Debating the need for petroleum subsidies

Scott Tong Sep 22, 2010

Debating the need for petroleum subsidies

Scott Tong Sep 22, 2010


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.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.