The Economic Impact of the G20 Ending Oil Subsidies

The upcoming September 24-25, G20 summit led by the U.S. contingent will propose ending all fossil fuel subsidies within five years. Currently, the G20 nation governments combined spend over $335 Billion annually for all fossil fuel subsidies including oil, gas and coal worldwide. Additionally, it costs governments about $1 trillion annually in related healthcare, climate warming and environmental cleanup of natural disasters linked to fossil fuels, according to several reports including from the National Defense Council Foundation and RAND Center National Security Research Division, 2009.

By eliminating hidden government subsidy costs, it would raise the price of a gasoline to about $5.28 per gallon making the typical fill-up of the average mid size 16 gal tank vehicle cost over $84 per visit.

Today, the U.S. imports more than 64% of its oil consuming a total of 22 million barrels per day. Of this amount, America generates 8.8 million barrels domestically with the remaining (13.2 million barrels) imported each day.

It is estimated Arab sovereign wealth funds owned over $3.8 trillion in assets at the end of 2008 and set to reach $14 trillion by 2018, equivalent to America’s projected gross domestic product, GDP.

Top Ten Oil Importing Countries

1. United States 13.2 million barrels per day (64% of domestic consumption)
2. Japan … 5.4 million bpd (101.3%)
3. China … 3.2 million bpd (46%)
4. Germany … 3 million bpd (112.8%)
5. Netherlands ...2.5 million bpd (100%)
6. South Korea ...2.4 million bpd (113.1%)
7. Italy … 2.2 million bpd (126%)
8. India … 2.1 million bpd (86.1%)
9. France … 1.9 million bpd (94.5%)
10. Singapore … 1.8 million bpd (228.2%)

The United States dependency on oil from unfriendly countries that are either politically unstable or at odds with the U.S. subjects the American economy to occasional supply disruptions, price hikes, and loss of wealth, which, according to a study commissioned by the U.S. Department of Energy, have cost us more than $9 Trillion present value dollars over the last 30 years significantly increasing our trade deficit. The Department of Energy estimates that each $1 billion of trade deficit costs America 27,000 jobs. Oil imports account for almost one-third of the total U.S. deficit and, hence, are a major contributor to unemployment. For example, the accelerated development of biofuel, solar and wind energy industries could generate hundreds of thousands of domestic jobs, according to the U.S. Department of Energy’s $3 billion Energy Recovery & Tax Incentive Act 2009.

Consider at $100 price per barrel levels the results meaning OPEC could potentially buy Bank of America (BAC) in two months worth of production, Apple Computer (AAPL) in two weeks and GM in just 6 days. At that price production level in less than three years, OPEC could take a 20% ownership of every S&P 500 company listed (which essentially ensures a voting block in major corporations that employ Americans).

While much of the economic activity is generated by the Asian funds, it is five Gulf Persian states--Abu Dhabi, Dubai, Qatar, Kuwait and Saudi Arabia—that account for nearly half of the world sovereign wealth funds assets. A quick review of the past several months’ roster of those countries’ acquisitions provides a glimpse into the scale of things to come. Prior to injecting $7.5 billion into the distressed Citigroup, Abu Dhabi’s fund, sized at $900 billion, purchased a $622-million stake in Advanced Micro Devices (AMD), the world's second largest chip manufacturer, and bought 7.5 percent of the Carlyle Group. Dubai, an emirate of only one million people, bought 22% of the London Stock Exchange (an additional 24 percent of the Exchange was bought by Qatar), 20% of Nasdaq, as well as portions of Deutsche Bank (DB), the British bank HSBC (HBC), Euronext stock exchange, the huge hedge fund Och-Ziff Capital Management, Daimler (DAI), Sony Corp. (SNE), MGM Mirage (MGM) and the luxury retailer Barneys. Kuwait’s Investment Authority injected billions into both Citigroup (C) and Merrill Lynch.

If the U.S. continues its addiction to oil, the competition from emerging countries given the declining oil reserves will force the U.S. to increase its footprint in the Middle East region enabling oil generated wealth to continue flowing to extremists for implement their radical ideology worldwide. The unavoidable result is even more terrorism and instability. So when it comes down to the question of whether we can actually afford to shift away from petroleum-based energy system one should remember that the combined impact of wars, terrorism and environmental degradation is likely to send the price of oil right through the ceiling over the next two decades. Alternatively, the cost of emerging technologies is likely to decrease over time, as mass production and commercialization takes place.

