Prepared by;
Ken G. Glozer
May 10, 2015
The Subsidies Mess!
The existing national energy policy is a gigantic mess of excessive and intertwined direct federal spending (DOE, USDA, DOI, FERC, NRC, etc) spending, federal credit (loans (RUS, DOE,USDA, EXIM Bank, etc) loan guarantees, implicit loan guarantees (TVA, et al), tax subsidies, and non competitive market federal regulations. The energy sector accounts for over 10% of the nation’s annual GDP and is absolutely critical to the future economic growth and stability of the US. None of the massive amount federal intervention for energy is needed nor is it economically productive—in fact it is counterproductive—a dead weight loss on the economy and by far the best example of out of control crony capitalism!
How bad is it? The Department of Energy’s independent statistical agency the Energy Information Administration (EIA has completed a series of reports—1992, 1999/2000, 2007, 2010 entitled “Federal Financial Interventions and Subsidies in Energy Markets” using the same methodology over the 18 year span. The 1992 report for tax and direct spending subsidies disclosed a total subsidy amount of $4.9 billion; the 2010 report disclosed the estimate had grown to $37.2 billion—a 760 % increase! Even adjusting for inflation of 50% the increase is still over 500% in just 18 years. This explosion in federal energy subsidies mainly occurred from 2005 through 2010.
And the EIA methodology does not include any of the regulatory subsidies such as the Renewable Fuel Standard for ethanol CAFÉ and many others. The methodology significantly underestimates certain subsidies such as the billions given to the Tennessee Valley Authority and many others because EIA assumes that if the number is not in the federal budget there is no subsidy—a seriously flawed assumption. My guess if all regulatory and other subsidies that are understated were included the annual subsidy value would exceed $100 billion annually.
The History
In 1971 Richard Nixon imposed a nationwide system of price controls to reduce the rate of inflation throughout the US economy. A Cost of Living Council was setup in the Executive Office of the President to administer the controls. In 1973, the Arab Oil embargo was imposed via some oil production/export cuts mainly by Saudi Arabia and caused world oil prices to sharply increase from $3/bbl to $12/bbl. At that time the nationwide system of price controls were being phased out but the Congressional Democrats with some Republican support passed the Emergency Petroleum Allocation Act (EPAA) and the billed was signed by Nixon putting in place a nationwide system of supply allocation and price controls on all crude and petroleum products. An extension of this law was passed in 1975 and signed by President ford extending the controls through 1981. The Federal Energy Administration was setup to administer the controls. This was by far the worst, most costly national energy policy ever. In 1978, the Shah of Iran was overthrown and the vast majority of Iranian oil production/export at that time was stopped –roughly 6 million barrels per day. World oil prices soared from $12/bbl to $36/bbl per by 1980. The unworkable series of FEA regulations that had to be followed by the oil producers, refiners and distributors were a disaster and the undoing of Jimmy Carter as President. Carter made things much worse by securing enactment of the Synthetic Fuels Corporation (SFC) and other costly, useless federal programs including the granddaddy of today’s RFS for ethanol and the really bad electric utilities oil back out legislation/regulation.
In 1981 President Reagan in his first week in office abolished the petroleum allocation and price control regulations then proceeded to get the SFC and the utility oil back out eliminated. Federal energy spending was sharply reduced and the DOE policy office went from over 200 federal bureaucrats to less than ten in just a year or two. Tax subsidies enacted during Carter’s term were largely eliminated with the Reagan tax reform act passed in 1986. By the end of Reagan’s second term the US had a highly effective competitive market policy for oil and natural gas (Also decontrolled in 1985). Only electric utilities were regulated at the federal and state level. President Reagan’s competitive market policy implementation by the end of his second term was a tremendous policy achievement yet he has been given little credit for this watershed event.
Correspondingly, world oil prices collapsed in 1984/5 going from $36/bbl to below $10/bbl by 1990. Bush I and Clinton I, II continued this highly effective and efficient competitive market policy further expanding it to include the electric industry wholesale power subsector (Note retail electric distribution regulation continued in about one half the states and wholesale power deregulation was not achieved in the southeast and northwest)
But when oil prices started to rise in the early 2000s both the congress and Bush II were not able to resist expansion of the federal energy intervention cancer. By 2007, a comprehensive energy bill was enacted and signed by Bush II that massively expanded the federal role with regulatory interventions (RFS and CAFÉ et al), tax subsidies—the deepest costliest ever (over $21 per barrel for ethanol in the form of a tax subsidy plus that mandate of increasing quantities of ethanol blended into gasoline reaching 36 billion gallons per year by 2022) major expansion of federal credit (DOE had appropriated loan authority exceeding $150 billion for renewable, coal , nuclear power plants and RUS, PMAs, USDA loans were increased substantially including $7,500 per electric car subsidy for the wealthy who buy Tesla cars—Elon Musk has replaced T.Boone Pickens as the greatest federal subsidy seeker in the 21st century.
