of natural gas. The push to keep all energy supplies at home actually harms the market forces. If we were able to export it would help our trade balance, create jobs, make us less dependent upon exports, and more importantly, strengthen our dollar.


In these times of tremendous deficits, we must realize the need to explore our markets and ensure our dollar remains strong.


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