Consumer Energy Report is now Energy Trends Insider -- Read More »

By Robert Rapier on Dec 13, 2012 with 22 responses

An Oil Company Finds Itself On the Losing End of Fossil Fuel Subsidies

Petrobras: A Case Where ‘Fossil Fuel Subsidies’ are Bad for an Oil Company

When most people hear the phrase “fossil fuel subsidies” it conjures up images of governments giving their hard-earned tax dollars to already highly profitable oil companies. That’s what they have been conditioned to think by certain activists and politicians, and quite naturally this image evokes outrage.

On more than one occasion, I have pointed out that the vast majority of these so-called fossil fuel subsidies are really governments keeping fuel prices artificially low for consumers. This is a subsidy because consumers aren’t paying the true price of the fossil fuel, and the amount of the subsidy is the difference between what consumers pay and the market price. In most cases, the primary beneficiary of the subsidy is the consumer, and the secondary beneficiary is the fossil fuel company who gets to sell more product than they otherwise might.

In oil producing countries, the government is typically the entity providing the subsidy. They do this by giving up revenue. For example, in Venezuela consumers can buy gasoline for pennies a gallon. The state-owned oil company Petróleos de Venezuela, S.A. sells gasoline at well below the cost to make it, and the loss of revenue to the government is the amount of the fossil fuel subsidy to the consumer.

Then there’s the Brazilian oil company Petrobras (NYSE: PBR). Petrobras is one of the world’s largest oil and gas companies, and the largest company in Latin America. Petrobras is a publicly traded company, and in fact I personally have owned shares in the company since late 2008, when I bought them following the oil price crash in the second half of 2008. But the Brazilian government also owns the majority of the voting shares in the company, and that’s where things get interesting.

To combat rising inflation, Brazilian President Dilma Rousseff has stopped Petrobras from increasing its fuel prices. Because of strong demand growth in Brazil, the country is no longer self-sufficient in refining capacity. Therefore, Petrobras is actually being forced to import gasoline and sell at 8% below cost. This has resulted in an estimated $8 billion loss for 2012, which is the company’s first loss since 1999.

Now imagine for a moment what this actually means. Petrobras itself is eating this subsidy, which is benefiting consumers. But the subsidy gets tallied onto the roles of “fossil fuel subsidies” — even though in this case it is costing an oil company money. Taxpayers, activists, and politicians see this outrageous tally of fossil fuel subsidies and get angry at the oil company — which is getting killed by this subsidy.

It boggles the mind.

Link to Original Article: An Oil Company Finds Itself On the Losing End of Fossil Fuel Subsidies

By Robert Rapier

  1. By GreenEngineer on December 13, 2012 at 6:13 pm

    Robert,

    As I hope you’ve picked up, I am very aware of the American consumer/voter’s primary role in insisting on cheap oil at any cost.  Many who demonize the oil companies are engaging in blame transference away from themselves.

     

    That said, and trying to leave aside the blame game, you said the following:

    In most cases, the primary beneficiary of the subsidy is the consumer, and the secondary beneficiary is the fossil fuel company who gets to sell more product than they otherwise might.

    I think that statement understates the impact of these subsidies, and that the reaction against Petrobras makes sense if you consider it in context.

    I agree that the short term benefit relative to any given oil company is secondary, in that it allows them to sell more profit.  But I argue that the maintenance of low oil prices over a long period of time (decades) has an effect that is much more pernicious, and much more beneficial to the oil industry as a whole, than your statement suggests.

