THE END OF THE OIL’S PROTECTION RACKET

Energy Subsidies: Getting the Prices Right
7 June 2010 (International Energy Agency)

THE POINT
Until the 1970s, the U.S. was a major oil-producing nation and its foundational economy, though much more diversified, had important similarities to today’s Russia, Saudi Arabia and Brazil.

The U.S. blessing was to discover its oil early in the industrial revolution and to figure out how to mass produce it at the dawn of the age of the internal combustion engine. The U.S. was never a victim of the “oil curse” that can bring corruption and over-dependence on the single and singular resource but, like other governments, it paid its best energy industry protection money to keep the power coming.

In the early years, the biggest pay-off to oil was simply the ignoring of all the dreadful environmental harm it did as it expanded its production. There are deserts in California and lowlands in East Texas and Louisiana, for instance, that were drilling field dumps in the days of abundance and now, decades later, remain toxic. (The coal industry got the same pay-off: The nation turned away from the killing the mining of coal did so as to go on burning it without paying for the lives it took.)

Later, the government instituted an oil depletion allowance that permitted oil companies to deduct a portion of their production from their taxes despite the fact that the inventory being depleted was the shared deep earth wealth of the nation that was giving the tax deduction. Today, they call such a tax break a subsidy.

The U.S. rode the wave of its oil abundance and the ingenuity of its auto industry to world economic dominance from the 1920s to the 1940s and the Western World won its wars with fascism and communism on the strength of U.S. oil and on Russia’s failure to dodge the oil curse. (All the while, the U.S. – and the industrial world – built modernity on the rock solid foundation of dirty coal that was only cheap because the poor and the disenfranchised paid the price for the getting of it.)

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Oil kept flowing in the U.S. in the 1960s, 1970s and 1980s, despite the waning of U.S. reserves, because the oil companies went to the Middle East, harvested the wealth and paid the people there little enough to keep domestic gasoline cheap. When some Middle Eastern leaders demanded the U.S. companies pay fair royalties, the U.S. Congress kept the oil flowing by providing the companies with the golden gimmick that allowed them to deduct from their taxes what was paid in foreign royalties. Today, they call such a tax break a subsidy.

The federal government was fine with paying the oil industry to keep the oil coming because by doing so they were keeping the economy growing. That’s not unlike the corner grocery man paying thugs to keep the streets clear when the thugs threaten to otherwise interrupt to his business traffic. That’s called a protection racket.

Oil is still a fundamental element of the U.S. economy but it has become a mixed blessing. The cost of paying off is so high that it is preventing economy-boosting New Energy growth to emerge. The same thing happened in the 1980s and 1990s but in those days oil and gas were so cheap that the payoffs were equitable. The failure of the Reagan administration to fund New Energy R&D combined with subsidized low oil and gas prices kept the New Energies non-viable - until now.

The New Energies have not only shown they are now viable, they have shown they will be key elements in a thriving 21st century economy. The sun, the wind, flowing waters, the earth’s deep heat and natural waste are recognized around the world as vital sources of tomorrow’s energy. At the same time, the costs of subsidizing oil and coal are so high, as is detailed in Energy Subsidies: Getting the Prices Right, from the International Energy Agency (IEA), the pay off is too burdensome for the limited protection they offer.

The IEA preview analysis of fossil fuel subsidies comes as the result of a request for a study by the leaders of the G-20 nations, spurred by President Obama, at their 2009 meeting. The full report will be presented at the 2010 G-20 summit.

It has been a tough season for the fossil fuels. With any luck, the trend will continue. Though the nation and the world will not be able to do without them for some decades, it is healthy to see them for what they are.

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THE DETAILS
The IEA analysis identifies 37 countries where fossil fuels subsidies distort energy markets in favor of fossil fuel consumption. This is estimated to constitute 95+% of world subsidized fossil fuel consumption.

The analysis found $557 billion in 2008 subsidized fossil fuel consumption, up from $342 billion in 2007. A 2009 analysis is expected to find less subsidized fossil fuel consumption because a number of countries – including China, Russia, India and Indonesia – have made subsidy reforms.

