Debating the need for petroleum subsidies

Oil rigs in Culver City, Calif.


Kai Ryssdal: Even though Senate Democrats decided a couple of months ago they don't have the votes to pass a comprehensive energy bill this year, Energy Committee Chairman Jeff Bingaman is still fighting the good fight. He introduced a bill yesterday that would force energy companies to generate a certain minimum percentage of green power.

Where it gets sticky is in this evaluation of the bill's chances from one energy analyst, and this is a quote: "We give near zero odds," they said, "for passage of this bill in 2010."

So for now, at least, official government policy on energy is the same it's been for decades. We are a fossil fuel economy and that's what we're going to support, with tax breaks and subsidies that have been in place for a long, long time.

From the Marketplace Sustainability Desk, Scott Tong has more.

Scott Tong: The world's petroleum economy goes back more than a century. So do the petroleum subsidies.

That's the sound of light, sweet crude, pumped from the oldest operating oil well in the world. No, this is not Saudi Arabia. It's Titusville, Penn., north of Pittsburgh. Here, in 1859, a train conductor named Edwin Drake drilled a big hole, in search of oil -- a potentially new, cheap source of fuel for lamps.

Dan Weaver: At that point in time, people kind of thought he was a little nuts.

Local historian Dan Weaver.

Weaver: Their well came in on Aug. 27, 1859, at a depth of about 69 and a half feet. It was from that moment that the industry was truly born.

The song "American Petroleum Polka" played as drillers rushed in, and rig workers, and barrel makers. First the oil was refined into kerosene, and a generation later, into gasoline when the internal combustion engine and automobile hit the scene.

But drilling was costly. So to help the fledgling energy sector, state governments gave companies a generous tax break for buying supplies and building access roads. Without the deduction, the industry may not have taken off, says consultant Kevin Book at Clear View Energy Partners.

Kevin Book: It was really about the economics of doing it at all. It was whether or not the business existed.

The state deduction became a federal one in 1913 -- the same year the federal income tax was ratified. And the write-off has aged well. It's beat back several challenges. And today, federal fossil fuel subsidies in all run about $10 billion a year, more than double those for renewable energy.

And Tufts University economist Gilbert Metcalf says it's time to end them.

Gilbert Metcalf: A hundred years later, I think that it's time for these industries to leave the nest and stand on their own two feet. Congress never has the right exit strategy to figure out how to phase things out.

Subsidy backers say it's the worst time for a phase-out -- because another hydrocarbon boom is afoot.

Once again, in western Pennsylvania: This drill rig is going a mile down for vast quantities of natural gas encased in rock. Energy companies consider this a game-changer.

Pittsburgh native Jeff Ventura is the CEO of drilling company Range Resources.

Jeff Ventura: The biggest discovery I've ever associated with is right back in my hometown, and almost literally right beneath the house that my mom still lives in today.

To drill here, in what's called the Marcellus Shale, Range builds new roads to accommodate its heavy trucks. The costs are all deductible, helping the company cut its federal tax bill to almost zero, according to BusinessWeek. In other words, Range takes more than a third of its income and plows it into gas production instead of paying Uncle Sam.

Ventura: And with that we've discovered fields like the Marcellus, that could be 500 trillion cubic feet of gas. Second largest gas field in the world.

An oil industry study says a firm like this would still eke out a profit without key subsidies. But at this diner in hard-hit western Pennsylvania, the point is jobs -- the gas boom is creating an estimated 100,000 of them.

Gravel supplier Barry Fink helps drilling firms pave access roads.

Barry Fink: We need investment here to keep the jobs here. And the only way you're gonna encourage -- whether it's a small business, an entrepreneur, or a larger company -- to do that, is through certain select tax breaks.

At the same time, non-partisan experts say the tax breaks are speeding up the depletion of energy resources, and are propping up smaller companies that otherwise would not be in business.

Again, Tufts economist Gilbert Metcalf.

Metcalf: Does the tax credit lead to more drilling than we'd see otherwise? I think the answer is, yes it does.

This fall, many federal lawmakers want to cancel historic drilling subsidies in favor of tax breaks for renewable energy. If that happens, the question is, will it take another century to ask if those tax breaks have outlived their usefulness?

In western Pennsylvania, I'm Scott Tong for Marketplace.