    Basically, having very cheap oil has had several related and powerful effects:

    • It has retarded the development of effective alternatives, either in terms of fuels (unlikely to be technically possible, but who knows), battery/EV/hybrid technology (more promising than alternative liquid fuels), or public transit (the only real long-term solution, IMO).
    • It has created a sense of entitlement to cheap oil.  This is one of those things where the cause-effect loop is self-reinforcing.  Consumers have an irrational/unreasonable expectation of cheap oil.  Politicians and oil companies bend over backwards (and in the case of Petrobras, break their own back) to provide same.  This reinforces the consumer’s sense of entitlement, and makes look foolish those who would declare cheap oil to be an artificial, temporary endowment rather than a permanent condition.
    • It has created an urban and industrial infrastructure in which oil, and driving, are basically necessary for participation in society.  Driving is treated like a right, not a privilege (at least in the US); the problem is that, practically speaking, it has to be treated that way.  Taking away a person’s right to drive severely compromises their life options.  We will (sometimes) do that for serial DUI offenders, but we are far to hesitant to (for example) take driving privileges away from octogenarians with failing eyesight and reflexes because doing so really is cruel.  This dilemma wouldn’t even exist, if our urban fabric for the last 50 years was not designed around the assumption of infinite cheap fuel.
    • Similar the the previous point, the auto-centric urban infrastructure imposes enormous costs on everyone in order to cater to the needs of the car.  This includes everything from urban air quality and stormwater management problems, to the number of people and pets killed every year by cars.

     

    Again, my point here is not to place blame.  But I wanted to point out how the culture of cheap oil benefits the oil companies (and related industries) across the board even when it hurts an individual company.  It has created a situation where serious people do not take seriously any notion of getting away from oil (voter-directed rhetoric notwithstanding; as we both know, that’s all empty talk).

    This, to my mind, is a perfectly reasonable basis to object to these subsidies and is very much the point of the more enlightened sustainability activists I know.  I think your statement on the topic glosses over this very real phenomenon, which deserves to be unpacked rather than ignored.

    [link]      
    • By Robert Rapier on December 13, 2012 at 6:44 pm

      But I wanted to point out how the culture of cheap oil benefits the oil companies (and related industries) across the board even when it hurts an individual company.

      No doubt that historically oil companies have benefited from these types of subsidies, and the industry would be smaller today if they did not exist. Further, I am not for them — whether being paid by the government or in this case extracted from the companies themselves. 

      My point is simply to continue to point out that when it comes to subsidies, it’s not as simple as it may sometimes seem. In this case, consumers would be upset by a subsidy — which in this case transfers money from an oil company into their pockets.

      RR

      [link]      
      • By GreenEngineer on December 13, 2012 at 7:00 pm

        I know that you are not defending the subsidies.  And I agree that many who attack the subsidies do so out of ignorance and/or emotionalism.

         

        That said, I think my point is that – on the long-term strategic level – it actually is fairly simple: low fossil energy prices have allowed the fossil energy industries to complete dominate, both in real space and in terms of mindshare.  

        There are very good technical reasons (convenience, density, etc) why one might rather burn coal than build a windmill.  However, the technical benefits of fossil power are not so completely overwhelming as would be suggested by the predominance of fossil energy sources in our economy, except for the fact that costs are artificially low and have been kept that way for decades.

        On a short-term, tactical and financial level, I agree: subsidies are complicated and dealing with them intelligently is not straightforward.  But in terms of their impact on a decadal timescale, their impact is pretty one-sided and clear.

        (Note that I consider the permissiveness of externalized costs to be a subsidy – probably the largest single source of subsidy and certainly the one of longest standing.  The direct financial subsidies are minor by comparison, but they are also much easier to attack.  So if one’s goal is to see the price of energy go up, then removing the direct financial subsidies is one way to do that in the shorter term, so realpolitik makes them a target.  One should also fight for a price on carbon and on other environmental externalities, but that is a long-term, long-shot campaign.)

        [link]      
        • By Ed Reid on December 13, 2012 at 8:17 pm

          It would be nice if, in the process of fighting for a price on carbon, we had any clue what that price should be. I have seen estimates ranging from $20-300 per ton. With a range that broad, there is a reasonable chance that the “right” price might lie somewhere within the range.

