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Dems Call GOP Bluff on Oil Subsidies, Deficit

In his 2012 budget plan, President Obama proposed taking tax subsidies away from oil and using the money to subsidize "renewables". Further subsidies for the renewable energy industry would have been relatively easy for Republicans to vote against. But now Democratic Senators Robert Menendez of New Jersey, Sherrod Brown of Ohio, and Claire McCaskill of Missouri have vastly improved the proposal by requiring that all the savings go to deficit reduction. Time to see who's serious about a free market and a balanced budget and who's in the pocket of the oil industry.

Republican Senate leader Mitch McConnell of Kentucky is off to a bad start. He's quoted in a Wall Street Journal story parroting the oil company line that the Democratic proposal would increase fuel prices and make the US more dependent on foreign oil.

Emotionally, the Democrats are using anger at the oil companies who are reporting huge profits in a time when consumers are paying through the pump. Emotionally, Republicans are using the fear of even higher prices. Let's look at the economics.

About a third of the savings comes from eliminating a tax loophole which lets oil companies treat the royalties they pay foreign countries as if they were taxes paid abroad; this allows them to subtract the cost of their raw material directly from their tax bill instead of using the cost to reduce income like other companies do. This is really awful policy when you think about it. It favors foreign oil over domestic oil (because the provision only applies to foreign oil); and it says that when Saudi Arabia, for example, raises the price of crude, the entire increase comes out of the US Treasury; the net earnings of the oil companies are not affected at all.

OK, the oil lobbyists would say, but we would raise prices to cover our "lost" net income.

First, this is pure BS because, like any other company, they raise prices whenever they can. There is a world market for oil and gas and that determines prices, not some mythical return the oil companies would like to have. The prices are set by supply, demand, marginal costs of production, and some speculation. Oil prices have more than doubled in the past couple of years; the tax provision hasn't changed. In the great recession, oil prices plummeted despite no change to the tax provision.

Second, even if it were true (it's not) that we are buying down the price of gas at the pump by giving tax breaks to oil companies, why would we want to do that? Those who use oil ought to pay for it according to their use; the cost shouldn't be socialized across all taxpayers according to ability to pay (or find a good tax accountant). Republicans should know that.

Remember, these are special purpose tax loopholes, wealthfare; they are every bit as much a government expenditure as a welfare check or a grant to a politically correct business. Ending tax giveaways isn't raising taxes.

OK, the oil lobbyists will continue, the bulk of the savings is coming from repealing certain writeoffs for domestic production expense. Don't you want more domestic production?

Sure we do, you should say if you meet one of these oil lobbyists, that's why we repealed the provision favoring foreign oil (see above). Now get to work; you have plenty of "incentive" to drill and explore with oil at $100/barrel. We should, however, open up more of the US for exploration. That is the way to get more domestic supply.

The argument that they need incentives to drill just leads to us canceling those out at taxpayer expense by giving incentive after incentive to both oil companies and their competitors who provide energy from other sources. So wait; there is a way that Republicans can improve this Democratic legislation. They can propose also eliminating competing incentives to "create a level playing field" for the poor oil companies. Let's start with corny ethanol. Pretty soon we'll be saving real dollars; and we'll have a better energy policy, too.

It would be a clutter-cutter if one of the GOP Presidential candidates would make a straight forward pitch for ending all energy subsidies; he or she would have my vote if he or she survives Iowa. Obama, of course, doesn't have to worry about Iowa this time.

Related posts:

"Government Economic Development Program" is an Oxymoron

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Ending Tax Giveaways Isn't Raising Taxes

“Government Economic Development Program” is an Oxymoron

"I can't believe I'm hearing that from a Republican," said Ann Cummings (D - Montpelier), Chair of the Finance Committee of the Vermont Senate.

"As I said, Madame Chair, I'm speaking only for myself," I responded; "grants and loans from the government to businesses are more likely to be harmful than helpful." The committee had invited me to testify on money for the Clean Energy Development Fund, of which I'm a board member; however, I was testifying as an individual and not as a board member. Most of my fellow board members would probably not have agreed with my position that providing us with a few more million dollars wouldn't do significant good for the environment or the Vermont economy and could well hurt. The committee hadn't asked my opinion of government financial aid for economic development in general, but it just slipped out.

IMHO a much better case can be made for giving some people public welfare than for giving ANYBODY wealthfare (and I am, usually, a Republican). Welfare has to be used sparingly, as much for the sake of the recipients as for the taxpayers; dependence can become a multi-generational affliction. But public aid to business, wealthfare, is always bad policy. Public money drives out private investment; political correctness and the desire to reward political supporters drive investment decisions; energy spent in lobbying and grant-grubbing trumps innovation in products and services; good money is often thrown after bad; the net effect of economic development programs can't be measured; and government does a lousy job of policing areas where it is, itself, an investor.

Besides all that, government has no money to give out that it hasn't first removed from the economy. Why in the world would we think that this money will be better invested by politicians and bureaucrats (I've been both) than by the people who had the money before it was taxed or borrowed away?

