Attack on Oil Subsidies a ‘Ruse’

Former Secretary of Energy, James Schlesinger, once observed that “ the tool of politics…is to extract resources from the general taxpayer with minimum offense and to distribute the proceeds among …claimants…” That describes how the energy subsidy process works. And from an unlikely source of wisdom, Groucho Marx, “politics is the art of looking for trouble, finding everywhere, diagnosing it incorrectly and applying the wrong remedies.” And, that describes our energy policy.

If Congress could be trusted to provide lower corporate tax rates and a level playing field, then a strong case could be made for eliminating all real subsidies. In the real world, lower tax rates and fewer deductions, credits, etc are not going to come about soon. The reaction to the Deficit Commission’s report makes that clear.

When a government official wants to criticize something in the tax code, it is a subsidy. When the official wants to support something, it is an investment. But, the fact is that the only money the government has is what it borrows or extracts from taxpayers.

Politicians like to substitute their judgment for the market’s and use tax dollars to reward those that they favor. Since the first Arab oil embargo, Congresses and most Administrations have promoted subsidies in various forms to find alternatives for fossil energy. First to achieve energy independence and now to promote an off oil agenda. Billions and billions of taxpayer dollars have been wasted in the pursuit of an illusion and still the nation and others rely on fossil energy because of cost, abundance, and per unit energy content.

Today’s favored alternatives are wind, solar, and biofuels, mainly ethanol. None make economic or energy sense. European governments have heavily subsidized the first two only to make their economic and employment conditions worse and electricity prices higher. We squander about $5 billion annually on ethanol and enrich producers and corn farmers without achieving either environmental benefits or significant reductions in imports.

The current attack on oil company “subsidies” is a ruse to make gasoline more scarce and to shift blame for high prices. It will fail but be costly and disruptive in the process.

The subsidy charges are bogus. Of the four mentioned most often–depletion allowance, intangible drilling costs, manufacturers tax credit and foreign income tax credit–two apply to all business. The manufacturing tax credit was designed to promote domestic job creation while the foreign tax credit is in place to prevent double taxation. The US already has the second highest corporate tax rate in the developed world.

The depletion allowance is only available to small, independent oil and gas producers, of which there are about 18,000. Major oil companies have not been able to use it since 1978. The ability to deduct intangible drilling costs like wages, the costs of drilling muds, survey work, etc. is no different than deductions of the operating expenses by any business. The ability to write these off in oil and gas exploration is recognition of large up front costs and the fact finding oil and gas also involves a lot of dry holes. The immediate write off provides a one time lower tax bill. After that, taxable revenue is higher. The government is not losing anything. Eliminating it would discriminate against oil and gas exploration and reduce domestic production.

Schemes to promote alternative energy are dangerous because they distort market forces, create rent-seeking incentives, and encourage the use of non-economic forms of energy. In a competitive global economy, we need efficiency and competitive energy markets, not the heavy hand of government tilting the playing field.

All “subsidies” are not created equal. There is a big difference between direct government expenditures, including loan guarantees, for preferred activities and organizations and tax credits or incentives that do not discriminate within a class of activities and which lead to increases in government revenue.

The current debate has been spawned by President Obama’s response to high oil and gasoline prices. His proposals do not stand up to careful scrutiny and will do nothing to lower gasoline prices.

While there is not a lot he or Congress can do directly about the instability in the Middle East and North Africa, rational fiscal and energy policies would produce long term economic and energy benefits and in the process put downward pressure on prices. More domestic production, more cost-effective regulation would stimulate more domestic gasoline production and more domestic energy investment. Putting the economy on a sounder footing would strengthen the dollar and make traditional stock market investments more attractive than oil. Both would lower oil prices.

Originally published by the National Journal athttp://energy.nationaljournal.com/2011/05/should-washington-stop-subsidi.php#1971302

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