Categorized | Economy, Food and Ag, Trade

Daryll Ray: Oil subsidies vs. ethanol subsidies

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Since energy is a big part of our trade deficit, from 30-50% depending upon the year (approximately), it is a subject worth considering on the trade reform blog.  The energy issue is really hard to get consensus on, especially with the hot button issue of climate change in the middle of it.

Do we do domestic production?  Well yes.  What forms of domestic production?  Oil, coal, ethanol, solar, wind, nuclear, hydro?  If the cost is higher than imported fossil fuels, then do we get a net benefit elsewhere?  Where do the costs and the benefits fall?  Are alternative energy sources too costly or not?   Does the green energy economy create so many jobs that the benefit outweighs the costs elsewhere?  Do we look short term or long term?

People don’t like subsidies, except the ones they receive.  Ethanol is attacked for being subsidized, but oil is subsidized too.  And what is a subsidy anyway?

Daryll Ray, ag economist at the University of Tennessee looks at these issues in a recent article.

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Ethanol and oil subsidies: A case of competing claims and self-justification

By Daryll Ray

A common question we hear when we tell people that we are agricultural policy analysts is “Well, whaddya think about ethanol subsidies?” That question becomes critically important as the blenders credit, the ethanol import tariff and the small producers’ tax credit face a deadline of December 31, 2010 for renewal by a lame duck Congress.

Over a period of three weeks (October 13 – October 29, 2010), Todd Neeley, a DTN staff reporter, wrote a series of six articles that compared the subsidies received by the ethanol and oil industries. Neeley writes, “DTN spent months examining the various tax credits, incentives, and other financial support received by the oil and ethanol industries to see which one gets more subsidies.” The information he uses was culled from “academic studies, state government documents, press releases, government websites, and other sources.”

Reading the articles, one is reminded of a scene from the 1972 movie, Deliverance, only this time what we have is not “Dueling Banjos,” but rather “Dueling Subsidies.”

The first thing that becomes apparent from reading the six articles is that hard numbers are difficult to come by. Second, there is no common definition of a subsidy, especially when various tax credits and deductions used by oil and ethanol are available to a large number of other firms and industries as a part of the overall industrial policy framework of the US.

That being said, DTN is to be commended for tackling an issue that will be hotly debated as soon as the election is over. Though DTN is a subscription service, we hope that they will find a way to make the series of six articles available to the public.

According to Neeley, “Looking at state and federal taxes and incentives available exclusively to the oil industry, DTN’s tally comes to $17.9 billion annually. The comparable figure exclusively for ethanol is $7.1 billion. This does not include tax credits and other incentives that both industries share, such as the blenders’ credit or VEETC.”

When other “subsidies” are included the numbers can soar. For oil, the numbers Neeley came up with can range between $100 billion and $200 billion annually, not including any costs for military activities in the Persian Gulf. When a share of military costs is added in, the numbers can go as high as $281 billion according to Neeley.

The comparable number for ethanol is $16 billion, not counting multiple state subsidies—Tax Increment Financing granted by counties to attract plants and other state incentives for ethanol—that are difficult to track. The oil industry argues that the net effect of the subsidies is offset by the more than $200 billion that they spend annually on research and development.

For ethanol, the subsidies have been crucial to the development of the industry over the last 30 years. Without the subsidies and mandates, the ethanol industry would be far smaller than it is today.

Both industries have costs that are not factored into the balance sheets of either industry: the sealing of wells, and environmental remediation for oil, and water usage and the dead zone in the Gulf of Mexico for agriculture in general and 4 billion bushels corn used by the ethanol industry in particular.

In reading the articles, one gets the clear impression that Neeley’s research for DTN has just scratched the surface of a contentious issue where accurate numbers are difficult to come by—neither industry publishes a list of the subsidies they receive. In addition, some of the numbers are provided by sources that have an ax to grind.

The series did not deal with the issues surrounding the use of a finite resource (oil) compared to the use of a renewable resource (ethanol)—though the production of ethanol is currently dependent upon fossil fuel in the production of the corn used to make ethanol. Nor did it deal with climate change caused by the burning of fossil fuels and the clearing of land for agricultural use.

Even with the uncertainty of the numbers, we were left asking ourselves, “compared to what?” Given the difference in the relative size of the two industries, it would have been more informative if the numbers were converted to a per gallon subsidy estimate. Certainly that will be a question that many will ask.

Lastly, the series did not explore the role of ethanol in using up to 4 billion bushels of corn a year. If the ethanol industry were to shrink in the absence of the subsidies up for renewal this year, corn prices could end up somewhere south of the loan rate. If that were to happen, we could see LDPs (remember them?), soaring federal expenditures, and people talking about how US policy has hurt the income of farmers around the world.

Whaddawe think about ethanol subsidies? Well, to start with, it is complicated. And how we deal with them could affect farm prices around the world.

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu  and  hdschaffer@utk.edu;  http://www.agpolicy.org.

Reproduction Permission Granted with:
1) Full attribution to Daryll E. Ray and Harwood D. Schaffer, Agricultural Policy Analysis Center, University of Tennessee, Knoxville, TN;
2) An email sent to hdschaffer@utk.edu indicating how often you intend on running the column and your total circulation. Also, please send one copy of the first issue with the column in it to Harwood Schaffer, Agricultural Policy Analysis Center, 309 Morgan Hall, Knoxville, TN 37996-4519.

2 Responses to “Daryll Ray: Oil subsidies vs. ethanol subsidies”

  1. Mo says:

    Also research into deep sea drilling for years I believe was heavily subsized by the federal government.

  2. Dr Bob Goldschmidt says:

    The terms “renewable ethanol” and “clean coal” are have been recognized for some time by scientists as fabrications. They are political constructs designed to attract federal dollars and glean votes.

    The oil industry, however has carried this far beyond the bounds of morality. Through Vice President Cheney they targeted Iraq as the last significant area in the world for development of new oil reserves. He met with all of the major oil companies of the world, before the war, and they divided Iraq up into specific development regions for each company as illustrated by a map which has been released under the Freedom of Information Act.

    In 2006, the late Milton Copulos gave testimony to the Senate Foreign Relations Committee that the military cost to the US of securing the world’s imported oil supply was approaching one trillion dollars a year!

    The indirect costs of our delayed energy transformation to true renewables such as solar and wind are immeasurable. For example, what will the cost be when Iran uses the profits from the high price of oil to go nuclear?

    If our economy and democracy are to survive, we desperately need a federal industrial policy which addresses our biggest economic threats — energy transformation and quality life span extension.

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