Just read a bit about the massive subsidies the fossil fuels industry receives in the U.S and I was confused. Aren’t these companies one of the most profitable ones in the U.S?
In: Economics
The oil industry makes large amounts of money but has low profit margins. And it is critical to national defense and our economy.
It is in all of our interests to keep the oil flowing. Without it, our lives comes to an abrupt stop.
Last time I looked, the average rate of return on oil capital investments is about 7%. That is a fraction of the Tech sector and the pharmaceutical sector.
The biggest reason why oil is hated so much is the lingering effect of Ida Tarbell and her History of the Standard Oil Company book which exposed the predatory behavior of John D Rockefeller. And the effect of television shows like Dallas.
There are really two types of subsidies, which exist for very different reasons, subsidies for consumers and producers.
For consumers, these subsidies exist for a pretty basic reason, to allow poorer consumers access to some of the basic things fossil fuel provides (heating/electricity/transport).
As for why producers are subsidized, there are also two main reasons for subsidies. The first is national and is mainly a belief that the US should be energy independent more or less for it’s national security (to not have to rely on other countries in case of conflict). There are also local subsidies (mainly at the state level), for fossil fuels and many other industries, in order to push businesses to establish themselves in very specific places, because the local government hopes that having that industry there will be more economically beneficial than it costs in subsidies
Edit: Just a little added info… fossil fuel subsidies are not a US exception. Most if not all countries have fossil fuel subsidies and the per capita or % of the GDP of the US is actually lower than many other countries.
Because they’re so rich, they can pay out millions to politicians to rake in additional billions from the government.
It’s a sound investment.
Putting to one side the obvious talking point that any company will take government money if it is offered to them, it is worth saying that the energy sector costs a ton of time and money to get a project up and running. The oil and gas is getting harder to extract using traditional and inexpensive technologies. You have unconventional plays that need special tools, and you are also operating in all sorts of environments all around the world, all of which costs money to develop inversely proportional to the ease of accessing the area.
Now put on top most companies both need some energy infrastructure within their borders to get energy where it needs to go, and also want energy infrastructure within their borders both for job generation and for resource security and independence, and you start seeing how it’s not a question of, “Should the government pay energy companies to do business here?” but “Which countries are going to prioritize attracting energy companies to do business here?” There is an ongoing calculation driving a bidding war at all times of what it costs to operate, what are the benefits of domestic production, global pricing, global distribution, market demands, geopolitical concerns, and that’s all before the energy company has even lobbied for anything or offered people in positions of power the opportunity to work for energy companies during or after their time in government (depending on the rules of individual countries), all of which has been happening since energy production was sometimes as easy as sinking a well a few feet into the ground.
The country that cuts its subsidies tomorrow is going to lose long-term future development and employment in their country as the energy companies choose to go elsewhere. Meanwhile, energy prices in their country will rise, and the government that set that price rise in action will be punished for it. Also, the decision-makers behind that policy are not going to be welcomed into many avenues of employment after their time in power has ended, which —rightly or wrongly— is a factor many of those decision-makers do have in mind when they are deciding on something as radical as spiting some of the biggest companies in the world.
All of your goods need to come from somewhere. Gas is still the most energy dense method of delivery for the energy needed to get those goods where they need to go. Gas price goes up and the price of everything goes up.
Energy cost directly relations to societal wellbeing, market productivity, and military capabilities.
It’s basically a no-brainer to smooth out medium-term energy prices, subsidize infrastructure, and counter short-term spikes for elected policymakers.
It does however impede energy transition efforts and other long-term policy needs.
So now we’re in this position where long-term stability and wellbeing requires reorganizing our energy policies to support energy transition while minimizing negative impacts where possible.
This is going to be very complex and hard to do.
Well, part of the reason they’re so profitable is because they are heavily subsidized. If your costs are being nerfed by the government, more profit for you. They’d have tighter margins without that subsidy.
The government doesn’t always subsidize businesses that need it to be profitable, either. The government just subsidizes what it wants to see more of. So if the US has plenty of fossil fuel production but wants even more, they could still subsidize it to promote more production.
Lastly, lobbying is a thing that fossil fuel companies are particularly good at. They fight to keep subsidies in the budget year after year, even if they’re no longer very appropriate.
One thing to remember is that oil is a commodity and strategic resource. It’s a building block price for a shit load of other prices we deal with everyday. In my line of work the cost of fuel for construction equipment is built into the construction cost with considerable risk to the contractor (if you bid something in April to be built next year in March, you better hope something horrible doesn’t happen to fuel prices between now and then). So fucking with it too much has a ripple effect that can cause some serious harm (businesses going under kind of harm).
Strategically the US wants the oil companies on their dole so they can exert pressure over prices and such. Consider the subsidies as one way the US exerts influence over what would be considered a private enterprise. “We’ll pay you this, this, and this, you do X/Y/Z for us and let us keep the tanks and jets flying for cheap”. Japans entry into World War 2 was largely driven by access to oil, the fact the US has a ton of it is actually a fairly unique geopolitical circumstance (like Russia or Norway or Saudi Arabia) so it tracks that the Government wouldn’t want to give up any leverage on the domestic industry. Knock on effects of those subsidies make oil and gas some of the most lucrative industries for people to get involved in, meaning you’ve got smart folks running the thing, and the gas gets delivered correctly to consumers.
So you’ve got a lot of good answers. My explanation is they convinced congress back in the day that they needed the subsidies to survive.
They grew into behemoths who no longer need the subsidies, but to remove them is to cause chaos in the markets they a service and they get to make higher profits at the same time. Removing subsidies immediately means gad companies had to reprice their products in an upward direction. Which means everything pil and petrol related goes up in cost which means consumers get very unhappy.
So they don’t want to remove it and voters will go ape if gas prices go up since they’ve been uses to low prices essentially their entire lives. So no politician is interested in fixing it cause they will be voted out. A campaign of awareness must be done as well as many voters aren’t even aware that the government is spending money effectively to reduce their gas price, which is enriching oil companies.
This issue is like many others(and it’s not just gas subsidies, corn hasn’t needed subsidies for ages nor have a lot of farmers) – the budget deficit is very similar in that we need to probably fix it at some point, but to fix it means raising taxes or lowering government spending dramatically and both of those things are incredibly unpopular with most voters so it won’t happen till it gets so bad people care en mass.
Generally if it costs money with no actual gain, aka to fix a problem, then it won’t happen cause the PR cost of looking bad on the economy is all you get out of it as a politician. Climate change is going down a very similar path.
There is a nationalist aspect to oil production. It’s seen as bad by voters if the results of a politician’s actions result in increased use of foreign oil.
It’s seen as bad by voters if the cost of fuel increases.
Politicians are more incentivized to be reelected than they are to declare their principles and take actions towards those principles (such as decreasing oil dependency overall and/or believing in a free market without corporate welfare).
Voters don’t like corporate welfare, but they dislike the consequences of not subsidizing oil even more.
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