Federal energy subsidies and the battle between cronies
by Jon Sanders
Director of the Center for Food, Power, and Life, Research Editor | John Locke Foundation
The New York Times asks, "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.
The first part of the NYT's answer is correct insofar as it would make foreign oil and gas marginally more competitive. The second part is utter fantasy and wrong in many ways.
The question itself is far too narrow for a discussion of energy subsidies. It ignores the far, far greater subsidies for renewable energy, and it also ignore the massive regulatory burden placed on traditional energy sources — which are penalties or, in a different way of looking at it, negative subsidies.
Further discussion and graphs follow.
To begin, removing subsidies from the oil and gas industry would make foreign oil and gas marginally more competitive against it. In what was truly unthinkable just a decade ago, the U.S. is the world's top producer of oil now:
This has happened in the face of a direct price war from OPEC (attendees of JLF Shaftesbury luncheons may remember Daniel Fine's May 2015 presentation about it). This illustrates why Saudi billionaire Prince Prince Alwaleed bin Talal and Russian Federation President Vladimir Putin stridently oppose fracking … in the U.S.
Now, as The Telegraph (U.K.) writes, "Texas shale oil has fought Saudi Arabia to a standstill." The main takeaway from "OPEC's worst fear" is this:
North America's hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.
This cost-cutting sugests that removing subsidies would make foreign competitors marginally more competitive, but it won't be a game changer for them.
Meanwhile, a key reason OPEC thought they could put U.S. competitors out of business by flooding the market and underpricing them is that the regulatory costs in the U.S. are so high. It's the most regulated industry in America:
If there's a case to make for removing subsidies for oil and gas (there is), then there is also a case for removing policies that unfairly penalize that industry as well.
The even more heavily subsidized energy sources — solar and wind — wouldn't be in favor of that, of course. Here is how the federal government subsidizes different sources of energy production:
Could removal of subsidies for oil and gas really "move the United States toward a future free of fossil fuels"?
In a word, no.
Nature, economics, simple math, and physics are all insurmountable barriers to solar and wind being the main sources of electricity in the future. Even the hopeful idea that battery storage will some day solve the intermittency problem is rendered essentially impossible by economics and physics.
Ultimately the argument for removing subsidies from the oil and gas industry is every bit as compelling as the argument for removing subsidies from solar and wind energy. The government doesn't need to play favorites.
As I argued last year in opposition to the legislature giving state funding for oil exploration, right after they ended a generous subsidy for solar and wind energy,
It does the citizens little good to exchange one form of energy cronies for another.
Of course, the top priority for electricity policy in North Carolina — where consumers are given no choice in who provides them electricity — absolutely must be least-cost, reliable power for captive ratepayers.
That used to be North Carolina's standard, but that changed after the passage of its Renewable Energy Portfolio Standards (REPS) mandate.
Since then, North Carolina has been fast squandering its legacy of highly competitive electricity rates.
Here is why all that matters:
The environmentalists are also wrong about emissions, however — an error that comes from believing intermittent, unreliable, and enormously expensive renewable resources with no emissions will replace traditional sources. They won't. They can't. Even their research advocates know this.
It turns out that solar and wind are the most expensive ways to reduce emissions.
Meanwhile, the shift to natural gas in electricity generation over the last decade has produced actual reductions in emissions. Researchers at the National Oceanic and Atmospheric Administration (NOAA) found that the increased use of natural gas for electricity generation was responsible for the following reductions per unit of power produced from 1997 to 2012:
23% lower CO2 emissions
40% lower SO2 emissions
44% lower NOx emissions
The U.S. Energy Information Agency has shown that actual, falling carbon dioxide emissions over the last decade are mostly because of the change to natural gas in electricity generation:
This reduction in emissions is being done in a way that serves the top priority for electricity provision in North Carolina: least-cost, reliable power for captive consumers. Rates are down this year, and here's why:
As you can see, fuel price decreases, primarily natural gas, have produced overall rate savings for consumers despite rate-raising impacts from the REPS law.
Jon Sanders
Jon Sanders is director of the Center for Food, Power, and Life and also Research Editor at the John Locke Foundation. At the CFPL Jon focuses on the policy issues of agriculture, energy, and the environment. These are issues of critical importance to people, their families, and their businesses — food, power, and life — and as such, he knows it is vital to protect and expand freedom in these all-important areas.
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