The End of Oil’s Protection Racket

Until the 1970s, the U.S. was a major oil-producing nation and its foundational economy, though much more diversified, had important similarities to today’s Russia, Saudi Arabia and Brazil.

The U.S. blessing was to discover its oil early in the industrial revolution and to figure out how to mass produce it at the dawn of the age of the internal combustion engine. The U.S. was never a victim of the “oil curse” that can bring corruption and over-dependence on the single and singular resource but, like other governments, it paid its best energy industry protection money to keep the power coming.

In the early years, the biggest pay-off to oil was simply the ignoring of all the dreadful environmental harm it did as it expanded its production. There are deserts in California and lowlands in East Texas and Louisiana, for instance, that were drilling field dumps in the days of abundance and now, decades later, remain toxic. (The coal industry got the same pay-off: The nation turned away from the killing the mining of coal did so as to go on burning it without paying for the lives it took.)

Later, the government instituted an oil depletion allowance that permitted oil companies to deduct a portion of their production from their taxes despite the fact that the inventory being depleted was the shared deep earth wealth of the nation that was giving the tax deduction. Today, they call such a tax break a subsidy.

The U.S. rode the wave of its oil abundance and the ingenuity of its auto industry to world economic dominance from the 1920s to the 1940s and the Western World won its wars with fascism and communism on the strength of U.S. oil and on Russia’s failure to dodge the oil curse. (All the while, the U.S. – and the industrial world – built modernity on the rock solid foundation of dirty coal that was only cheap because the poor and the disenfranchised paid the price for the getting of it.) ::continue::

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Oil kept flowing in the U.S. in the 1960s, 1970s and 1980s, despite the waning of U.S. reserves, because the oil companies went to the Middle East, harvested the wealth and paid the people there little enough to keep domestic gasoline cheap. When some Middle Eastern leaders demanded the U.S. companies pay fair royalties, the U.S. Congress kept the oil flowing by providing the companies with the golden gimmick that allowed them to deduct from their taxes what was paid in foreign royalties. Today, they call such a tax break a subsidy.

The federal government was fine with paying the oil industry to keep the oil coming because by doing so they were keeping the economy growing. That’s not unlike the corner grocery man paying thugs to keep the streets clear when the thugs threaten to otherwise interrupt to his business traffic. That’s called a protection racket.

Oil is still a fundamental element of the U.S. economy but it has become a mixed blessing. The cost of paying off is so high that it is preventing economy-boosting New Energy growth to emerge. The same thing happened in the 1980s and 1990s but in those days oil and gas were so cheap that the payoffs were equitable. The failure of the Reagan administration to fund New Energy R&D combined with subsidized low oil and gas prices kept the New Energies non-viable – until now.

The New Energies have not only shown they are now viable, they have shown they will be key elements in a thriving 21st century economy. The sun, the wind, flowing waters, the earth’s deep heat and natural waste are recognized around the world as vital sources of tomorrow’s energy. At the same time, the costs of subsidizing oil and coal are so high, as is detailed in Energy Subsidies: Getting the Prices Right, from the International Energy Agency (IEA), the pay off is too burdensome for the limited protection they offer.

The IEA preview analysis of fossil fuel subsidies comes as the result of a request for a study by the leaders of the G-20 nations, spurred by President Obama, at their 2009 meeting. The full report will be presented at the 2010 G-20 summit.

It has been a tough season for the fossil fuels. With any luck, the trend will continue. Though the nation and the world will not be able to do without them for some decades, it is healthy to see them for what they are.

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This post is based on Energy Subsidies: Getting the Prices Right (7 June 2010, International Energy Agency)

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