Subsidizing Fossil Fuels

The nation went through a period of high gasoline prices, even though the government released oil from the reserves. Now it appears the US has a glut of oil and may (and always has) lack refinery capacity. Prices appear to have stabilized in many places at about $3.50 per gallon (I may be paying more than you.).

PS: I do not recall news of any new construction of oil refinery.

The question I would ask? What should the US be doing to get off the oil/gasoline habit?

I believe the advent of electric driven cars is still a ways out there. The batteries are huge and it appears we are wasting time building super-sized vehicles. Such is a waste of resource in my opinion. What else is new on the horizon. Popularity in traveling is governed by the size of the vehicle. In Illinois they used to license vehicles by the weight of them. Pickup trucks can get a car license but the police would watch for such plates if they are loaded. The penalty is steep or it was such. Maybe it is time to license all pickups and the family suburban is similar manner?

The government may wish to lead us in a different direction.

Your thoughts?

“Countries spend huge sums on fossil fuel subsidies – why they’re so hard to eliminate,” The Conversation, Bruce Huber

How are fossil fuels subsidized?

Fossil fuel subsidies take many forms around the world. For example:

• In Saudi Arabia, fuel prices are set by the government rather than the market; price ceilings subsidize the price citizens pay for gasoline. The cost to state-owned oil producers there is offset by oil exports, which dwarf domestic consumption.
• Indonesia also caps energy prices, then compensates state-owned energy companies for the losses they bear.
• In the United States, oil companies can take a tax deduction for a large portion of their drilling costs.

Other subsidies are less direct, such as when governments underprice permits to mine or drill for fossil fuels or fail to collect all the taxes owed by fossil fuel producers.

Estimates of the total value of global fossil fuel subsidies vary considerably depending on whether analysts use a broad or narrow definition. The Organization for Economic Cooperation and Development, or OECD, calculated the annual total to be about US$1.5 trillion in 2022. Tche International Monetary Fund reported a number over four times higher, about $7 trillion.

Why do estimates of fossil fuel subsidies vary so dramatically?

Analysts disagree about whether subsidy tabulations should include environmental damage from the extraction and use of fossil fuels that is not incorporated into the fuel’s price. The IMF treats the costs of global warming, local air pollution and even traffic congestion and road damage as implicit subsidies because fossil fuel companies don’t pay to remedy these problems. The OECD omits these implicit benefits.

But whichever definition is applied, the combined effect of national policies on fossil fuel prices paid by consumers is dramatic.

Oil, for example, is traded on a global market, but the price per gallon of petrol varies enormously around the world, from about 10 cents in Iran, Libya and Venezuela – where it is heavily subsidized – to over $7 in Hong Kong, the Netherlands and much of Scandinavia, where fuel taxes counteract subsidies.

What is the world doing about fossil fuel subsidies?

Global leaders acknowledge subsidies for fossil fuels undermine efforts to address climate change because they make fossil fuels cheaper than they would be otherwise.

In 2009, the heads of the G20 (which includes many of the world’s largest economies) issued a statement resolving to “rationalize and phase out over the medium-term inefficient fossil fuel subsidies encouraging wasteful consumption.” Later that same year, the governments of the Asia-Pacific Economic Cooperation forum, or APEC, made an identical pledge.

In 2010, 10 other countries, including the Netherlands and New Zealand, formed the Friends of Fossil Fuel Subsidy Reform group to “build political consensus on the importance of fossil fuel subsidy reform.”

Yet these commitments have scarcely moved the needle. A major study of 157 countries between 2003 and 2015 found that governments “collectively made little or no progress” toward reducing subsidies. In fact, the OECD found that total global subsidies nearly doubled in both 2021 and 2022.

Why are fossil fuel subsidies hard to eliminate?

There are various reasons fossil fuel subsidies are hard to eliminate. Many subsidies directly affect the costs that fossil fuel producers face, so reducing subsidies tends to increase prices for consumers. Because fossil fuels touch nearly every economic sector, rising fuel costs elevate prices for countless goods and services.

Subsidy reform tends to be broadly felt and pervasively inflationary. And unless carefully designed, subsidy reductions can be regressive, forcing low-income residents to spend a larger percentage of their income on energy.

So, even in countries where there is widespread support for robust climate policies, reducing subsidies  can be deeply unpopular and may even cause public unrest.

The 2021-22 spike in fossil fuel subsidies is illustrative. After Russia’s invasion of Ukraine, energy prices surged throughout Europe. Governments were quick to provide aid for their citizens, resulting in their largest fossil fuel subsidies ever. Forced to choose between climate goals and affordable energy, Europe overwhelmingly chose the latter.

Of course, economists note that increasing the price of fossil fuels can lower demand, reducing emissions that are driving climate change and harming the environment and human health. Seen in that light, price spikes present an opportunity for reform. As the IMF noted, when prices recede after a surge, it “provide[s] an opportune time to lock in pricing of carbon and local air pollution emissions without necessarily raising energy prices above recently experienced levels.”