          Once we have determined the “right” price for carbon, we might move on to determine how many angels can dance on the head of a pin. :-)

          [link]      
          • By GreenEngineer on December 13, 2012 at 8:44 pm

            The right price for carbon is the classic capitalist pricing formula: all the market will bear.  Dumping carbon in the atmosphere is pissing on your (and everyone else’s) children’s future.

             

            We are way, way overdue for reigning in our carbon consumption.  We’re seeing the impact of climate change now, but the thing people don’t realize is that, even if we had gotten serious and made the transition to renewables in the 70′s, we would still be seeing climate impacts today.

            The difference is that, had we acted 30 years ago, we would not then be seeing much worse impacts 50 years from now.  As it stands, we will.  But we still have a chance to improve the picture for our great-grandchildren.

            At any rate, one thing is completely clear: the most-wrong price for carbon is the one we have now.  Externalities must be internalized for markets to function correctly – otherwise the “free market” is just an excuse for the economically and politically advantaged to steal from the rest of us, by socializing the costs of associated with their profits.  Carbon is one of the biggest externalities we currently have, and certainly the one of the greatest long-term consequence.

            [link]      
            • By Ed Reid on December 14, 2012 at 3:02 pm

              And here I thought the stated intent was to monetize and internalize the environmental externalities resulting from carbon emissions. That would require knowing, with some degree of accuracy, what the externalities (both positive and negative) really are, regardless of what the market would bear.

              However, if the intent is actually to punish the emitters of CO2, rather than merely to internalize the externalities, then “all the market will bear” is not sufficient. The carbon price must be more than the market will bear, so that the market decides not to bear it any longer.

              The freedom of religion guaranteed in the First Amendment to the US Constitution guarantees both your right to believe as you wish, but also to practice what you believe. Your reproduction of the short version of the AGW Creed above establishes what you believe. I trust you also assiduously practice in accordance with that Creed.

              [link]      
            • By GreenEngineer on December 14, 2012 at 4:54 pm

              Ah, a flat-earther.  Lovely.

              What’s your excuse for rejecting the conclusions of multiple distinct scientific disciplines?  It’s not just climatology.  Field ecologists have verified the impacts predicted by the models.  Do you really believe that all the researchers in both fields are engaged in an enormous conspiracy?

              Or do you reject climate science because the models don’t all exactly agree with each other (thus proving that you know nothing at all about computer modeling)?

              Or is it just too ideologically and economically difficult to accept that natural limits apply to human activity, just like they do to EVERY OTHER thing that has ever lived on this planet?

              [link]      
            • By Ed Reid on December 14, 2012 at 5:48 pm

              http://wattsupwiththat.com/2012/12/14/the-real-ipcc-ar5-draft-bombshell-plus-a-poll/#more-75771

              Climate science is based on data that aren’t and models that don’t.

              [link]      
            • By GreenEngineer on December 14, 2012 at 8:03 pm

              Climate science is based on data that aren’t and models that don’t.

              Only if you believe that partisan bloggers with clear financial ties to the fossil energy industries are a more reliable source of information than peer-reviewed publications in scientific journals: http://goo.gl/7zO1v

               

              Dude, you are going full-on tinfoil hat brigade.

               

              [link]      
            • By GreenEngineer on December 14, 2012 at 8:21 pm

              I suppose you also believe that the ocean research community (an entirely different group of scientists) are also part of the global conspiracy?

              http://goo.gl/yv25R

              http://goo.gl/c4dpz

              Or do you have some other way to explain away ocean acidification?

              [link]      
            • By Ed Reid on December 14, 2012 at 9:53 pm

              Once data have been “adjusted”, “infilled”. “homogenized”, “pasteurized”, “folded”, “bent”, “spindled” and “mutilated”, they are no longer DATA. Rather, they become “undata” and then the “global temperature record”.