Furthermore, if history is our guide, we can see that every industrial and technological revolution in history inspired an economic boom. Building an infrastructure for next-generation energies would generate millions of jobs around the world, and revolutionize the automobile, manufacturing, healthcare and agricultural industries.

Still the top five fossil fuel energy companies are very attractive investments including ExxonMobil Corporation (XOM), Royal Dutch Shell (RDS.A), Total SA (TOT), Chevron Corporation (CVX), and British Petroleum (BP). All of these forward looking energy leaders are rapidly diversifying their production portfolios. For example many energy companies have aggressively invested in development of algae, African palm oil and jatropha biofuel feedstock processing including ExxonMobil ($600M), BP ($20M) while Boeing (BA), British Airways (BAIRY.PK) and Virgin Atlantic ($3B) develop bio-aviation jet fuels. Separately, we find Shell-CODEXIS ($30M, example Dyadic International received $10M) and Chevron ($20M) focused on enzymes biomass fermentation investments.

Going forward, even if the G20 begins phasing out government subsidies, fossil fuels will still be a prominent energy source for transportation, agriculture, manufacturing, healthcare and waste treatment. However by researching, developing, and advancing wind, solar, hydro, geothermal and biofuel energy technologies that are cleaner, safer, and less economically destructive it keeps our focus on the top national security and economic priority for the next twenty years.

DISCLOSURE: NONE

Comments

[captainccs:]

Rentech (RTK) has certified aviation and diesel fuel and should start selling in commercial quantities in 2010 (next year) from its Illinois fertilizer plant. Other commercial Rentech plants should come online starting around 2012.

Disclosure: Long RTK

Sep 17 08:31 AM

[whisperonth...:]

Save those funds from the subsidies - Obama can use them to pay for the health care plan.

Sep 17 08:41 AM

[Stephen Met...:]

This is a one-sided and very disappointing article. Hidden energy subsidies? Could you be more explicit and name them, please? $1 trillion in costs annually associated with fossil fuels? That I find very hard to believe and certainly does not pertain the United States. Green energy jobs? Non-existent without subsidies!! Mr. Rickman has, seemingly, taken the current administration's energy policy and simply regurgitated it. Energy independence? When you close off offshore drilling and ANWR, how can you seriously be interested in energy independence? Skating on the thin ice of subsidized greenery is not only precarious but downright dangerous. There is only one rational objective in this travesty and that is to bring down America. All aspects of this pathetic and dangerous administration point to this purpose.

Sep 17 08:52 AM

[jerrydd:]

On Sep 17 08:52 AM Stephen Metzger wrote:

> This is a one-sided and very disappointing article. Hidden energy
> subsidies? Could you be more explicit and name them, please? $1
> trillion in costs annually associated with fossil fuels? That I
> find very hard to believe and certainly does not pertain the United
> States. Green energy jobs? Non-existent without subsidies!! Mr.
> Rickman has, seemingly, taken the current administration's energy
> policy and simply regurgitated it. Energy independence? When you
> close off offshore drilling and ANWR, how can you seriously be interested
> in energy independence? Skating on the thin ice of subsidized greenery
> is not only precarious but downright dangerous. There is only one
> rational objective in this travesty and that is to bring down America.
> All aspects of this pathetic and dangerous administration point to
> this purpose.

Maybe your willful ignorance is the problem Stephen?

So let's educate you. First oil gets big tax breaks like the $10B passed last Nov before repubs would let the energy bill pass and many before that. Then they are depletion allowances, sweetheart royalty deals but these are small compared to Persian Gulf military costs, the oil wars which come to $500B/yr. Do you really think we would be they if not to protect international oil companies?. 33% of our military goes to protect big oil.

Next imported oil drains $500B/yr from our economy going directly to our enemies, Iran, Russia, oil dictators and terrorist in the form of higher oil prices. This will rise to $1T/yr in 2 yrs if we don't make oil pay it's full costs.

Or we could tax oil so those who use it pays these costs instead of it in our income taxes. With the revenues we can give a tax cut, help switch to more eff transport or alt fuels and pay down the deficit.

The beauty of this is it would drive down the price of oil so Iran, Russia, oil dictators would pay most of it!! Now add the 2 million new jobs in the US from it and it is the difference between a great economy or going back into recession next yr as oil hits $150/bbl.

One choice here is economically smart, patriotic, the other treasonous. Which will you be?

Sep 17 09:53 AM

[jerrydd:]

In addition I should say the solutions are easily done and should cost less than fossil fuels will over the next 10 yrs.

, The tech needed, eff, making fuels from waste biomass, converting NG to liquid fuels, making more eff cars, EV's, PHEV's, switching trains, trucks to NG, etc are doable with present tech. It's just by subsidizing oil so much they have a hard time competing.

