Oil Subsidies and the Real Cost of Gasoline
House Speaker John Boehner made news this week by doing something simple enough: departing from his standard talking points on energy. He told told ABC news that big oil companies don't need certain tax breaks and said three times that “we ought to take a look at” repealing some oil subsidies.
Those were attention-getting words from one of several Republicans who were on the receiving end of BP's first campaign donations since last year's oil spill. Democrats wasted no time pouncing on Boehner, in their bid to repeal roughly $4 billion in tax breaks, with President Obama himself taking the lead. Boehner's staff is walking back the comments, painting them as the speaker's way of avoiding the appearance of defending big oil companies.
Then, on Thursday, House Budget Chairman Paul Ryan dropped a bombshell at a town hall in his home state of Wisconsin, saying that repealing oil subsidies is part of Republicans' overall strategy for ending corporate welfare. Now, with lawmakers set to vote in the coming weeks on plans to boost domestic drilling, amendments seeking to repeal the subsidies will no doubt come up again.
The renewed debate comes against a backdrop of rising oil prices and profits that has most American consumers furious. Exxon is reporting its biggest profits since 2008, the last time oil and gasoline prices spiked. Shell and other companies are reporting increases as well. BP, which is being held responsible for last year's oil spill, is also announcing its earnings are up from the first quarter last year, as it seeks to resume drilling in the Gulf of Mexico.
As is often the case in politics, the key players place blame before deciding on a solution. Republicans are quick to point the finger at the president and his energy policies. Boehner did his best to do that in the ABC interview, saying Obama “isn't doing anything to help” – by his definition of increasing domestic oil production. He even produced a chart showing rising gasoline prices throughout Obama's presidency. But other energy experts aren't convinced. The amount of oil that could be produced domestically, they say, is not enough to influence the price on the world market. That's because the price is determined by world demand, not just that of the U.S., and other countries are driving that. Chinese oil and gasoline demand is soaring by 15 percent this year -- despite efforts by the Chinese government to control it. Demand in the United States, by comparison, is projected to grow by just 1 percent this year.
New figures from the Energy Information Administration show oil production in the U.S. actually has increased in the past two years – despite the drilling moratorium that followed the oil spill, and the concern that White House policies are hampering domestic energy. Most of that oil is coming from onshore resources, not offshore. So why hasn't this increased production driven down prices? Because in our free-market economy, there's no way to guarantee that gasoline made from domestic oil will be sold to U.S. drivers. Much of it is, but many refined products – including gasoline -- are, in fact, shipped overseas.
Democrats, on the other hand, blame market speculation for the increase in prices. The president has formed a working group to investigate the role of speculation in oil prices and "root out any cases of fraud or manipulation" in oil markets. Attorney General Eric Holder has said he sees some “disturbing details” early in the investigation.
So what about the subsidies? Repealing them would certainly be a way to vent the anger, to seemingly punish the companies for taking advantage of the situation. But who would benefit, really? Sad to say, it would not be us unfortunate consumers, at least short term. Even White House spokesman Jay Carney concedes that the strategy won't result in lower oil or gas prices. Dan Weiss of the liberal Center for American Progress, meanwhile, argues that investing half the money recouped from the oil tax breaks in transit improvements would ultimately lower demand for gasoline, and therefore prices. The American Petroleum Institute, on the other hand, argues that cutting into oil profits by getting rid of these subsidies would hurt Americans in the long run, by eliminating a source of revenue for many pension funds. While it's true that many of us benefit in one way or another from the profits oil companies make, would they opt for lower prices and just have us keep that money for ourselves, to invest as we please? That's what proponents of lower taxes argue.
But perhaps we're looking at these tax breaks the wrong way. Even with some average prices now topping $4 a gallon, there is a good argument to be made that they are still keeping prices artificially low. The International Center for Technology Assessment released a study in 1998 called “The Real Price of Gasoline.” The information was updated by the Earth Policy Institute in 2007. Researchers factored in the tax subsidies that oil companies receive, as well as other costs associated with producing gasoline and driving, such as military protection of oil shipments, pollution (air, water and noise), highway maintenance and a host of others. The totals from these reports need to be adjusted for today's prices, but they conclude that the “real” price of a gallon of gas is up to five times what we pay at the pump. This is evident in what consumers in other countries are paying for their gasoline, but perhaps many Americans are unaware of this or take it for granted.
The 1998 report summed it up well, and the words are still true today: “If we do not start paying the real costs created by our reliance on cheap gasoline, future generations will surely suffer as a result of our selfish and shortsighted policies. Instead of wasting billions of dollars annually, preserving and subsidizing an unsustainable transportation status quo, we should begin making the transition to efficient alternatives.” If making gasoline more expensive and inconvenient can provide both the incentive and additional funding for doing so, then we “oughta take a look” at that, too. But I don't see too many elected officials lining up to really make that reality.
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