Increasing Gas Prices Despite Subsidies

This post is part of a blogging series by economics students at the Presidio Graduate School's MBA program. You can follow along here. By John Heylin

If there’s one thing that will get environmentalists fired up, it’s the discussion over federal subsidies for the oil, nuclear and coal industries.  Renewable energy is forced to stand on its own two feet while less sustainable, unhealthy, and politically unstable energy sectors are being lavished with subsidies by Uncle Sam (pdf).  Halliburton and Exxon are reporting record level profits and yet still get billions in subsidies from the government and pay less taxes due to tax havens out of the country.  Clean energy technologies have often been accused of not being able to be implemented without subsidies; however, no energy sector has ever been developed without subsidies.

Without subsidies we would all be paying roughly $12.75 per gallon for gasoline.
The subject area of interest is how budget cuts might actually get rid of dirty fuel subsidies.  It's amazing how easy it becomes to discuss legalizing drugs, green energy, sustainability and the end of subsidies when a deficit comes to town.  One wonders if gas hit $10 a gallon how many of our problems we would be forced to solve.  Calvin’s Dad was right all along!

It’s fairly unclear just how much the government pays out in subsidies, but Doug Koplow of Earth Track has done his best to conduct solid analysis. The results, to say the least, are not surprising.

• The oil and gas industry currently receive $41 billion annually (adjusted for inflation).  This accounts for 52% of federal subsidies to the energy industry given out by our government.

• Coal receives $8 billion annually, this brings the fossil fuel subsidies to roughly two-thirds of all energy sector federal subsidies.

• Nuclear energy, although no new plants have been built in decades, account for $9 billion annually.  This goes towards currently running plants and waste management.  The simple fact is that nuclear power cannot succeed without subsidies.

• Ethanol gets $6 billion, that’s not even accounting for the waste of food and rising food prices.

• Renewable energy gets about $6 billion annually as well.  You can count on this number increasing in the coming years.

As oil prices have increased, the subsidies have been increasingly difficult to maintain. As a result prices have spiked, leading to civil unrest in many parts of the world which have led to even higher prices.  In order to get out of the vicious circle associated with fossil fuel dependence, more effort must be put into bringing clean energy technologies online.  Transitioning to renewable energy is a known solution to many of these issues, so why has it not been more aggressively pursued?

Big Oil  invests approximately 5 to 7% of its profits in clean energy, often in the form of marketing campaigns, and less so in the form of technical innovation.  When the percentage of profits diverted to alternative energy are compared to the percentage of subsidies received, the reality of a tax-payer supported marketing campaigns becomes painful.  Given the ever growing demand for energy, the clean energy sector has the potential to rapidly grow.  What is holding back the clean energy bubble from forming at a .com-like growth rate?

The current subsides for renewable energy and fossil fuels in 2008 were $46B and $557B respectively.  Michael Liebreich, chief executive of Bloomberg New Energy Finance, puts forth "One of the reasons the clean energy sector is starved of funding is because mainstream investors worry that renewable energy only works with direct government support.”  Furthermore, Liebreich states, "Setting aside the fact that in many cases clean energy competes on its own merits - for instance in the case of well-situated wind farms and Brazilian sugar-cane ethanol - this analysis shows that the global direct subsidy for fossil fuels is around ten times the subsidy for renewables. And that is without taking into account the enormous security and public health costs of fossil fuels, as well as the appalling pollution catastrophes on the Gulf Coast, the Niger Delta and elsewhere."

In the last month, the gas prices have increased on average $0.50 across the nation and in some specific fueling stations as much as a $1.00 in the same time period.  Now, it is a rare moment when former President George W. Bush can be referenced with respect to the need to reduce subsidies; but in 2005, Bush  noted that with higher oil prices Big Oil does NOT need tax breaks and incentives to explore and develop oil fields.  According to Daniel J. Weiss, above $55 dollars/barrel, tax breaks are not necessary to support exploration.  As you read this, oil prices are somewhere around $115/barrel.

Investors must stop waiting for the government to make its move and the general public must demand clean energy solutions.  An energy system must be developed that does not have a drastic increase in price every time there is a protest halfway around the globe.  Maybe then we'll never have to face the $8 for a gallon of gas that Calvin's dad predicted.