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The Anti Oil Crowd says Fossil Fuels are Subsidized and They Should be Eliminated: Here’s the Problem With That Statement – David Yager – Yager Management

Posted On September 15th
By : EnergyNow Media
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David Yager

 

 

 

 

 

By David Yager, September 15, 2016

Entrepreneur. Consultant. Journalist. Political Activist.

www.davidyager.ca

At the conclusion of the G20 conference among the top national economies this month in China the assembled pledged yet again to end fossil fuel subsidies. An action item read the attendees would, “reaffirm our commitment to rationalize and phase-out inefficient fossil fuel subsidies that encourage wasteful consumption, recognizing the need to support the poor”. Ending fossil fuel subsidies was a Liberal election promise a year ago.

The last six words highlight the conflicted nature of the discussion. What the statement says is governments should stop all financial incentives and programs that help make hydrocarbon energy cheaper while at the same time acknowledging low cost fuel makes life better for the poor.

This is yet another example of the successful long-term strategy of the anti-oil crowd to make it more difficult to stay in the oil business. They allege carbon fuel is heavily subsidized by governments to the detriment of everyone. Put another way cheap energy is now a liability, not an asset. Whatever negative impact higher fuel costs will have on people struggling to survive is secondary to having a nicer planet for everyone else. This new form of class warfare is rarely acknowledged as such.

It is not intuitive that an industry which in Canada alone pays tens of billions in corporate taxes, worker income taxes, property taxes, production royalties and consumer fuel tax levies such as GST and PST plus fuel surcharges would be considered subsidized. The major financial problem provincial and federal governments face today is low oil and gas prices and collapsed capital investment. The pair have greatly reduced the upstream petroleum industry’s ability to remit historic levels of royalties and taxes. Yet the subsidy allegations continue.

Definition please. Businessdictionary.com defines subsidy as, “Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to (1) support a desirable activity (such as exports), (2) keep prices of staples low, (3) maintain the income of the producers of critical or strategic products, (4) maintain employment levels, or (5) induce investment to reduce unemployment. The basic characteristic of all subsidies is to reduce the market price or an item below its cost of production.”

Prior to the Paris Climate Change Conference last November there was flurry of activity by the anti-carbon crowd to push again for agreement to make fossil fuel more expensive by reducing and eventually eliminating government support of any kind. A report by Oil Change International (OCI) released November 12, 2015 alleged Canada’s fossil fuel industries were the recipients of $3.6 billion in annual subsidies, a fraction of global financial support of US$452 billion. If only governments would listen they could fulfill more worthy commitments like, “The savings could be redirected to investments in new and clean technologies”.

Which, of course, are heavily subsidized as consumers are forced to pay more for wind and solar power than cheaper sources like coal and natural gas. There are clearly “good” subsidies and “bad” subsidies. More below.

OCI alleged government funds for carbon capture and storage (CCS) projects and research were a subsidy. This includes $226 million that went to SaskPower to clean up coal emissions from the Boundary Dam. “Two CCS projects in Alberta received $US 156 million from the federal government and an annual supplement of roughly US$ 103 million from the province for several years”. OCI called CCS “extremely controversial” because the captured carbon dioxide would also be used to enhance oil recovery “thereby releasing more carbon into the atmosphere”.

The condemnation of research funds into CCS projects because they recover carbon dioxide and produce lower-carbon oil will come as a surprise to the federal government and the provinces of Alberta and Saskatchewan. All three believed they were doing something useful. Subsidy for sure but bad for the world? Who knew?

Export Development Canada (EDC), another government organization supporting business because it provides higher-risk financing for export-oriented projects, also came under attack. Although it could not verify the numbers, OCI nonetheless wrote, “But OCI estimates that the institution provides an average of US$ 2.5 billion per year to fossil fuel production for companies like TransCanada, Enbridge, Encana, Devon Energy and Chevron”.

TransCanada and Enbridge are pipeline companies and actually don’t produce fossil fuel. On its website EDC says it guarantees bonds for companies helping the issuer to qualify for lower interest rates. A loan guarantee is not a real cash subsidy if the borrower never defaults. The cash cost is near zero. EDC finances Canadian exports of everything, not just oil. A disingenuous application of the term subsidy but there’s a lot of that going around when the future of the planet is at stake.

Then there’s the tax breaks. These include two hallmarks of oil and gas exploration and production, the Canadian Development Expense (CDE), Canadian Exploration Expenses (CEE). There are the resource industry equivalents of depreciation expenses on property, plant and equipment used to reduce taxable income by every company that owns and operates capital assets to generate revenue. Machinery wears out. The hydrocarbon equivalent is depletion whereby the reservoir eventually drains. This form of tax sheltering to build cash to replace revenue generating assets as they wear out or decline to stay in business has been around forever.

Yet the OCI calls them “subsidies” for oil and gas which totaled over US$ 1 billion in 2013. That number could be right. But if they are indeed subsidies, then every business in Canada is subsidized. There are other examples such as special tax credits for oil investment in Atlantic Canada, Alberta crown royalty reductions, and deep drilling credits in B.C.