So the problem isn't technical or economic, it's political as big oil, coal rules congress.

Price of oil is going up, the only detail is who gets the money, our gov to help us switch or our enemies.

Sep 17 10:03 AM

[Jimbo:]

I favor getting rid of Jerry's subsidies. But let us also open up our potential oil and gas provinces. I agree the age of oil is coming to a close but I strongly disagree with the timing. We certainly should look at bio sources, such as Jatropha. But the Greenies are sabotaging their own cause: as you read this, they are trying to stop solar electric plants in the California desert, and wind energy farms all over the country. This kind of obstructionism will only place us at even greater dependence on energy from tyrannical, anti-democratic regimes. It may be true that coal state senators have been blocking the extended development of natural gas as a better fuel choice from an environmental, economic, and import view. But many of these coal states are also sources of natural gas.

Sep 17 12:12 PM

[Socialism c...:]

Right on, Stephen! This admin is clearly in the tank with the anti-oil syndicate, as witnessed by the push for "cap & trade" and the biggest farce ever pushed on mankind: "global warming"! Obama and Gore both have big stakes in the "carbon exchange" and stand to make mega-bucks by pushing their vested interest in such...while living in complete hypocrisy with large homes that burn several times the energy of the average American home!! I'll start listening to these fraudulent goons when their personal actions measure up to their rhetoric and when the obvious vested interests are not what is pushing their agendas!


On Sep 17 08:52 AM Stephen Metzger wrote:

> This is a one-sided and very disappointing article. Hidden energy
> subsidies? Could you be more explicit and name them, please? $1
> trillion in costs annually associated with fossil fuels? That I
> find very hard to believe and certainly does not pertain the United
> States. Green energy jobs? Non-existent without subsidies!! Mr.
> Rickman has, seemingly, taken the current administration's energy
> policy and simply regurgitated it. Energy independence? When you
> close off offshore drilling and ANWR, how can you seriously be interested
> in energy independence? Skating on the thin ice of subsidized greenery
> is not only precarious but downright dangerous. There is only one
> rational objective in this travesty and that is to bring down America.
> All aspects of this pathetic and dangerous administration point to
> this purpose.

Sep 17 12:24 PM

[root:]

In all honesty if you were in their shoes you would live in a cardboard box and burn wood for heat and drive a steam powered car??

No matter what side of the fence your on in politics. The facts remain that they are influenced by some sort of big business. Whether its alternative energy, health care, energy or the military industrial complex. Deal with it or rally for an overall change in our govt.

Besides I am not really taking a stance on health care but I find it funny when so many people are against using our money for something that benefits us. But are all for spending hundreds of billions yearly on building up our military so we can bomb random middle eastern countries like Iraq. Or poor billions into Israel


On Sep 17 12:24 PM Socialism cannot compete! wrote:

> Right on, Stephen! This admin is clearly in the tank with the anti-oil
> syndicate, as witnessed by the push for "cap & trade" and the
> biggest farce ever pushed on mankind: "global warming"! Obama and
> Gore both have big stakes in the "carbon exchange" and stand to make
> mega-bucks by pushing their vested interest in such...while living
> in complete hypocrisy with large homes that burn several times the
> energy of the average American home!! I'll start listening to these
> fraudulent goons when their personal actions measure up to their
> rhetoric and when the obvious vested interests are not what is pushing
> their agendas!

Sep 17 02:49 PM

[root:]

Mind you i mean wastefully spend our money in a corrupt healthcare systems as opposed to wastefully spending it into our corrupt military industrial complex and Israel and all that garbage :D


On Sep 17 02:49 PM root wrote:

> In all honesty if you were in their shoes you would live in a cardboard
> box and burn wood for heat and drive a steam powered car??
>
> No matter what side of the fence your on in politics. The facts
> remain that they are influenced by some sort of big business. Whether
> its alternative energy, health care, energy or the military industrial
> complex. Deal with it or rally for an overall change in our govt.
>
>
> Besides I am not really taking a stance on health care but I find
> it funny when so many people are against using our money for something
> that benefits us. But are all for spending hundreds of billions
> yearly on building up our military so we can bomb random middle eastern
> countries like Iraq. Or poor billions into Israel

Sep 17 02:51 PM

[WayneS:]

A subsidy is not money given to a tax payer, it is an adjustment to the taxes paid. It is a socialist policy. It is not under the jurisdiction of law. Tax them the maximum amount they can pay without going under. With "Big Oil", the difference between subsidy and no subsidy is 3%. If they lose subsidies, they will just move to where there is profit (overseas). For the 500 other oil companies in the U.S., this would mean bankrupcy and loss of millions of jobs. For the IRS, this would mean loss of $Trillions of revenue .
Polosi's idea of double-taxing "American Big Oil companies" is a better plan, except that is illegal at this time.

