Saturday, August 06, 2016

Do Oil Companies Really Need $4 Billion Per Year of Taxpayers’ Money? - The New York Times

Natural gas being flared off at a site in North Dakota. (Credit: Jim Wilson/The New York Times) Click to Enlarge.
What would happen if the federal government ended its subsidies to companies that drill for oil and gas?

The American 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.

In a new report 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.

Mr. 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 American 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 to 4 percent in American 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.  Mr. 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.
Mr. 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,” Mr. Metcalf writes.

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