Canada’s alleged subsidies to oil and gas development are mostly royalty holidays, royalty reductions or tax deductions. In every case the purpose is to encourage economic activity that would not take place otherwise.

Is a tax or royalty not collected on industrial activity, that would not otherwise occur, really a subsidy? Because when the full-cycle/recycle economics are calculated, the dim-witted government behind these programs yield significant returns through personal income taxes, corporate income taxes, property taxes, consumption taxes and fuel taxes from industrial expenditures that would otherwise not be made. These incentives for investment create taxes that would otherwise never be collected. Critics shamelessly overstate the actual financial contribution.

The notion that Canadian governments in some way subsidize the cost of the final product to consumers – as per the dictionary definition – is preposterous. According to PetroCanada the taxes on a liter of gasoline in Canada in 2015 above and beyond the cost of petroleum, refining and distribution included a federal excise tax of $0.10 per liter, GST/HST ranging from 5% to 15%, a $0.667 per liter carbon tax in B.C., and provincial fuels taxes ranging from $0.13 to $0.192 per liter. Similar direct fuel cost levies exist for diesel fuel. These can total 25% or more of the total cost or more depending on crude prices and where you live. It is estimated these fuel levies provide Ottawa and the provinces with $15 billion annually. This is on top of another $18 billion oil and gas producers paid to all levels of government in 2014 in the form of property taxes, income taxes, payroll taxes and producing royalties.

Some subsidy. Fuel taxes are also a major source of government income in most European countries. They are considered a reliable source of revenue in countries where tax avoidance is becoming increasingly common because taxes on everything else are so high.

This is to not say governments in other parts of the world don’t truly subsidize fossil fuel at great expense. Countries which sell domestically produced or imported oil to their citizens below the global market price include Iran, Saudi Arabia, India, China, Egypt, Iraq, UAE, Indonesia Mexico, Algeria, and Kuwait. This is done at great expense to the treasury. The Organization for Economic Cooperation and Development reported that in 2014, 40 countries subsidized the cash cost of motor fuel by a whopping US$548 billion. Gasoline prices in Venezuela, Saudi Arabia, Iran, UAE, and Indonesia averaged only $0.31 a liter. As finances tighten some of the oil producers are trying to raise domestic prices but of course consumers are not pleased.

Meanwhile, Ontario is vying for the title of Canadian provincial subsidy leader. Forced renewable energy subsidies finally cost so much the premier just dropped the provincial sales tax on electricity to mitigate rising costs. Website investinontario.com contains a document titled “Incentive programs and services” introducing eight pages of handouts for business. They include “grant and loan funding for projects in advanced industries”, how EDC “takes on the risk of non-payment” for exports; “government grants to cover the cost of hiring and training”; specific funds for regions of Ontario including southwest, eastern, northern and rural (looks like the whole province except Toronto and Ottawa); “grants and incentives for R&D”; “funding for aerospace and defense” (ironically for equipment powered by carbon fuel); “funding for food processing companies”; “funding for Ontario’s interactive digital media sector”; “funding for clean technology and energy conservation”; “funding for Ontario’s life sciences sector”, and “government grants, loans and support for start-ups”.

Wow. There are the folks introducing carbon taxes, making oil pipeline construction difficult and who undoubtedly subscribe to the anti-carbon definition of subsidy.

The outer fringe of the anti-carbon movement puts the total cost of carbon subsidies in the trillions because it includes future damage to the environment and health that hasn’t happened yet. This includes death and injuries from vehicular accidents that wouldn’t happen if there were fewer cars on the road. The blame is put on governments afraid to make a decision, not the hapless people of the world who, left their own devices, continually make the wrong choices. The Alberta NDP government’s taxpayer-funded propaganda campaign supporting next year’s massive carbon tax increases includes the benefits of improved health because of airborne emission reductions. But when most think of bad air it is Beijing that comes to mind, not Beaverlodge or Bonnyville.

This matters to the battered Canadian oilpatch because it is yet another example of how the anti-carbon crowd influences politicians, the media and domestic energy policy. This issue gained traction in 2009 when the anti-carbon movement got it on the G20 agenda where it was broadly supported. Few in the oilpatch took notice. When you live in Alberta where provincial finances ebb and flow depending on how much cash oil and gas producers ship to Edmonton, we can be forgiven for not paying attention.

But now the Canadian oilpatch is increasingly fighting for its legitimacy and existence in the face of carbon taxes, emissions caps and export pipeline opposition. It behooves everyone to pay more attention. The politicians are listening to an intellectually and economically dishonest use of the word subsidy and agreeing to implement policies that will have very damaging impacts on what’s left of Canada’s once-vibrant upstream oil and gas industry.

About David Yager – Yager Management Ltd.

Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.

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David Yager can be reached at Ph: 403.850.6088 Email: [email protected]

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