These may seem heretical thoughts for someone who was once a "stimulus czar"; but my experience with the private sector grants in the stimulus bill was that, on a national basis, they probably retarded the economy more than they stimulated it (see Stimulus Delayed Is Depressing and Confessions of a Stimulator).

Public money drives out private investment. This is a corollary to Gresham's Law, which states that bad money drives out good. It makes no sense for someone to put private money into an idea or company whose competitors may get no-cost capital from the government. If you were to invest in a politically-favored area, you'd pick the company with the best political connections rather than the one with the best product. Investment in telecommunications, for example, flagged in the great recession; that wasn't the fault of government grants. However, private investment in rural broadband practically stopped for the almost eighteen months between passage of the stimulus bill and the first actual awards. No one wanted to risk private money where public money would soon be available; and no one knew where and when the public money would be available.

In the end Vermont received more in broadband grants and loans per capita than any other state; I worked as hard as I knew how to help make that happen and have no apologies. Once government aid becomes the only game in town, you have no choice but to go after it. The money'll probably be good for Vermonters (assuming we execute well); but the national program set back rural broadband on the whole more than it helped it – and, ironically, assured that no jobs were created in this field while the recession was at its worst; most awards weren't announced until midway through 2010 and they came with at least six months' of paper work before the money could actually be spent.

But, some may say, these grants come with match requirements so they actually attract private investment. Baloney, that money (and more) would've been invested SOMEWHERE if there had been no government program – but it might not have gone where politicians or grant-givers wanted it to go. All you do by putting a match requirement on a grant is assure that private as well as public money will be allocated by other than market forces. Of course that's exactly what some people do want – but why Republicans?

Political correctness and the desire to reward political supporters drive investment decisions. Need I say more than "corny ethanol" and "Iowa has the first in the nation presidential primary." But we can't seem to stop the .45/gallon per gallon subsidy, the $.54/gallon tariff on competing ethanol from Brazilian sugar, or the REQUIREMENT, passed by Congress, that an increasing amount of our fuel supply come from ethanol. Government doesn't like to lose; if no one wants to buy the product it subsidizes, it just passes a law to mandate use of the product and punishes competition. Despite all the heavy-handed support for corny ethanol, it looks much more like natural gas will be the fuel that takes us a long way towards both energy independence and less CO2 use (see Natural Gas Disrupts the Energy Industry). Of course people are already calling for subsidies for natural gas adoption (see The Pickens Plan Bill: The Wrong Way to Get the Right Result) on the grounds that everything else is subsidized.

There has been "economic stimulus" as a result of subsidies for ethanol. We've successfully convinced farmers to take land out of producing food and driven up food prices; we created a plethora of ethanol distilleries, some of which have folded and the rest which will fold if we stop the subsidies. Which brings us to…

The net effect of economic development programs can't be measured. For my sins, I was appointed to a state panel which, among other tasks, was supposed to come up with a way to measure the effectiveness of the state's many economic development efforts. We asked the state economists; they said it couldn't be done – "too many exogenous factors"; we asked the economic development "community" – some felt measurement was inappropriate; someone suggested that we ask the recipients of aid whether they were satisfied with the programs. When an economic development bill is debated in the legislature, people who've benefitted from the program (or might benefit) are trooped in to testify. Of course, the beneficiaries benefit (at least for a while until the politically correct spotlight shifts elsewhere and unsustainable businesses collapse); but those who didn't get grants or loans are disadvantaged – especially when you consider that they contributed some of the money to subsidize their competitors.

Government economic development is much like the lottery; the winners win (no doubt about that); the losers lose, and overall more is lost than is won. At a time when we need faster economic growth and less government spending, we could get both by eliminating the wealthfare called economic development.

The Pickens Plan Bill: The Wrong Way to Get the Right Result

Getting government to pay your customers for buying your product is no substitute for creating compelling value. A marketplace dominated by political decision making will result in neither innovation nor wealth creation. So why is American business allowing itself to succumb to the weakening influence of wealthfare?

Take T. Boone Pickens – the quintessential American entrepreneur. T. Boone is an oil and gas man. He has been prescient about the opportunity natural gas presents for reducing our dependence on foreign oil and reducing carbon dioxide and other emissions. As a geologist he understood the enormous difference fracking would make in both the price and availability of natural gas. As an owner of natural gas producing properties, he has an economic need to get the price and/or the volume of natural gas use up. Nothing wrong with that. He's spent over $80 million dollars promoting his plan for natural gas use; nothing wrong with that, either; it's his money and he's trying to expand the market for his product.

Originally his plan included wind turbines to REPLACE natural gas for electrical generation and free it up as a transportation fuel. But even Pickens underestimated the pace at which natural gas supplies would increase and prices fall. He abandoned his wind turbine project when he realized that the turbines, despite huge subsidies, couldn't compete economically with natural gas as an electrical source. Now he is for using natural gas for both generation and transportation; he needs a bigger market for the increased supply. Nothing wrong with a business person changing his or her mind in the face of changing economics; good business people do that well. One of the problems with government subsidies is that they are intended to run counter to economics (else why subsidize?) so they are not subject to marketplace reality checks.

