The real price of gasoline?

So here I am, reading a Discover article on the Thermal Conversion Process when I'm assaulted by the following number:

Appel offers no apologies for needing government largesse to make money. "All oil, even fossil-fuel oil, gets government subsidies in the form of tax breaks and other incentives," he says, citing a 1998 study by the International Center for Technology Assessment showing that unsubsidized conventional gasoline would cost consumers $15 a gallon. "Before we got this, I had the only oil in the world that didn't get a subsidy."

So I went and found the study at the the CTA's web site. It turns out the $15 is at the high end of their range, which means you're taking the high range for all the numbers that went into the study as well. This makes it an incredibly low probability number. The low end of the range was $5.60 a gallon. He or Discover also completely misinterpreted the study; nowhere does the study claim that unsubsidized gasoline would actually cost that much, though to be fair the study does speak hypothetically about "$15 a gallon gasoline." In fact, some of the "subsidies" mentioned by the study actually serve to drive the average price of gasoline up by providing price supports. The study just takes the total cost of these subsidies and then adds them to the price of gasoline, which doesn't make much sense to me. But then again, it's clear that the CTA have an agenda here. I guess this is more "overrepresentation of factual presentations."

In reality, if the subsidies the study talks about were ended, the most inefficient oil producers would probably go out of business, which would overall be a good thing. It's hard to tell, even after reading the study, what the long term impact would be on the price of gasoline. Do we keep the current mishmash of state requirements for gasoline in place? Do we continue the nimbyism that prevents construction of new refineries? Do we continue moratoriums on offshore drilling, giving no opportunity to allow private property to solve the problem? In places where the gas tax is higher than the sales tax, do we keep treating gasoline as "special?" The price of oil was much lower before the noises about the invasion of Iraq started and all this recent crap about Iran, so it's not clear to me at all that US military action is helping the price of oil either, though of course the study just adds the cost of the invasion of Iraq right on the top of the gasoline price as if the invasion is somehow responsible for the "low" price we pay for gasoline.

I'm all for ending government subsidies in any form, but it's not clear to me that overall government meddling in the oil market is really driving the price we pay at the pump down. But, you know, if it encourages the lefties and global warming alarmists to push for ending oil subsidies (versus taxing me for the "true cost" of oil), more power to 'em!

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Comment on one of your side

Comment on one of your side remarks--there's a new refinery planned near Yuma, Arizona: http://www.arizonacleanfuels.com/

Jim: Nice, though it's

Jim:

Nice, though it's interesting to note all the hoops they've had to jump to to get to this point. "Toughest clean air standards applied to any refinery to date" indeed.

Yeah, and they're still

Yeah, and they're still being opposed by so-called environmentalists, even though the effect would be pollution reduction (check out the sarcastic arguments they make in lieu of facts here: http://www.yumarefinery.com/). If this refinery gets built, it will be the first U.S. refinery built since 1976. That one was built in Garyville, Louisiana: http://www.gasandoil.com/goc/news/ntn12966.htm

I've never understood why

I've never understood why anyone would refer to tax breaks as subsidies. We have two different terms for these things for a reason: a subsidy is when government robs Peter to pay Paul. A tax break is when it declines from robbing Peter in the first place. Yeesh.

Matt, So what would we call

Matt,

So what would we call it if the government declines to rob Peter and instead mugs Paul in a back alley in order to make up the foregone income... aside from "business as usual" that is?

Actually, I've been mulling

Actually, I've been mulling doing a post on the difference between tax breaks and subsidies. It's hard for me to see the difference between the two when the government is clearly discriminating among various activities. What is the difference, for example, between the government's sending me a check to pay for part of my mortgage interest, and their allowing me to deduct the mortgage interest from my income, in terms of the wealth transfer that's occurring between renters and homeowners?

My present opinion is that all that matters is what the government does differently based on the activities in which one is engaged. If someone gets an advantage *due to government policy* for engaging in a particular activity over another activity, you can treat that as a subsidy.

You make the assumption that

You make the assumption that if the government had not declined to rob Peter it would not have mugged Paul. In some sense what governments spend it determined by revenue and not by the amount they want to spend.

That said, since when do oil companies receive tax breaks? Don't they pay the same corporate income taxes as everyone else?

Plus, the study included silly things such as "spending on the transportation infrastructure, such as the construction, maintenance, and repair of roads and bridges" as if this was a direct subsidy to oil companies. Without which people would probably consume less oil, but there is no rule they must burn oil to use the roads, it could just as easily be bio-diesel or ethanol or electricity.

Not to mention the inclusion of "Accelerated depreciation" in tax breaks and other insanity. They tacted on the entire budget for Maritime security, as if oil tankers were the only ships at sea, plus the whole of police and fire protection. :juggle:

Sean, The difference is, to

Sean,

The difference is, to me, that when the government sends you a check, it mugged everyone, including you, to get the revenue to send you a check. When the government "allows" you to deduct the interest, it doesn't mug anyone to implement that policy.

I came across this blog

I came across this blog doing a web search.

Sean Lynch is right to point out how the 1998 study on the "real cost of oil", by the International Center for Technology Assessment has been widely misinterpreted, particularly as a justification for the government levelling the playing field by offering large subsidies for the production of biofuels (ethanol and biodiesel).

