Oil and Gas Subsidies

Brad Plummer yesterday:

Last year, the G-20 nations all pledged to start phasing out fossil-fuel subsidies as a step toward reducing greenhouse-gas emissions. The White House is proposing to redirect some of that money toward cleaner energy sources: The budget also has $5 billion in new loan guarantees for renewable projects and $36 billion in new loan guarantees for nuclear reactors. Though, granted, the president can propose whatever he wants; what really matters is whether lawmakers follow through. And the tax breaks for oil and gas producers have a lot of support in Congress—last year, in the FY2010 budget, the White House wanted to repeal $31.5 billion worth of fossil-fuel subsidies, and that idea was buried.

Meanwhile, it’s worth asking what effect this would actually have on oil and gas production. The petroleum industry responded to the news this morning by predicting doom. But for another view, economist Alan Krueger went before Congress last September and estimated that junking the tax breaks would only decrease domestic production of oil and gas by less than 0.5 percent. Natural gas prices would, in the absolute worst case, nose up by about 1 percent, while world oil prices would hardly budge at all (that’s because U.S. oil production is relatively small in the global scheme of things). Of course, that also means that, by itself, repealing the subsidies won’t have a huge environmental impact, either.

It’s worth noting:
1) Oil we leave in the ground doesn’t go anywhere and most economists believe it doesn’t lose value at all if you slow the rate of exploitation and
2) The environmental impact would be determined by the rate and type of cleaner energy that replaces fossil fuels, not the decline of production.

-Chris

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