Pickens' need and good policy for the United States pretty much coincide. We have huge reserves of domestic natural gas; its price has gone down while oil prices have gone way up over the last couple of years. Natural gas has less carbon and sulfur in it than oil or coal so it releases less sulfuric acid and carbon dioxide when burned. Natural gas can be used to generate electricity (as it already is) and to substitute directly for oil in powering cars and trucks and heating homes (again, existing uses). We don't use much oil for electricity generation; increasing the number of houses heated by natural gas means building more pipelines (which we should do but it'll take time); switching vehicles to natural gas means that we need more natural gas fueling facilities.

The heavy truck fleet is a good place to start since much of it could be served by relatively few fueling stations. 16% of the 20 million barrels of oil we use per day goes to fuel heavy trucks so a switchover could lead fairly quickly to reduced use of oil. More converted trucks will result in more fueling stations which will make natural gas cars practical for more and more applications and people.

But there's a business problem. Building natural gas fueling stations costs money; whose money is going to get spent? Today truck engines which run on natural gas initially cost more than oil-powered alternatives, even though, according to Pickens, the lifetime cost of running natural gas trucks is lower because of lower fuel costs and the reduced maintenance need which results from burning a cleaner fuel. American truckers are not investing in natural gas trucks as quickly as Pickens would like. We are not displacing a substantial amount of oil as a transportation fuel.

The solution in H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011 (aka the Boone Pickens bill) is billions of dollars in new tax credits for building and buying natural gas vehicles – up to $64,000 per truck - and for building natural gas fueling stations. This wealthfare bill has bipartisan support, even in this time of huge budget deficits. It has 157 co-sponsors in the House; President Obama has mentioned it favorably; Pickens likes it; and columnist Joe Nocera of the New York Times loves it: "If Congress can't pass this thing, there's really no hope."

Promoters of wind and solar projects don't like natural gas elbowing its way to the subsidy table where they (and corny ethanol) have favored positions. There's an understandable business reason for their opposition – but this opposition is also an indication of the problem with the subsidy culture: it shouldn't be government which decides on fuel (or any other) technology. Government has an important role in regulation for safety and environment; in enforcing honest weights and measures and advertising, in preventing monopolies, and as a customer. But the marketplace should determine which technologies within safety and environmental constraints win or lose.

John M. DeCicco, of the University of Michigan's School of Natural Resources and Environment, is quoted in Yale e360:

"In general, I do not look fondly upon these technology winner-picking adventures that have been, and continue to be, a hallmark of America's failed energy policy. The U.S. transportation energy market is way too huge to create a business case for anything through taxpayer subsidies…. How many times does the country have to get it wrong before realizing that such approaches don't work?"

The business problem of customer reluctance to make capital investments so they can buy your products is not a new one. If subsidies (tax incentives ARE subsidies) weren't a possibility, Pickens would have easily figured out the solution. How did wireless carriers get us to buy smartphones when they still cost $500 and weren't a popular technology? They (the private companies) subsidized the price of the phones and recovered their money through a long term usage contract. How did cable companies "sell" us set top boxes? They didn't; they rent them to us explicitly or implicitly. Pickens, whose book is entitled The First Billion is the Hardest, has plenty of capital of his own and access to more. He believes that the lifetime cost-of-ownership of a natural gas truck is less than that of an oil-powered rig. He could buy the trucks and lease them to his customers in a deal which includes buying natural gas from him. That might force his competitors to do the same including those pushing different technologies. Great!

How did we get a network of gas stations? The oil companies built them and leased them out. Natural gas magnates like Pickens could start by building fleet-filling stations (with an exclusive contract to supply them) and go on to public stations. This not rocket science. This is how economies grow and technologies change.

The subsidies already on the books for competitors like electric vehicles and corny ethanol are a problem that natural gas entrepreneurs have which only government can solve. H.R. 1380 methodically goes through the tax code and adds credits for natural gas where there are already subsidies for other politically-popular fuels. A much better approach would be to just delete each of these sections and all of the subsidies from the tax code.

Which brings us back to the question above: why is American business allowing itself to succumb to the weakening influence of wealthfare? Answer: business people have to go after the lowest price capital; if someone else is getting a subsidy, they need one as well in order to be competitive. But grant-grubbing and subsidy-seeking is bad for the national economy and displaces innovation with lobbying. Let's remove the subsidies and some regulatory obstacles; we will probably then see a quick swing to natural gas given the price of oil. Unless some better fuel comes along – which would be fine also. And we'll reduce the deficit instead of adding to it.

Related posts:

T. Boone Pickens' Bold Plan (the original plan)

Ending Tax Giveaways Isn't Raising Taxes

We'll Always have 50 Years of Oil Left

Natural Gas Disrupts the Energy Industry

What's the Transportation Fuel of the Future ?

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