October 04, 2017
A Washington Post article on government subsidies for oil and gas production might have misled readers on the importance of these subsidies for global warming. The article focuses on the finding of a new report that almost half of projected new production in the U.S. would not be profitable without various tax and other subsidies. This finding has less importance for global warming that the piece implies.
First, it applies to future, not current production. Once a well has been dug, it is generally reasonably cheap to keep it in production. Output will decline as the oil or gas becomes depleted. But the immediate impact of removing subsidies would be minimal.
The second point is that it assumes the price of oil remains at its current level of $50 a barrel. As the piece notes, if oil prices rise to $70 a barrel (they had recently been over $100), then the subsidies would have far less impact on profitability. I have no crystal ball, so I’m not projecting higher prices. My guess is they are more likely to go lower than higher, given the many areas with substantial potential to increase production and the rapid growth of electric car production, but certainly no one can rule out substantially higher oil prices in the future, in which case the subsidies will not be of much consequence.
The third point is that the impact of U.S. production on global warming will be very limited. The story here is that, without the subsidies, cheaper foreign oil and gas will displace more expensive U.S. produced oil and gas. Increased U.S. consumption of foreign fossil fuels will lead to somewhat higher world prices. This will both provide incentives for more production elsewhere and also lead to somewhat reduced consumption worldwide as people conserve energy and switch to cleaner sources.
In this way, reduced U.S. production can be thought of as equivalent to imposing a modest carbon tax. That’s a good thing, but it will not have a large impact on the future course of global warming. And just to be clear, subsidizing the fossil fuel industry is really stupid policy.
Comments