Obama’s Pro Environment Energy Policy
But that was not enough for the Obama massive intervention pro regulation planet Earth is going to be destroyed demons! In 2009 another major set of energy intervention policies were enacted and an extensive expansion of energy regulations was undertaken from 2009 to the present day—in the name of saving the planet from GHG emissions buildup and destruction from excessive heat. The economic cost of this mountain of regulation is enormous (and purposely not disclosed by Obama and his EPA army—some 10,000 strong. This would include the EPA electric power plant pending regulations for existing and new power plants, the pending extremely tight ozone regulation, the CAFÉ disaster, the deep costly subsidies for renewable/electric cars, the RFS, the rapid phase out of coal fired power plant generation and many others. What the Obama bunch did for the auto/light truck fuel economy (CAFÉ) standard is nothing short of unbelievable! The standard was 27.5 mpg by 2017. This was increased by Obama in 2012 to an average of nearly 55 mpg by 2025—an unachievable costly standard that is sharply pushing up the price of new autos and light trucks forcing consumers to buy expensive technology when gasoline prices have fallen to less than $2.50 per gallon and new auto light truck buyers do not have a snowball’s chance in hell of ever getting a return on their investment for these high fuel efficiency vehicles. The auto/truck manufacturers do not have a clue as to how to meet the 55mpg standard by 2025 and what is even more absurd is the Obama bunch did this to save a few tons of so called GHG emissions that does not amount to a tinker’s dam in terms of total world GHG emissions. A world where India and China and others are rapidly building coal fired electric generating power plants because it is economic to do so.
A competitive market policy would reduce GHG emissions but in a prudent cost effective way. This would occur through the gradual substitution(by the marketplace not USG direction) of natural gas for coal fired generation in the electric utility sector because gas is cheaper. It would also occur elsewhere where improved technology would be used when existing investments age and wear out. An example would be consumers replacing their old vehicles with new one s that are far more fuel efficient. The competitive market energy policy makes economic sense for the US especially since the evidence that the buildup of GHGs in the atmosphere at most maybe causing some warming but at a much lower rate than the IPCC claims. If the US allowed for the export of natural gas this would also allow Europe to reduce their dependency on Russian gas and accelerate the phase down of coal fired generation in Europe since US gas exports are likely to be lower cost than coal. The Obama do anything to reduce US GHG emissions policy —even if it means making china and India more economically competitive than the US— is just plain stupid!
The Path Forward
Today’s national energy policy is an incoherent, internally conflicting, costly mess. A strongly recommended approach is to go back to the tried and proven—a competitive market policy—no exceptions no excuses. This would save about $40 billion per year in budget costs or over $400 billion over ten years. Get rid of the RFS, postpone all pending EPA regulations indefinitely, CAFÉ, etc saving at least $500 billion in economic costs over ten years. Get rid of all federal credit programs for energy—DOE, USDA, RUS, TVA, PMAs. Zero all of them out in the first budget. Same for all energy tax subsidies. This is a take “no energy prisoners” set of policies then couple this long overdue major house cleaning with major reforms to aggressively lease far more federally owned acreage than has been the case. This would include the leasing of federal energy resources onshore and offshore including Alaska Naval Petroleum Reserve and a small but important land area inside the ANWR in Alaska. Further, begin the drawdown and selloff of the SPR potentially worth over $50 billion in revenues from the sale of the oil and storage facilities. Finally, approve the export of oil and gas from the US to any buyers with cash to pay for it at world market prices
These suggested reforms, if attained, could probably add 1% of additional GDP growth annually while achieving gradual economically effective reductions in GHG emissions !
References
- For detailed complete history of US energy policy see “Corn Ethanol, Who Pays Who Benefits” by Ken G. Glozer, 2009, pp 1-69, Hoover Institute.
- For the TVA see “Sunset the TVA” by Ken G. Glozer, 2014, Heritage Foundation, See the Heritage website
- For a detailed assessment of federal electricity subsidies see “Comments for Docket No. AD05-17-000 On FERC’s Draft Report to Congress on Competition in the Wholesale and Retail Markets for Electric Energy” 200 plus pages of detailed assessments and descriptions of the many USG subsidies for electricity providers filed June 23, 2005 by OMB Professionals, Inc, Ken G. Glozer, President
- For a more detailed specification for a competitive market energy policy see energy policy paper prepared by Ken G. Glozer as a formal response to the House Energy and Commerce Committee’s request for public comments on their proposed energy policy paper.
- For a brief discussion of why the SPR is not needed any longer and who benefits if the SPR is maintained at the existing level of 700 million barrels see Ken G. Glozer’s letter dated May,2015, to Chairman Fred Upton, Energy & Commerce Committee commenting on draft SPR legislation sponsored by Chairman Fred Upton (attached).
6. Various other publications/articles on GHG emissions and their impacts on the climate, detailed descriptions of energy tax subsidies published by the Joint Tax committee staff, EIA’s reports 1992,1999, 2007, 2010 on federal energy subsidies, etc.
7. Resume (attached) for Ken G. Glozer, former White House OMB SES career employee from 1970-1997, served as OMB’s energy expert. From 1997 through 2012 setup and built an energy consulting practice serving Fortune 100 companies in their dealings with the USG. Clients included; Exxonmobil, BP, Conoco Phillips, Ford, GM, Chrysler, Duke Energy, CINERGY, American Petroleum Institute, Edison Electric Institute and many others. Current working full time managing my personal investments in real estate, stocks bonds, commodities, and classic cars from the 1950s,60s.