Energy Subsidies: Weighing the Playing Field

Posted on March 9, 2012 by Elliot Laws

Even as a latent issue, subsidies to the oil and gas industry have the potential to be a political hot potato.  But with President Obama putting them front and center in his recent speech at New Hampshire’s Nashua Community College, the issue joins the already crowded landscape of political fodder heading into the fall elections.  President Obama’s “all of the above” energy program covers a variety of activities, including production of oil and gas, funding renewable energy sources, and encouraging innovation of new technologies.  In the end, fossil fuels are an exhaustible source of energy that cannot be the total answer to our energy needs, as even oil and gas companies recognize.  And they come with a real set of hazards, as the recent Deepwater Horizon settlement reminds us.
 
Although not directly part of his “all of the above” energy program, President Obama is rightfully addressing government subsidies for oil and gas that could be migrating towards increasing subsidies for solar farms and wind turbines.  While fossil fuels will eventually run out, wind, solar, and biomass will not, but have yet to enjoy the level of support afforded to the oil and gas industry.  According to a recent analysis of the economics of energy by experts at the Imperial College London and the UK Energy Research Center electricity from wind power may, in five years, be less expensive than electricity from natural gas in the U.K. if current levels of government subsidies were transferred to renewable energy sources.
 
While the study is specific to the United Kingdom, there are takeaways applicable in the U.S.  First the analysis recognizes the important support that subsidies provided to oil, gas, and nuclear energy development when each were in infancy.  Through those subsidies, energy companies were encouraged to develop technologies, survey areas that were geologically ripe for oil and gas exploration, and hire workers to help build up the industry.  Second, now that oil, gas and, to a lesser extent, nuclear energy sources are more completely developed, those subsidies should be transferred to the development of renewable energy.  In addition, the gains made by the wind and solar industry should not be set aside in search of the elusive promise of cheaper oil through more drilling.  Fossil fuels will run out.  If “all of the above” is to be a real strategy, then it must provide more of an equal opportunity for all sources of energy.
           
The Department of Energy recently announced $150 million in grants under its ARPA-E program.   This money is intended for development of cutting-edge energy technologies so that they can gain the necessary traction to be self-sufficient.  The announcement follows on the heels of an additional $30 million offered under the ARPA-E program toward development of natural gas-based vehicles.  Both these numbers pale in comparison to the $4 billion in yearly subsidies for oil and gas developers.   Even shifting half of the oil and gas subsidies into renewable and developing technologies could well make a dramatic difference in our overall energy future by encouraging the build-out of wind, solar, and biomass businesses into viable and self-sufficient industries.  There will come a time for a full discussion of the value of energy subsidies as a whole, but this would provide a fair start toward creating parity with fossil fuels.
               
The Deepwater Horizon disaster is a reminder of the cost associated with use of fossil fuels.  Significant government subsidies provided to the oil and gas industry played an important part in encouraging their initial and ongoing development.  Programs such as ARPA-E can provide a jump-start for emerging energy technologies, and shifting subsidies can offer a chance for “all of the above” to be a real solution.




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