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Iran spent the most in fossil fuel subsidies in 2008, $101 billion. That is ~one-third of Iran’s annual budget. The subsidies have become a major burden on Iran’s economy and habituated the Iranian people to a fossil fuel dependence that now forces the government to import refined oil products. The Iranian leadership agreed on sweeping subsidy reforms this year but the recent economic, political and social turmoil has made implementing the reforms difficult and lasting reform tentative.

According to the analysis, a subsidy phase-out would create a price signal that would give consumers the incentive to use energy more efficiently. Similarly, the absence of a price on greenhouse gas emissions (GhGs) acts as a fossil fuel subsidy because pricing GhGs would trigger a consumer switch from fossil fuels to low- and zero-emission fuels.

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Phasing out international fossil fuel subsidies between 2011 and 2020 would:

(1) Reduce primary global energy demand by 5.8% (the current energy consumption of Japan, Korea, Australia and New Zealand combined) by 2020.

(2) Reduce global oil demand by 6.5 million barrels per day (~one-third the U.S. total consumption) in 2020.

(3) Diminish world CO2 emissions 6.9% (the current emissions of France, Germany, Italy, Spain, and the UK combined) by 2020.

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Though not specifically cumulative, combining the fossil fuel subsidy phase-out with the implementation of the Copenhagen Accord would move the world toward the IEA goal of holding international CO2 levels at or below 450 parts per million. The Accord pledges the nations of the world to ~70% of the CO2 reductions needed by 2020. The phase-out would get ~30% of the cuts needed by 2020.

The IEA analysis calls for caution in phasing out subsidies to kerosene, LPG and electricity. Though easily targeted, these often support subsistence energy used to meet the basic needs of the world’s poor.

The strategy for phasing out fossil fuel subsidies among the world’s 2.5 billion people whose primary source of energy is traditional biomass and the 1.5 billion who have no access to electricity should be different, the analysis says, than the strategy applied in the developed world.

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Phasing out subsidies to kerosene, LPG and electricity in countries less than 95% electrified and/or in countries where less than 85% of the population have access to modern fuels would only reduce the $557 billion by 11%. Making such subsidies more cost-effective would be a wiser strategy.

Based on this analysis, the World Energy Outlook 2010, the IEA’s annual report (due this year on 9 November), will for the first time include a special energy subsidy focus. This analysis is part of a Joint Report from the IEA, OECD, World Bank and OPEC that will be presented at the June 25-27 G20 Leaders' Summit in Ontario.

The increasing availability of data on energy subsidies is an indication of momentum building for fossil fuel subsidy reform.

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QUOTES
- Joe Costello, subsidies and democracy, Archein: “The IEA has put out a study stating global fossil fuel subsidies amount to almost $600 billion a year. I guarantee that's vastly, vastly under counted, but it's an improvement over ten years ago…At that time, there was one study from the late 90s, from the IMF…that estimated fossil fuel subsidies around $200 billion…The renewable energy industry, who I was working with, was dead in the water. Their existence completely dependent on subsidies, and of course, it being the pinnacle of America's Friedmanite, Randian, Greenspanian, free marketeer era, the renewable industry spent most of it's time trying to convince they would eventually strive in the "free-market". Most subsidies for fossil fuels are so baked-in the system to be unrecognizable as such, to broach the topic of the existence of fossil fuel subsidies in established energy circles was to be considered absurd, and that folks is real power.”

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- Achim Steiner, United Nations Under-Secretary General and UNEP Executive Director, in the foreword to Untold Billions: Fossil-Fuel Subsidies…: “Governments around the world spend significant sums of public money—many billions of dollars each year— subsidizing the consumption and production of fossil fuels. These subsidies have several key impacts: they lock economies into longer-term reliance on fossil fuels; they exacerbate greenhouse gas emissions by, in part, supporting inefficient energy use; they contribute to other forms of environmental pollution and land degradation; and they reduce investments available for cleaner energies, healthcare and education…[S]uch support mechanisms for fossil fuels run contrary to the urgent need for a low-carbon, resource-efficient, twenty-first century Green Economy…Smart financial mechanisms, including short-term subsidies, can be advantageous if aimed at assisting a new and beneficial technology, process or market take-off. Fossil fuels do not fit this profile and are, indeed, far from it: they are part of a highly mature market whose impacts are now well known and should, in most circumstances, be able to compete without the public purse…”