What If Oil Producers Actually Received Subsidies Like Wind Energy Producers?

Posted on Sat 05/14/2011 by

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By David Kreutzer, Ph.D.

With the current debate over ending oil producers’ subsidies the question arises as to what subsidies do the producers actually get.  It is a surprisingly complicated question.  Wind producers also get subsidies that take complex forms—investment tax credits, production tax credits, mandates, property tax exemptions, etc.  But the major federal subsidy for wind producers is the option to take a 30 percent investment tax credit or to receive a 2.2 cents per kilowatt-hour production tax credit.

“2.2 cents” doesn’t seem like much, but, depending on the time of year, it falls somewhere between 25 percent and 100 percent of the wholesale price of electricity.  Forty percent if frequently used as the average.

So, what would an oil-production subsidy look like if it were the same magnitude?

Deepwater drilling rigs can cost over $400,000 per day.  With other costs, a rough per-well figure would be $100,000,000 per well.  If an oil company could get the same 30 percent investment tax credit as wind producers, the government would write the company a $30,000,000 check for each well completed.  For the lower cost, shallow-water wells, the government would write a check closer to $3,000,000 for every well drilled.

If on the other hand, the oil company opted for a production tax credit (and it was set at 40 percent of the 2010 average price of about $75 per barrel) then the government would write the oil company a check for $30 for each barrel produced (onshore as well as offshore).

If a subsidy like that was the deal oil companies had, then cut away.  But the $4 billion per year that oil’s detractors keep repeating works out to $0.60 per barrel, and upon closer examination they do not even qualify as oil-industry subsidies.

Heritage’s Nick Loris and Curtis Dubay have sorted it all out. Of course, there are subsidies for the oil and gas industry, but they come from the Department of Energy, not from unfair tax benefits, and they work out to about a nickel per barrel.  So, leave it to Washington to misidentify and exaggerate the problem.  It’s as though they are firing a shotgun at the chandelier when the problem is a gnat in the salad dressing.

David Kreutzer, Ph.D. writes articles for The Heritage Foundation and is the Senior Policy Analyst in Energy Economics and Climate Change, Center for Data Analysis.

Read more informative articles at Heritage – The Foundry . http://blog.heritage.org/

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