Ending $4 billion U.S. oil, gas drilling subsidies would have low impact: study

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Oil well (photo by John Hill)

Oil well (photo by John Hill)

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U.S. subsidies to the oil and gas industries are often a flashpoint among electric-car advocates and environmentalists.

They see a conflict in the government providing billions of dollars in incentives for drilling while simultaneously attempting to lower consumption of carbon-emitting energy sources.

Now a new study suggests that those subsidies could be entirely eliminated with little effect on energy prices.

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As covered in the Upshot analysis column of The New York Times, the study was conducted for the Council on Foreign Relations.

An economics professor at Tufts University, Gilbert Metcalf, analyzed what would happen if three types of federal subsidies for oil and gas production were to be eliminated—in particular, how that would affect consumer prices for gasoline, natural gas, and electricity.

Together, the subsidies cost U.S. taxpayers roughly $4 billion a year.

Natural gas flaring from oil well [licensed under Creative Commons from Flickr user Sirdle]

Natural gas flaring from oil well [licensed under Creative Commons from Flickr user Sirdle]

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Metcalf's conclusion, contrary to assertions by the oil and gas industries and their lobbyists, suggests that the impact on production and consumption of those fuels would be extremely limited.

He modeled how eliminating the subsidies could affect drilling, which would in turn impinge on production, prices, and consumer demand for the fuels.

His data set included historic evidence of how energy companies have reacted in the past to oil- and gas-price fluctuations.

In the case of oil, Metcalf reported, elimination of the subsidies might cut U.S. domestic production by 5 percent within 15 years.

But because production in other countries would likely rise to meet demand, the global price for oil would likely rise just 1 percent, with at most a 2-cent-per-gallon increase in U.S. retail gasoline prices.

King Fahd Road in Riyadh, Saudi Arabia

King Fahd Road in Riyadh, Saudi Arabia

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Eliminating subsidies for domestic natural gas would have slightly more effect, his model showed, because it is not such a global and fungible product.

Loss of government support could cut U.S. production by 3 to 4 percent, he estimated, which might raise natural gas prices—which have fallen over the past 15 years—by up to 10 percent.

That in turn would likely cut demand for natural gas by 3 to 4 percent. But a household's monthly electric bill—which now averages about $107—would increase by $7, at most.

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It seems relatively unlikely that under the current political climate, Congress would agree to phase out these subsidies, which flow only to certain states.

But as the U.S. struggles toward cutting its carbon output, the existence and cost of such subsidies will likely remain in the public eye, and a source of continued lobbying from both sides.

The study, The Impact of Removing Tax Preferences for U.S. Oil and Gas Production, can be found here.

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