Story by Michael Lynch of Forbes
Critics of subsidies for renewable energy are usually met with the retort that the oil industry gets trillions subsidies, as in this article, which claims that these subsidies amount to $5.3 trillion a year. That estimate is based on three major mistakes: it’s the entire energy industry, not oil; the estimate includes externalities, which are not subsidies; and most of the amount tends to benefit consumers, not the industry. Here, I will provide some more accurate numbers.
As my last post noted, a quick Internet search produces a wide range of global energy subsidies, in part because of differences in coverage, both regional and by fuel, as well as inclusion (or not) of externalities, which can be enormous but constitute a very different animal from “pre-tax subsidies” which represent actual money spent.One report described credible estimates for U.S. subsidies as being $10-52 billion annually, and gave their own number as $37 billion, of which $21 billion was for exploration and production (for the whole fossil fuel industry). Writers for Mother Jones put the figure at $4.7 billion annually for the oil industry, with a detailed breakdown which is fairly reasonable. (Not that I would give much credence to their speculation that JFK was killed because he wanted to end the depletion allowance.)
Recognizing that the data on prices, taxes, and subsidies globally is seriously lacking, there are nonetheless estimates by more-or-less reputable organizations like theIMF and IEA. The usual caveats apply: nobody’s perfect, the work is often academic in nature, with estimates as well as data, and the apparent precision in some numbers hides a degree of uncertainty.
That said, the data is good enough for policy analysis. For one thing, generally speaking, the worse the data, the smaller the numbers. There is little info on how much farmers in Africa get, but the amount used is dwarfed by that going to city-dwellers in Egypt or India. The biggest subsidies consist of below-market prices for electricity and petroleum products in large countries, and these are known with a reasonable degree of accuracy.
So, actual subsidies: the IMF estimates that in 2013 (when oil prices were high), global energy subsidies (pre-tax) were $541 billion of which over half was for petroleum and the rest split between natural gas and electricity. Coal subsidies are trivial, a minor spot of rationality (accidental, one presumes). They should have dropped by nearly half in 2015, almost entirely due to lower oil prices. Still, that amounts to $135 billion for oil.
The IEA has a different take, focused on developing nations, which it estimates subsidized petroleum product consumption by $295 billion in 2013, about $28 billion higher than the IMF estimate. And that involves only the primary energy consumers in the developing world, forty in total. One-third of that is to be found in Saudi Arabia and Iran alone, although the latter has undertaken reforms to reduce the budgetary burden. Other oil exporters, notably Malaysia and Mexico, and countries like China, India and Indonesia spend moderate amounts, but relative to their economies and population, the size is much less important. Egypt is probably the worst case, spending 11% of GDP in 2013 on subsidies, of which two-thirds was for oil, an amount they can ill afford.
These numbers stand in contrast to the constant refrain about “oil industry” welfare, since the money goes primarily to consumers as a form of entitlements. The companies at best receive market prices for their goods, which are then transferred at below market prices. Most of the money (in the OPEC nations) is simply lower payments to national oil companies for their products. It encourages the consumption of oil, of course, but profits the industry little or not at all.
Now to the United States. The DOE reports data (FY 2013) for a variety of government support, including R&D funds, which make up more than 10% of the total ($3.4 billion out of $29), an amount that I consider inadequate. Over half of the total goes to renewables, of which $1.8 billion is for biofuels (read ethanol), largely a waste IMHO. Renewable electricity gets $13 billion, compared to $3.4 billion for fossil fuels and $1.7 billion for nuclear.
But to paraphrase Yogi Berra, if you have a numerator and a denominator, divide ‘em. The absolute amounts of subsidies are less interesting than the relative amounts, which show what we get for our money. In the table below, calculated from DOE data for 2013, I have used the simple level of subsidies and production by source, which is not completely accurate since it doesn’t deal with capacity. But the differences are so enormous as to overwhelm any methodological questions.
For those with weak math skills, the table is recalculated below to show the relative subsidies compared to those for oil and natural gas (set equal to 1). This will be no surprise to many analysts, but it will no doubt shock renewable power advocates to realize the magnitudes involved, including the fact that wind is a much better buy than solar. The reason is that most solar subsidies go to residential installations, while wind is usually industrial scale and thus more efficient. But efficiency has never been very relevant to the renewable power sector. (The much lower figure for total renewable electricity subsidies reflects the impact of hydroelectric power, which receives almost no support but is a major source of energy.)
So, yes, petroleum is subsidized, primarily in OPEC countries and mostly to the benefit of consumers. Complaints that the renewables industry gets inadequate support in the U.S. are untrue, and rationalization for that support because of the minor subsidies for oil and gas (in the U.S.) are at best disingenuous. Most of the money spent on solar, especially, is wasted and should be a target for rational energy policy planners. Move the money to R&D and maybe we’ll get solar power cheap enough that it doesn’t require subsidies at all.