Oil and Gas

Democrats Call for Shifting Subsidies to Green Energy

Kenneth Stier|Features Writer

Investors in renewable energy have long suffered from Washington’s seesawing policy support.

That’s in contrast to the warm – and generous - embrace big energy firms have always found in Congress.

Now Democrats think they have a revenue-neutral solution: shift some $18 billion in subsidies now helping the bottom line of the oil and gas industry to fledging green industries – wind, solar and alternative fuels.

Wind turbines are seen in Dronten, the Netherlands, July 27, 2006. The Dutch have used windmills for centuries to pump water out of their low-lying country, and old-fashioned wooden mills are closely linked with their international image. But in the face of a large and growing lobby against the windmill's modern electricity-generating counterpart, the wind turbine, the country has now started moving them offshore and out of sight. (AP Photo/ Peter Dejong)

That’s the thrust of the proposed Renewable Energy and Energy Conservation Tax Act of 2008, which was the subject of a Congressional hearing Tuesday where top oil executives – from BP, Chevron, ConocoPhillips , ExxonMobil and Shell – were called to explain how these subsidies are justified at a time of record company profits.

“On April Fool’s Day, the biggest joke of all is being played on American families by Big Oil who are using every trick in the book to keep billions in federal tax subsidies, even as they rake in record profits,” complained Chairman Edward J. Markey (D-Mass.) and the Select Committee on Energy Independence and Global Warming.

At the hearing, which came as the national average for a gallon of gas hit a new all-time record and a nationwide truckers protest, Markey appealed to the companies to invest “at least 10 percent of their profits” in renewable energy and biofuels to help consumers.

Markey said poor Americans - those making under $20,000 a year – are spending roughly 10 percent of their income on fuel to drive an average of 12,000 miles a year. 

Big Oil Tax Incentives

The five major oil represented at Tuesday’s hearing collectively earned $123 billion last year but only spend roughly one percent of net profits on developing alternatives, he added.

There are currently modest tax credits available for renewables – generally $0.02 per kilowatt hour produced – which brings solar and wind closer to being cost competitive with natural gas - but these are set to expire at the end of the year.

John Hofmeister, president of Shell Oil , said his firm was making significant investments in renewables – including involvement in 1,100 megawatts of wind energy. But he did not say what portion this was of the company’s  $29 billion capital expenditure program this year.

“This new gas price record is a perfect example of why we need these oil companies to go on the record with the American people to discuss our dangerous dependence on oil,” said Markey.

There is an irony here. The principal pool of money Markey is targeting – $13 billion in tax credits for the petroleum industry as part of the America’s Job Creation Act of 2004 – was aimed at boosting domestic production by reducing the tax burden from 35 to 32 percent.

The bill was aimed at boosting domestic production for all manufacturers.  The portion set aside for the oil and gas industry came to be derided as the controversial “Drill American First” policy.

Domestic exploration activity has spiked recently but Mark Kibbe of the American Petroleum Institute said it was too early to know just how new production will result and even more difficult to determine how tax policy influenced these investment decisions.

In fact, domestic field production decline slightly – from 7,228,000 barrels per day in 2004 to 6,879,000 bpd in 2007 but Kibbe said since these are long-term investments – 10-30 years in most cases – no firm judgments should be made. 

Instead he pointed to a substantial increase in the number of wells drilled domestically, which shot up from 40,271 in 2004 to 52,731 in 2007.

“The record number of well completions is a good indicator of what we may see down the road as a result of this expanded investment currently,” he said.

But many consider these tax credits wasteful especially since higher prices are a far more important factor encouraging more domestic exploration and production.

“Domestic production is going up anyway because of higher oil prices – domestic oil rigs that weren’t profitable two years ago are now profitable – they would be profitable with or without that deduction,” says Gilbert Metcalf, an energy economist currently at the National Bureau of Economic Research. “So it is simply giving some additional cash to producers who are going to be producing anyway.”

The idea of shifting oil and gas subsidies – which have been around for decades, mostly in the form of accelerated depreciations worth about $9 billion over five years - to renewables has been kicking around for some time.

A similar measure passed the House in December but, after failing to pass the Senate by a single vote, it was stripped out of the final version of the Energy Independence and Security Act of 2007 that became law.

Eben Burnham-Synder, Markey’s spokesman said passage of the new draft bill was even more likely now as prices continued to soar and enjoyed strong support in the Senate including from majority leader Harry Reid. 

But Metcalf, a Tufts University professor, was critical of Markey’ call for oil companies to boost their investment in renewables.

“Requests to do these sorts of things are noble gestures but we are better off – if we are concerned about global warming  - let’s set a carbon tax,” argued Metcalf. “That will get the attention of these companies much more than a plea to shift 10 percent of their profits into renewables.”