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Euan Mearns

Euan Mearns

"Euan Mearns is a geologist and geochemist. In recent years he was a principal at The Oil Drum, the worlds leading energy blog, until it…

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The Appalling Truth About Energy Subsidies

The Appalling Truth About Energy Subsidies

There’s nothing makes my blood boil more than to read reports about the international level of subsidies of the fossil fuel industries like this one in Bloomberg.

Fossil fuels are reaping $550 billion a year in subsidies and holding back investment in cleaner forms of energy, the International Energy Agency said.

Oil, coal and gas received more than four times the $120 billion paid out in incentives for renewables including wind, solar and biofuels, the Paris-based institution said today in its annual World Energy Outlook.

It makes you think that BP, ExxonMobil and Shell are receiving vast state handouts, doesn’t it? I’ve done a bit of sleuthing and it seems that nothing could be further from the truth. The map below from the IEA shows countries where the state pays energy subsides to its citizens, many who will be poor!

Subsidies Map

The dark red on the map are the countries paying the highest FF consumption subsidies and is of course more or less a map of OPEC. The grey are countries paying no energy consumption subsidies and covers the OECD + darkest Africa. I have not been able to get my hands on a copy of the IEA World Energy Outlook (yet) but this 2011 presentation on the IEA energy subsidies web page makes clear what the IEA are talking about when it comes to FF subsidies. They are subsidies paid to consumers to help them afford to pay for gasoline, diesel, electricity and natural gas that amounted to about $409 billion in 2010, $550 billion today. This has proven to be a problem for Egypt that is not nearly as energy rich as its North African neighbours. It is one thing providing indigenous energy at discounted rates (relative to international market prices) to the indigenous populations. It is a totally different matter subsidising energy (and food) imports. Related: Big Oil And Renewables: Not So Strange Bedfellows

So, when it comes to fossil fuels, the Bloomberg article and the IEA are talking about consumer subsidies, paid by the State. In the case of OPEC, the main source of income that the State has is oil. So this is State oil companies subsidising consumers.

There is another flavour of alleged fossil fuel subsidies out there linked to oil companies charging exploration costs against tax. The oil companies pay a lot of tax, in the UK at a much higher rate than other companies, and rightly so. It is basic accounting practice in the OECD that companies deduct costs from income to define a profit and it is the profit that is taxed. Greens seem to want a different set of rules for the FF companies, presumably to try and drive them out of business.

This via email from Nate Hagens:

The report by Oil Change International is a complete distortion of facts. The authors have described as “subsidies” normal deductions of expenses and capital costs from revenues for calculation of taxable income. These are procedures which are followed in all fiscal systems in all countries for all forms of business and investment endeavors. Under normal definitions of “subsidy” the United States has no subsidies for the oil and gas industry which is why Obama has taken no steps to reduce them.

US subsidies for the oil and gas industry ranks with alligators in the sewers as a popular urban myth. To believe this reveals no knowledge of accounting and government tax rules or the authors are intentionally distorting reality for purposes of deceptive propaganda. Such persons or organizations and their opinions cannot be taken seriously.

Dr. Charles A. Kohlhaas

I could not find a definition for renewable energy subsidies on the IEA web site but assume that these are mainly the consumer paid subsidies that go into the pockets of wealthy land owners in the UK or into community energy projects in Denmark. In the USA, these subsidies end up in the pocket of Warren Buffet:

“I will do anything that is basically covered by the law to reduce Berkshire’s tax rate,” Buffet told an audience in Omaha, Nebraska recently. “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”

The renewables subsidies are paid to producers by the consumers and are the exact opposite of the consumer subsidies described above. These are apples and oranges and it is appalling that Bloomberg and the IEA (?) do not understand the deception of conflating the two.

Related: Oil Market Complexity Means Prices Make The Story

I want to conclude by reflecting on the levels of these alleged subsidies compared with the energy that is produced. The consumption figures below (million tonnes oil equivalent – Mtoe) are for 2013 taken from the 2014 BP Statistical Review:

Oil 4185
Gas 3020
Coal 3827
FF total 11032
New renewables 279
FF consumption subsidy = $550 billion
Renewables production subsidy = $120 billion


Doing the sums:
FF $51 consumption subsidy per toe

New renewables $430 production subsidy per toe
@ $80 / barrel 1 toe is priced at $586

We are comparing apples with oranges but normalising for energy production, the renewables subsidies are 8.4 times larger and amount to 94% of the value of the energy produced. This latter statistic is hard to believe, but if it is close to true, it suggests that new renewables are contributing virtually nothing to society.

By Euan Mearns

Source – www.euanmearns.com  

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  • rusti on November 19 2014 said:
    Of course you conveniently ignore the massive ongoing costs both in terms of dollars and human suffering that result from wars of empire in obtaining oil and geopolitical power and alliances being based on oil considerations. As well as the inherent subsidies for corporations that do massive environmental damage and are never truly held to account.

    But your salary is dependent on shilling for those same interests that benefit most, so we can write all that stuff off and focus on how much Venezuelans pay at the pump.
  • AugustusGloopius on November 19 2014 said:
    rusti, the cost I pay to gas up my car is what I pay for the ability to make it move and serve me. The ongoing damage done by the fossil fuel system is an externality that doesn't NEED to be factored in to the price. Like I said, I pay for its utility, not what it does to the environment. If you want to factor in externalities, then the cost for renewable technologies should include the environmental damage done while mining for the various metals that make renewable power generation possible. But if you do that, you increase the price of renewable power and that wouldn't bode well for its future, now would it? People imply fossil fuel use is "forgetting" other costs, but so is most any industrial endeavor, including green technologies. Besides, most oil subsidies, like in the article, are for end users, who would otherwise not be able to afford much more expensive green energy, and that would be inhumane.
    I agree that fossil fuels are wrecking the environment and something has to be done, but don't conflate externality costs with market-set price/dollar costs. The former is a very complex normative value, while the latter is actual/demand driven. If you want to factor in externalities, then the newly recalculated costs have to apply to every human pursuit (which is not a bad idea per se, but it lies in a very normative realm subject to tons of interpretation).
    As a curious aside, I wonder what happens to the petrodollar system should the globe switch to something other than fossil fuels? Would it lead to a more multipolar world and maybe more instability ('wars of empire') or would it make for a more peaceful world?


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