              The graph in my last comment was from the IPCC AR5 draft. You might not like it, but that is not my problem. The “data” are not data anymore; and, the models don’t accurately model. Aside from that, the science is “settled”. If that is all it takes to satisfy your curiosity, so be it. My curiosity takes more to satisfy.

              [link]      
            • By Michael Pawluk on December 14, 2012 at 11:38 pm
              [link]      
            • By russ on December 15, 2012 at 2:58 am

              Green yes! An engineer? Maybe and maybe not – not all engineers have their heads screwed on without cross threading. Your entire rant is just rehashing of various talking points by loonies of the enviro mafia where common sense an reality play no part.

              You really lose your case in the ranting.

               

              [link]      
    • By Russ Finley on December 15, 2012 at 12:41 pm

      GREENENGINEER said:

      .. it actually is fairly simple: low fossil energy prices have allowed the fossil energy industries to complete dominate, both in real space and in terms of mindshare.

      However, the technical benefits of fossil power are not so completely overwhelming as would be suggested by the predominance of fossil energy sources in our economy, except for the fact that costs are artificially low and have been kept that way for decades.

      I agree with you and Robert that there is no need to subsidize the fossil fuel industry.  I agree with Robert that subsidies are not needed for fossil fuels to remain economically viable.

      I agree that we should be trying to move to less environmentally destructive sources of energy.

      I disagree that fossil fuels would never have come to dominate without government subsidies, and that is an understatement.

      Read the book “Coal: A Human History” by Barbara Freese. Areas of China and Europe were denuding their forests for fuel. Canals were being dug to transport goods. Water wheels, windmills, and sail boats were centuries old technologies when along came coal and the steam engine, following by oil and the internal combustion engine.

      Subsidies (like most subsidies) vary widely all over the world. They are often (although not always) a tool used by politicians to stay employed by using the public larder to buy votes from powerful interests. That is a given and a constant.

      In some cases energy subsidies mean the difference between solvency and bankruptcy, as is the case with corn ethanol and soy biodiesel, but in the case of coal, oil, and natural gas, subsidies don’t make or break the industry.

      There are very good technical reasons (convenience, density, etc) why one might rather burn coal oil than build an windmill electric car. 

      You forgot to mention cost. Even as an owner of an electric car, I still have to admit that the above statement is accurate. Coal defeated oil in the competition to provide electric power although nuclear has given it a run for its money, hydro, less so, natural gas is gaining ground, and oil won the battle against natural gas and coal for transport.

      Fossil fuels have dominated because they have been by far the cheapest source, subsidy or no subsidy. If we want to change the status quo we have to start by recognizing that reality.

      The fact that European’s pay twice as much for gasoline and diesel hasn’t ushered in an alternative mode of transportation. They just pay more per unit of energy and attempt to compensate with less travel, smaller cars, and more public transport. They may use less fossil fuel but their energy bills are no lower and they still use the same technology (internal combustion engine). Conservation can be driven by price, but conservation alone isn’t enough and obviously, price increases do not guarantee the creation of game changing technologies.

      So what is the answer? I have my hypothesis but that’s another subject.

      [link]      
      • By Ed Reid on December 15, 2012 at 1:45 pm

        Russ,

        http://www.eia.gov/analysis/requests/subsidy/

        The largest single “subsidy” to the fossil energy industries is LIHEAP (see table ES2).

        LIHEAP is not truly a subsidy to the fossil fuel industry, it is a welfare program which provides support to low income individuals to assist them in paying their energy bills. In the specific cases of oil and propane suppliers, if customers do not pay their bills, they do not receive future deliveries of fuel; and, may be subject to recovery of stored fuel for which the suppliers have not been paid.

        The primary indirect beneficiaries of LIHEAP are electric and gas utilities, which are typically prohibited from discontinuing service to “payment troubled” customers during the winter heating season. However, once the heating season is over, the utilities typically can discontinue service until the customer pays overdue account balances; and, the utilities can usually also charge for reconnection of service once full payments have been received. Uncollectable utility bills represent a cost to the utilities, but not to their fossil fuel suppliers, who had already been paid for the fuel.

