High Oil Subsidies Ensure Profit for Nearly Half New U.S. Investments, Study Shows

The findings suggests U.S. oil may be more dependent on subsidies than previously thought. The subsidies could also undermine international climate goals.

Oil drilling.
A new study determined that the impact of federal and state subsidies could increase domestic oil production by 17 billion barrels over the next few decades, producing enough oil to put the equivalent of 6 billion tonnes of CO2 into the atmosphere. Credit: David McNew/Getty Images

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Government subsidies to American energy companies are generous enough to ensure that almost half of new investments in untapped domestic oil projects would be profitable, creating incentives to keep pumping fossil fuels despite climate concerns, according to a new study.

The result would seriously undermine the 2015 Paris climate agreement, whose goals of reining in global warming can only be met if much of the world’s oil reserves are left in the ground.

The study, in Nature Energy, examined the impact of federal and state subsidies at recent oil prices that hover around $50 a barrel and estimated that the support could increase domestic oil production by a total of 17 billion barrels “over the next few decades.”

Using that oil would put the equivalent of 6 billion tonnes of CO2 into the atmosphere, the authors calculated.

Taxpayers give fossil fuel companies in the U.S. more than $20 billion annually in federal and state subsidies, according to a separate report released today by the environmental advocacy group Oil Change International. During the Obama administration, the U.S. and other major greenhouse gas emitters pledged to phase out fossil fuel supports. But the future of such policies is in jeopardy given the enthusiastic backing President Donald Trump has given the fossil fuel sector.

The study in Nature Energy focused on the U.S. because it is the world’s largest producer of fossil fuels and offers hefty subsidies. The authors said they looked at the oil industry specifically because it gets double the amount of government support that coal does, in the aggregate.

Written by scientists and economists from the Stockholm Environment Institute and Earth Track, which monitors energy subsidies, the study “suggests that oil resources may be more dependent on subsidies than previously thought.”

The authors looked at all U.S. oil fields that had been identified but not yet developed by mid-2016, a total of more than 800. They were then divided into four groups: the big oil reservoirs of North Dakota, Texas and the Gulf of Mexico, and the fourth, a catch-all for smaller onshore deposits around the country. The subsidies fell into three groups: revenue that the government decides to forgo, such as taxes; the government’s assumption of accident and environmental liability for industry’s own actions, and the state’s below-market rate provision of certain services.

The authors then assumed a minimum rate of return of 10 percent for a project to move forward. The question then becomes “whether the subsidies tip the project from being uneconomic to economic,” clearing that 10 percent rate-of-return threshold.  

The authors discovered that many of the not-yet-developed projects in the country’s largest oil fields would only be economically feasible if they received subsidies. In Texas’s Permian Basin, 40 percent of those projects would be subsidy-dependent, and in North Dakota’s Williston Basin, 59 percent would be, according to the study.  

Subsidies “distort markets to increase fossil fuel production,” the authors concluded.

“Our findings suggest an expanded case for fossil fuel subsidy reform,” the authors wrote. “Not only would removing federal and state support provide a fiscal benefit” to taxpayers and the budget, “but it could also result in substantial climate benefits” by keeping carbon the ground rather than sending it into a rapidly warming atmosphere.