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November 21, 2011

U.S. Energy Subsidies: Wind and Solar Have No Argument

November 21, 2011
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A recent report of the U.S. Energy Information Administration (EIA) has put the kaput to the argument that natural gas and coal receive more federal subsidies than politically correct energies (wind, solar, and not much else). In FY 2010, wind’s $5 billion swamped oil and gas’s $654 million. Even tiny solar out-received oil and gas by one third.

But when you look at the subsidies on an energy production basis, the disparity becomes stunning (or scandalous from a taxpayer viewpoint).  Wind’s 5.6 cents per kilowatthour is more than 85 times that of oil and gas combined. And solar … would you believe 13 times that of wind, making the disparity north of a thousand times?

But a second argument of renewable advocates has crept up: that government subsidies over many decades allowed the oil and gas industry to cement its perch atop the energy chain. The implication is that wind and solar may need the same long-lived subsidization to achieve commercial viability too.

Argument from History

This argument from history is errant as well.

The commercial oil industry dates to 1859, the year of the Drake well in Pennsylvania. The U.S.petroleum industry matured in the next decades and then shifted to the southwest with the discovery of the Spindletop gusher in Beaumont,Texas in 1901.

Meanwhile, a commercial petroleum industry developed abroad, a development that would lead to increasing oil imports to the U.S.and price “demoralization” for domestic producers by the late 1920s. From this period through the 1960s, the “problem” was too much oil, not too little.

Does this sound like an infant industry? Hardly! It was an industry that was ‘too good for itself’ in some ways, and certainly not one threatened by a cheaper energy source as, say, electricity was to manufactured (coal) gas in this era.

So when did government oil and gas subsidies begin in the U.S.?

Corporate taxation began in 1909, and the depletion tax writeoff began in 1913. The intangible drilling and development cost deduction began in 1917. So the classic subsidies cited by renewable apologists began a half-century after the industry was born. Direct government subsidies, such as checks written on the U.S. Treasury, were virtually nonexistent in the history of the petroleum industry.

Industry Penalization

The federal government has a long history of penalizing the industry, not only subsidizing it via the tax code. Price ceilings on oil production and the sale of petroleum products during World War II and again in the 1970s are cases in point. Also recall the Windfall Profit Tax of 1980, however short-lived.

On the natural gas side, comprehensive price controls on wellhead gas sold in interstate commerce lasted from the 1950s through the 1970s. Such controls caused predictable shortages for consumers, making not only producers but consumers victims of federal energy policy.

Moreover, the brunt of special tax favoritism was removed beginning in the 1970s. So an argument can be made that the U.S.government has reverse subsidized oil and gas in the last half-century.

Imagine if electricity from wind and solar were constrained by a federal price ceiling. Imagine is solar and wind companies were subject to an excess profits tax. Imagine if a wind-turbine exploding or a wind worker falling to his death led to a moratorium on new wind projects.

Or imagine if governments around the world suddenly announced a 50-year holiday on taxpayer favor to correspond to the sink-or-swim period of the oil industry.

Say goodbye to virtually all of industrial windpower. And the solar industry would shrink to its rightful off-grid self, where its niche applications would provide bridge energy until the place/area could graduate to (fossil-fuel) grid power.

Conclusion

Wind and solar are consumer-rejected forms of electrical power, pure and simple. They are not infant industries but perennially inferior ones. Government subsidies for any form of energy, and certainly the least economic (most dilute), is an easy budget cut for any democracy in deficit.

 

Source: Robert L. Bradley Jr., Oil, Gas & Government: The U.S. Experience (Roman & Littlefield, 1996): chapter 5 (wartime price controls); chapter 7 (oil and gas taxation); chapter 8 (natural gas price controls); chapter 9 (crude oil price controls).

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