Addressing Oil Company Subsidies

Addressing Oil Company Subsidies

Ed. note: This piece was first published on Robert Rapier”s R-Squared Energy Blog.

Following my recent essay on the elimination of the VEETC, the major ethanol subsidy in the U.S., some ethanol supporters argued for continuing the subsidies because oil companies receive subsidies. There are many versions of the oil subsidy argument – some of them grossly in error – but I won’t argue about what is and is not an oil subsidy.

I do believe that gasoline at the pump is subsidized in various ways. But these subsidies aren’t as simple as a credit based on the number of gallons of gasoline sold – as is the case with the ethanol subsidy. If they were, they would be much easier to eliminate.

My solution to addressing these hidden subsidies would be to artificially increase the cost of gasoline such that consumers are paying something more like fully realized costs. I have made the argument before that if we were to implement a revenue neutral scheme like lowering income taxes or offering tax credits while offsetting those with higher gas taxes, the cost of oil subsidies could be recouped at the pump, proportionately from people who drive the most. This would also improve the economic viability for biofuels because they would be competing against higher fossil fuel prices.

However, many of the so-called oil company subsidies are also subsidies that the ethanol industry receives. For instance, Section 199 of the IRS code is a deduction for domestic production activities. This has often been used as an example of an oil company subsidy, yet the ethanol industry receives the same tax deduction. So in cases like this, the “subsidy” has no impact on the competitiveness of one industry against the other.

But to the extent that oil companies are subsidized, the answer to that is to eliminate those subsidies, not to throw subsidies at the ethanol industry. The important thing to keep in mind is that the oil companies – subsidized or not – are still under mandate to blend ever-increasing volumes of ethanol into their product. Adding in a subsidy on top of these mandated volumes is redundant, irrespective of how much the oil industry is subsidized.

As far as subsidies themselves, I am neither for or against them. It depends. The question I would ask is what are the consequences with and without the subsidies. If an oil company subsidy merely preferentially increases the profitability of an oil company relative to other industries (i.e., a special subsidy that other industries don’t receive), or subsidizes consumption by making gasoline cheaper, I would be against it. If it increased domestic production and backed out imports, then the overall costs to society have to be taken into account in order to judge whether it is a good taxpayer investment.

This is why I oppose the continuation of the VEETC, as explained in the aforementioned post. Whether the VEETC is there or not, oil companies are still under mandate to blend an ever-increasing amount of ethanol. So the consequences of allowing it to expire aren’t going to be great relative to the $6 billion per year cost of continuing it. If the debate was on continuing the VEETC in some form for only blending above the mandated level, or on some modified version applying to only E85, then that’s a different discussion entirely.

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