Losing Money With Energy Subsidies

The U.S. economy continues to navigate murky waters in the wake of the recent debt ceiling standoff. In response, the partisan debate rages in a seemingly distracted attempt to find solutions to the crisis. The uncertainty about the validity of each party’s argument makes it difficult for citizens to participate. So while Washington's elite continue their political shenanigans, American citizens should be concerned with how their money is being spent. After all, it is their tax dollars that fuel the inefficient and, dare I say it, broken government machine.

With its provocative role in the financial quandary, the energy market provides a brilliant example of this quagmire. Energy subsidies granted by the federal government amount to $20 billion annually. Put into perspective, that’s larger than the State Department’s budget.

Who receives the money? The answer is somewhat dubious. Oil companies receive annual subsidies totaling more than $2 billion. Another $5-$6 billion is provided for the production of ethanol. Seems fair, right? After all, it is a renewable resource. However, the money does not go to farmers who produce the corn. Rather, it ends up in the pockets of the companies that blend the ethanol with conventional gasoline. In other words, oil companies. In the end, 70% of federal energy subsidies go toward fossil fuels: oil, natural gas, and coal. And let’s not forget about the $1-$2 billion in annual subsidies provided to promote research in nuclear technology and waste disposal. This is a time when much of the world is moving away from the use of nuclear power.

But if the government cut subsidies, then the price of energy (particularly oil) would skyrocket, right? Actually, the price probably would not change much at all. American domestic supply makes up less than 2% of the world’s proven petroleum reserves. The Treasury Department estimates that by cutting oil subsidies, domestic energy production would be reduced by less than one-half of 1% and would similarly effect domestic oil jobs.

In fact, in a 2005 meeting with the Senate, the head of ConocoPhillips indicated that his industry didn’t require such help to continue exploring for oil. Keep in mind that in 2005 oil was priced near $60 a barrel; a distant figure to the current figure which ranges from $85-$100 depending on the state of an inconsistent stock market.

Or consider that this year the Big Five – Exxon Mobil, BP, ConocoPhillips, Chevron, and Shell – reported profits of $35.1 billion in the second quarter alone. Are we still sure that oil companies need subsidies? Or can we call it what it is – a marriage of two powerful entities arranged for mutual benefit?

With the current federal debt now over $14.6 trillion and the 2011 deficit running at $1.6 trillion, a divorce is not only helpful, it is necessary. First, why shell out billions of dollars to an industry that has gone on record saying it doesn’t require subsidies in order to prosper? That money is better spent elsewhere. Second, it would raise tax revenue and would do so from a logical source – corporations worth billions and trillions of dollars. Finally, that money could be spent in more proactive, innovative ways. We have to create jobs. Rather than being the global leader in oil consumption, why not be the trailblazer in a new era of renewable energy – a task that will no doubt require new infrastructure and jobs.

Is this a silver bullet? No. However, one thing is certain: If the relationship between the federal government and big energy is not redefined we are going to continue to leak money we don’t have.

Photo Credit: Wikimedia Commons