As LoneSnark points out, many of the subsidies attributed to oil in the study relate to transport infrastructure, and could equally be applied to liquid biofuels. Similarly, many of the externalities associated with oil, such as congestion and noise (and some of the air pollution), are related to the operation of vehicles, and also could be attributed to liquid biofuels when used in cars or trucks.

Add up the common "costs" and you get much more comparable numbers for petroleum-based and biomass-based liquid fuels. However, the direct subsidies to biofuels (including tax breaks) are much higher --- per gallon --- than for gasoline or petroleum diesel. They include for ethanol various tax exemptions or production-related payments (worth up to 20¢/gallon) provided by states, and grants or loans to support the construction of refineries, as well as the 51¢/gallon federal tax credit.

Finally, in answer to the debate over whether tax breaks can be considered subsidies, economists long ago recognized the equivalence of the two. When economists estimate the revenue foregone associated with special tax breaks --- what they call, more formally, "tax expenditures" --- they do it by comparing the actual tax rules with a "benchmark", or an idealized set of tax rules. The tax system in a benchmark should neither favor nor disadvantage similarly placed activities, or classes of taxpayer.

At the international level, the WTO's definition of a subsidy (Article 1.1(a)(1)ii) includes "government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)". Note that broad-based tax reductions are NOT considered subsidies, since they do not constitute "government revenue that is otherwise due is foregone or not collected".

My present opinion is that

My present opinion is that all that matters is what the government does differently based on the activities in which one is engaged. If someone gets an advantage due to government policy for engaging in a particular activity over another activity, you can treat that as a subsidy.< \i>

Well, in theory, if the government were subsidizing someone but to a leser extent than it was taxing them, then the government could - I say in theory - change what it was doing from being a subsidy to being a tax break. There might be no difference from the point of view of the recipient of the subsidy, the government, or the other taxpayers, aside from a difference in paperwork. Now I think that actually there is a difference even here but I'm not going to argue that. Instead I'm going to point out this:

There is a difference between a subsidy that is smaller than taxes and a subsidy that is larger than taxes, because there is a difference between net inflow and net outflow of money. A company receiving a subsidy lower than what it pays in taxes is not, on net, receiving more money from government than it relinquishes.

Yes, I know, I'm not forgetting all the wonderful government services that businesses receive apart from direct subsidies. I'm simply not all that impressed by their wonderfulness.

But I want to make one more point. Subsidies are different from tax breaks in a simple additive sense. Imagine the government doing the following: every second of every day, the government creates another subsidy. What is the endpoint? The endpoint is a massive system of taxation and redistribution.

Now imagine the government doing the following: every second of every day, the government creates another tax break. What is the endpoint? Abolition of taxes.

Yeah, I know, there are other things to consider, such as that government might compensate for tax breaks for some people by increasing taxes on others, so that the endpoint is not abolition of taxes. Nevertheless, there remains a difference which even this does not undo, and that is that the endpoint of giving a particular person or company a tax break is strictly limited by the zero number, sometimes spelled "0". Someone who pays absolutely no taxes at all still has to make his way through the world.

But in contrast, the endpoint of giving a particular person a subsidy - well, there is no endpoint, or the endpoint is so high you could make someone as rich as Bill Gates off government subsidies and still not be done increasing subsidies to him.

So tax breaks have a built in limit. Moreover, if they are done without compensating tax increases then they tend to reduce overall taxes and therefore tend to reduce overall injustice.

The difference between a

The difference between a subsidy and a tax break may make all the difference in the world of corporate libertarianism, but in reality it serves the purposes of businesses either way.

A tax break is by definition letting one business out of an obligation that competitors AS WELL AS CONSUMERS are forced to honor. Thus, there is an element of comparitive disadvantage here in the final market analysis - among both industry competitors and consumers. Whether or not your particular analysis sees it as significant, it's obviously significant enough for politically connected businessmen to continue to lobby over.

And don't forget that regulations - especially, of all places, in the oil industry - serve to cartelize the market. By setting almost insurmountable barriers to entry for competitiors to build new refineries, this keeps supply lowerer than the market would otherwise be able to bear.

Now, one may argue that the energy industry in the aggregate - seeing opportunities for profit in increasing supplies - may start regarding this regulatory effect as less than 100% advantageous. However, throughout the history of state capitalism, big business has frequently sought government intervention ***at the expense of profit*** in order to rationalize the market and insulate themselves against risk. Sure, they may be forgoing some profits to be made by expanding supply, but on the other hand, they're in a fat "market" position right now with no foreseeable dip in sales in the long run. It's not at all clear to me from my study of corporatist history that big, established business values profits over stability - and the oil industry is a perfect example.

Tax breaks are like the free

Tax breaks are like the free country next door. Tax breaks are to taxpayers what the United States is to Mexicans. They create an opportunity for everyone to lower their tax burden by shifting business over to whoever is getting the tax break. The guy receiving the tax break could in theory become the messiah of taxpayers, the gatekeeper to the promised land.

Now it may not be "fair" that this one guy is put in the enviable position of being the christ of taxation, but really, better one guy be the christ than that no guy be the christ.

Risk, Control, and Profits:

Risk, Control, and Profits: A Look at Externalities in the Gasoline “Market”
Over at Catallarchy, Sean Lynch critiques a recent study by the International Center for Technology Assessment focusing on hidden externalities in the automotive fuel market. The study makes a startling claim:

The report divides the external costs of...