At $50 a barrel, the low price of crude oil has slowed some US oil production, especially in regions that are expensive to develop, such as the Arctic. But US oil producers are not taking the brunt of the low prices, as federal and state governments offer tax incentives that boost oil production despite low prices.
The tax situation is not unique to the US: China, the EU and India also offer different types of tax breaks to fossil fuel producers, despite their recognition of the need to tackle climate change. Although the US has signaled its withdrawal from the Paris Agreement, tax breaks that finance more fossil fuel production will not help the rest of the world limit warming to 2 degrees Celsius.
The latest research provides some hard numbers on how much tax policy supports additional CO2 emissions. “Federal tax subsidies to the oil and gas industry alone cost U.S. taxpayers at least $2 billion each year,” researchers from the Stockholm Environment Institute and Earth Track write in a recent paper. Nature Energy article. That $2 billion in uncollected taxes helps some oil fields go from “unprofitable” to “profitable,” increasing the amount of oil available for consumption. (The researchers broadly used the term “subsidies” to refer to various types of tax-based aid that “confer a financial benefit from the government to the oil producer.”)
The article’s authors focused on 12 federal and state grants in an attempt to quantify how much the oil industry benefits from lenient tax policies. The results are significant: At the current price of about $50 a barrel, nearly half of the discovered but undeveloped crude oil fields are becoming profitable where they otherwise wouldn’t be. When those fields are made profitable, they are developed and the CO2 derived from the use of crude oil is liberated.
With current government support, an additional 17 billion barrels of oil will be produced in the coming decades, resulting in an additional 6 billion tons of CO2 emitted that would not otherwise have been if the subsidies did not exist.
“Our analysis suggests that oil resources are much more dependent on subsidies than previously thought, at least at prices approaching US$50 a barrel,” the authors wrote.
The researchers were able to make this determination by taking data from Rystad Energy’s UCube database, which estimates “capital investment, operating costs, taxes and production profiles for every oil field in the US.” From there, the authors identified more than 800 onshore and offshore discovered but not yet developed fields. For each field, they determined the point at which each site would become profitable with a minimum return of 10 percent. If a site was profitable without any federal and state grants available, then the site is likely to be developed anyway. But if the site needs a bit of government support to get a good return on investment, then it was considered a move from unprofitable to economical with subsidies.
Overall, tax support increased returns for all oil fields studied by an average of three percentage points. Most of the fields that went from uneconomical to economic were found in the Permian Basin in Texas. (This may be due to the fact that several of the grants the researchers studied were based in Texas, so they were applied to fields in Texas and not to fields out of state). In Texas in particular, the researchers estimate that “about 40 percent of the economic oil supply depends on subsidies.”
On the other hand, fewer of the offshore oil projects were subsidy dependent. The researchers suspect this is because there are fewer operations offshore to begin with, and the big companies that can afford such expensive extraction don’t qualify for the most generous subsidies.
How to reform the system?
In the course of their research, the authors identified the three tax loopholes that had the greatest impact on oil production. All three were federal tax breaks. The most economically important of the three “allows oil producers to deduct many drilling and field development costs associated with domestic oil wells.” The second, called the “depletion fee percentage,” allows oil producers to deduct a portion of their company’s gross value rather than limiting the deduction to capital invested. And the third is the “domestic manufacturers’ deduction,” which gives oil producers “a percentage of ‘gross income’ of taxable income.”
The authors also noted that there is a potential feedback loop from the removal of subsidies. If fewer oil fields are considered profitable, less crude oil will be produced. The reduced supply could drive oil prices back up, suggesting that more US oil fields on the fence between profitability and unprofitability would end up on the profitable side. But the authors examined the numbers and found that this only leads to an additional $1 per barrel increase in global crude oil prices (assuming the current price of $50 per barrel is the starting point). “This increase would not have a substantial effect on our findings: some additional oil fields would be profitable (at an estimated 1 billion barrels), reducing the proportion of fields dependent on subsidies from 47 percent to about 44 percent,” the statement said. newspaper.
So what does all this have to do with climate change? Ultimately 6 billion tons of extra CO2 pose a major problem to our prospects for limiting warming. Estimates from the Intergovernmental Panel on Climate Change (IPCC) suggest that the world could only emit about 840 billion tons of CO as of 20162 have a two-thirds chance of limiting global warming to 2 degrees Celsius over the next 84 years. The 6 billion tons of CO subsidized by the government2 emissions will account for almost one percent of that – an amount that is hardly insignificant when faced with a world that could use all the help it could to reduce emissions.
Nature Energy2017. DOI: 10.1038/s41560-017-0009-8 (About DOIs).