About the author

Scott Tong is a correspondent for Marketplace’s sustainability desk, with a focus on energy, environment, resources, climate, supply chain and the global economy.
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Sort the subsidies out from the normal tax breaks that other businesses not in the oil and gas industries get, and end 'em. These industries are well past the time where they should be able to stand on their own two feet without Uncle Sam holding their hand.

Funny how multinational corporations turn all socialist when the subject turns to why they need taxpayers to fund their profits.

Get rid of tax breaks and "investments" given to the oil, gas, and coal companies.

Thank you, This is very clear statement of the rationales for any "subsidies" for energy development, production, and transmission. Subsidies or government incentives for a lot of things exist - for example, home ownership (percieved to be a socially desireable state of affairs that affects a really large proportion of the population). Subsidies of any sort for the various energy production and distribution industries were originally justified in terms of social desireability - going forward (oil energy was good, the whales were dying off, the trees were all cut down, what to do?). All those extroardinary subsidies are well past their due date: the whales are dead, the trees are making a comeback, the extractive industries are certainly mature, with very stable, mature and growing markets. It is time to stop letting the extractive industries from holding the sword of: "we will go out of business, and then what will you do?" over our heads. It really is time to let the market rule with its invisible hand. The oil and gas and coal will be found, produced, and gotten to market one way or another. The lights will stay on, the trucks will roll, homes will be warm in winter and cool in summer - until and unless the stuff just runs out - that is an area where subsidies make some sense, for the transition that many of us think is coming. The energy industry's old and tired arguments are getting boring. They are entirely self-serving in the best/worst bottom-line tradition. Get over it and get a modern business plan. That's what the recent global shale gas conference in Washington, D.C. was about. American technology for extracting shale gas is now mature and the conference's real goal was to "sell shovels to miners." Meaning that Halliburton, Schlumberger, B.J. Services, and other companies have a pretty tight lock on the technology that other countries need to get the fairly vast amounts of shale gas available worldwide. I am quite sure that they want to sell this technology while it is still fairly fresh. In the various American gold rushes, the money was made, we are told, by selling shovels and not much by extracting gold. The extractors - the drillers and diggers dont need any subsidies in this country and the creative parts of those industries have their new business plan: sell the technology, much of which has been developed with various subsidies - and here we go again, but at least it is a fresher plan. Stanley Scobie, Binghamton, NY

When people talk about $10 billion in subsidies they forget that we spend hundreds of billions a year on military support of oil. Troops in other countries helping guard oil pipelines, bases and wars in the Middle East, aircraft carrier battle groups patrolling Middle East oil shipping routes. Without these terrorists and hostile nations would disrupt the flow of oil to the West. Even though we get most of our imported oil from Canada, Central and South America, we spend all that tax money to keep Middle East oil flowing. Why? To prevent the world price of oil from going higher, which would make alternatives to be market viable.

Thanks for doing this story that featured my home town, Titusville, PA. Your reporter got some facts a bit garbled, however.

It is true that the world's first oil well was drilled in 1859 by Edwin L. Drake near Titusville. However, that well stopped producing many years ago. The oldest PRODUCING oil well was drilled a couple years later and a few miles south, near Oil City. It is the McClintock No.1 well. You can find out the details here: http://everything2.com/title/McClintock+No.1

As for the question about oil and gas drilling tax incentives, I am for ending them. They are no longer necessary to encourage what has become one of the largest and most lucrative industries on earth. Instead, we need to encourage more sustainable and eco-friendly energy development, such as wind and solar power.

Your reporting on this was awful and makes me wonder about your other reporting. You don't even describe what the subsidies are. If the subsidies you refer to are intangible cost deduction then the use of the word subsidy is absolutely misleading.

Building the roads sounds like an ordinary business expense to me. Ordinary business expenses generally are deductible. In all industries, not just fossil fuels.

Why does Accounting 101 magically turn into a "subsidy" just because it is in an industry Kai dislikes?

A tax break isn't necessarily a subsidy.

I'd be agreeable to ending these subsidies on one condition: that all the other energy subsidies end as well. The oil industry is a successful industry, which is vanishingly rare among subsidized industries. Subsidies for ethanol, solar and wind energy, and the like are demonstrably "propping up ... companies that otherwise would not be in business" and have by any rational metric far outlived their usefulness.

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