Fossil Fuel Subsidies – Shifting the Blame?

“Fossil Fuel Subsidies Must End!” say Green Groups


fossil fuel subsidiesWith the massive social action by environmental groups this week aiming to make ending fossil fuel subsidies the top priority at Rio+20, it’s time to look at exactly what that entails.

It’s relatively easy to gain large public support for removing apparent hand-outs to large companies which make huge profits.

But are those subsidies the real problem?

Or are we just trying to shift the blame?

First, let’s look at exactly what we’re talking about when we say we want fossil fuel subsidies removed.  (It’s not as simple as it first looks).

Then we’ll examine the possible effects of removing subsidies (could this fall into the category of “be careful what you wish for”?).

Finally, we’ll examine other beneficiaries of fossil fuel subsidies, and find a (possibly surprising) recipient.

Do they get hand-outs?

Many people think of subsidies as another word for hand-outs.  And because oil companies tend to be massively successful in terms of profit generation, it seems on the surface to be a little unfair that large profit-makers should get hand-outs.

$135 billion – the combined 2011 profits of the five largest international oil companies

It’s easy to make an emotive argument for saying they don’t deserve hand-outs.

But it’s not quite as simple as Bill McKibben suggested in the Huffington Post when he called oil subsidies “freebie cash”.  The subsidy question is more complex than just hand-outs.

Big Oil is subsidized in different ways, depending upon whether the country they operate in is industrialised or developing.

In the USA for example, many of the subsidies received by Big Oil are not hand-outs but tax breaks and incentives.

The manufacturer’s tax deduction from the IRS (which applies to all large companies, not just the oil industry) is designed to encourage companies to keep jobs in the USA instead of going abroad.

So, wouldn’t we need to remove these for all other highly profitable companies too?   And who would decide which companies should benefit, and which not?

Another type of oil subsidy which doesn’t directly benefit Big Oil is the Low-Income Home Energy Assistance Program.   Because it artificially reduces the price of oil, it’s classed as a subsidy. Removing this subsidy might cause some people to not be able to stay warm in winter.

Are we really sure we want these types of fossil fuel subsidies removed?

When operating in developing countries however, oil companies receive subsidies which can indeed be hand-outs.  They receive them for 2 main reasons – to provide energy to the impoverished, and to develop infrastructure.

It seems churlish to offer an outmoded, unhealthy and polluting system to people trying to break free from poverty

In terms of providing energy, the evidence is all too clear – it has failed.  Study after study (including one by the World Bank which itself provides many of these grants and hand-outs) shows that less than 4% of subsidies were used to directly provide energy access for the poor.  I have seen evidence of this for myself, having lived for many years in various parts of Africa.  Instead, there is considerable “leakage” to higher-income groups.

The World Bank also provides funds for infrastructure for fossil fuel extraction and use in the developing world.  I don’t believe we should be funding development which relies on fossil fuels.  To me, it seems churlish to offer an outmoded, unhealthy and polluting system to people trying to break free from poverty.

What about the Price at the Pump?

Oil companies have given us dire warnings that if we cut subsidies to them, they will pass the increase on to the consumer.

However, the US Treasury Department tells us that the impact would be minimal, and the Congressional Research Service agrees – because recent oil prices far exceed costs, removing subsidies is unlikely to increase gas prices.

But hang on.   Subsidies in Nigeria were removed in January and the fuel price doubled.  There were riots and the Nigerian government had to back-track and return some of the subsidies.

Won’t the same happen if we remove subsidies here?

That’s a different scenario.  The Nigerian government, in common with other developing countries, incurs costs to directly reduce the price at the pump for its citizens who are poverty-stricken.

less than 4% of subsidies were used to directly provide energy access for the poor

In industrialized countries however, citizens pay an amount more closely related to the market price.  The US, with one of the lowest fuel prices in the developed world, also ensures that the price at the pump is kept artificially low, but by less direct means.

Who else gets oil subsidies?

This is something that’s rarely discussed.

It’s not easy to face up to.

Because we also benefit from oil subsidies.  That’s you and me.

If you drive a car, then you get a ton of subsidies.

Even if the government doesn’t “pay” you anything, you are not bearing the full costs of driving.  By reducing the price of driving below its true cost, it is being subsidized.

And because it’s subsidized, we are encouraged to ‘consume’ (drive) more than we otherwise would.

I know if I had to pay the true cost of running my car to commute to work, do my shopping and drive for leisure, I would without doubt have to re-consider where and how I lived.

What is the “true” cost of oil and other fossil fuels?

The true cost would reflect huge sums ($1.6 billion yearly) on regulatory oversight, pollution clean-up and liability costs connected to the oil industry.  There’s the cost of the road networks (excluding toll roads), the disruption of urban life and the sheer physical space devoted to private vehicles in cities.

Add on the amount spent by the US and other countries to protect petroleum resources including wars ($55 to $96 billion a year), and the cost to the environment of mining, refining, transporting and using fossil fuels, in addition to the human health costs from air and water pollution ($125 billion), and you have a staggeringly high figure.

And oil is not used solely for fuel for cars.  Oil is used to manufacture plastics and many consumer goods.  We tell retailers every day that we won’t pay more for consumer goods.

That means we want more cheap (subsidized) oil so we can have cheaper goods.

Could they be right?

I’m delighted there’s been such a great response world-wide for the social media campaign #EndFossilFuelSubsidies to end subsidies to Big Oil.  I believe we need to turn away from our oil dependency.  And yes, that means that I believe we need to lose many of those oil subsidies that we and Big Oil benefit from – but it won’t be easy.

The environmental groups have used an emotive slogan (Big Oil makes $135 billion and still gets subsidies) which will appeal to many.

Even though many people don’t realise the implications of removing fossil fuel subsidies, the concept that we are also benefiting from subsidized oil will not engender popular support.

It’s much easier to shift the blame onto faceless corporations.

And if a catchy slogan is what it takes to garner more support towards cleaner, healthier fuels, then maybe, just maybe, it’s a good place to start.

  • […] Debating subsides to Big Oil is truly dwarfed by the reality of our commitment to fossil fuels. […]

  • Will says:

    I think it will be really difficult to simply remove subsidies across the board. I suspect, partly through ignorance of the facts, that in the US this would be political suicide and therefore the will to do so probably does not exist in either party. Education of Joe Public to understand and accept even gradual reductions I think will be a long process.

    • Clare Delaney says:

      Agreed, it’ll be hugely difficult to remove all subsidies, there are huge implications (as well as political careers). Also, petroleum is so ubiquitous as a product, we’re far from lessening our dependence on it.