        Most other “subsidies” to the fossil fuel industries are “tax expenditures”, the majority of which are common to all US industries, though they might have unique names when applied to the fossil fuel industries. Some others are small producer incentives, which are not available to the “majors”. Termination of those “tax expenditures” would likely result in offsetting price increases, which would likely increase the need for and magnitude of LIHEAP funding.

        I believe that “rent seeking” will continue unabated, as long as there is “rent” to be sought and humans who believe they can benefit from providing or receiving it.

        [link]      
        • By Russ Finley on December 15, 2012 at 9:46 pm

          Not sure I’m following. Are you suggesting that giving a discount to the poor so they don’t freeze to death is a subsidy to fossil fuel companies?

          [link]      
          • By Ed Reid on December 16, 2012 at 8:53 am

            I am not suggesting that at all. EIA lists it on Table ES2 of the linked document. I think its inclusion is ludicrous.

             

            [link]      
      • By GreenEngineer on December 17, 2012 at 7:54 pm

        Fossil fuels have dominated because they have been by far the cheapest source, subsidy or no subsidy.

        Certainly that has been true historically.  Would it still be true today, were the subsidies removed?  It’s hard to say, but I doubt it.  If you included the cost of militarizing the Middle East, and the cost of environmental externalities, then I doubt it very much indeed.  Coal is extremely expensive, if the accounting is honest.

        If we want to change the status quo we have to start by recognizing that reality.

        I think we agree in principle, but I would state it a bit differently.  Our economy is based on extremely, unsustainably cheap energy, and this low cost of energy is built into the bones of the economy.  If we want to change the status quo, we are going to have to get used to the idea of paying more for our energy.  And that’s not going to be particularly fun.

        [link]      
        • By Ed Reid on December 18, 2012 at 9:27 am

          “Coal is extremely expensive, if the accounting is honest.”

          US EPA, presumptively the experts in determining the externalities costs of coal, use $9 million as the societal cost of a life “unnecessarily shortened”, regardless of the age of the person whose life was “unnecessarily shortened”. That is how coal use becomes “extremely expensive“. The magnitude of this societal cost is difficult to appreciate without context.

          There are approximately 1.2 million lives “unnecessarily shortened” (terminated) by abortion-on-demand each year in the US. Assuming EPA’s “accounting is honest“, the societal cost of abortion-on-demand in the US is approximately $10.8 trillion [(1.2*106) * (9*106)] , or more than 2/3 of US GDP. The cumulative societal cost since Roe vs. Wade is ~$486 trillion.

          Additional perspective can be provided, assuming my “accounting is honest”, by noting that eliminating the societal cost of the lives “unnecessarily shortened” by abortion-on-demand for 3 years would fully fund the US transition to a zero carbon emissions economy over a period of ~3 years, with currently available technology.

          Context is important!

          [link]      
  2. By Jim Takchess on December 13, 2012 at 8:43 pm
    [link]      
  3. By Douglas Hvistendahl on December 15, 2012 at 8:28 am

    Personally, I would like to see some form of personalized rapid transit. It has been done on a small experimental scale, and one pilot project that I know about. The J-pod is worth looking at: it is a fraction of the cost of light rail for the equivalent capacity. It can be electrified, and doesn’t need batteries. For urban and the denser suburban areas, public transit makes the most sense. I wonder, has anyone worked out the economics for strip cities organized around some form of mass transit? With modern weaponry, my nickname for a centralized city is “ground zero” AKA bulls eye. A strip city would be less of a target. Also, urban dwellers in a strip city format would be closer to their food supplies. Another thing consumers think they are entitled to is cheap food, but any crisis in transportation economics would hit this also.

     

    [link]      
Register or log in now to save your comments and get priority moderation!