Sep 17 03:26 PM

[User 422955:]

Hold your horses, folks! It is only a proposal made to a group powerless to enact or enforce laws. It is hard to imagine these 20 countries agreeing to much of anything on energy. They include (Great) Britain, where petrol (gasoline) is taxed almost 80%, and India, where petroleum products are heavily subsidized.

Save your fire until you have something to shoot at.

Sep 17 05:33 PM

[Troy Jensen:]

Agree with the comment above - everyone hold their fire, I am highly skeptical the G20 will agree to ending subsidizes. Good article however, opinion is well-stated with some good facts (I agree some of the subsidy numbers are fuzzy, but in the author's defense, I can get that same number from ten respected sources, and they all are dramatically different).

That said, two quick factors:

1. The US controls the sea lanes, and is deeply rooted in most of the countries that make up OPEC - hence, OPEC won't be buying Apple, or doing much of anything, anytime soon. OPEC once was able to punish the US (e.g. 73-74 embargo) but in a true crisis, OPEC is in a far more dependent relationship with the US than the contrary - this is just an absolute fact. Any argument to the contrary is just to provide rationale to substantiate either an agenda or to garner media coverage. Our carrier battle groups in the Persian Gulf alone ensure if the stuff truly hit the fan, we decide what crude ships, what doesn't, and what ports they can ship from. Despite the hysteria, it's a mutually beneficial relationship economically, with the US having a insurmountable projection-of-power in the region to ensure stable oil flow if things flew out-of-control - a very unlikely scenario (long-term - short-term, absolutely, crude prices will continue to grow and there will be periods of volatility, IMHO).

2. That said, I agree investment in alternative forms of energy are absolutely critical for a number of important factors (hedge against the day Peak Oil is realized and prices skyrocket, hedge against temporary volatility in the crude marketplace, assurance of more stable energy costs to end-users, national security, and of course the environment). I would love to see a more free-market approach in developing Clean Energy technology and sources, as opposed to heavy government subsidization, but Green is now a global cultural trend, as opposed to a crazy group of Californians, and the pressure to increase Clean Energy production from that alone ensures there will be both subsidization from governments for Clean Energy development, as well as investment from Energy Companies to diversify into Clean alternatives.

Disclaimer: First, I am a Californian, so no flames at me for the Crazy Californians comment - I am one! Second, I work in the Clean Energy sector. You would think that would have me cheering at the top of my lungs for huge government subsidies, and indeed current subsidies are large, getting larger and benefit the sector, but the Capitalist in me believes in at least trying for a free-market approach.

Sep 17 07:28 PM

[Troy Jensen:]

Just gotta comment here - those wasteful billions ensure global stability. Our very presence in the Middle East ensures the lights stay on so you can tap that comment on your laptop or fully-charged PDA. Israel remains an important piece in maintaining that stability. And assuredly, there is nothing random about the countries on the receiving end of US military action. Morally, it may be wrong, unjustified, corrupt...take your pick, if you like. But maintaining objectivity is critical. There is an absolute, critical reason for that projection-of-power in the Middle East, and to simply eliminate the United States military would be catastrophic for not just the US, but for the world.

Not taking a stance on the morality of it - them's just the facts, and they are absolute. I'm an Objectivist when studying any marketplace - I leave politics for arguments with my rather strongly opinionated grandmother. ;)

Decrease our military budget by 25% or more, and we won't have to worry about any sort of health care debate, to be sure. There would be no money for the debate, and far more urgent matters for our leaders to then have to attend to. I wish there was a counter-force to help maintain order, and we could place those freed budgetary funds into whatever would be more beneficial...but we can't.

I do, however, applaud your strong moral stand. It shows conviction of the heart and mind, no matter which side of the fence anyone stands on. I just think when evaluating an article about G20 oil subsidies and their corresponding effect on the economy, politics goes out the window - if we are trying to objectively analyze, not further any one agenda.

Cheers to all!


On Sep 17 02:49 PM root wrote:

> Besides I am not really taking a stance on health care but I find
> it funny when so many people are against using our money for something
> that benefits us. But are all for spending hundreds of billions
> yearly on building up our military so we can bomb random middle eastern
> countries like Iraq. Or poor billions into Israel

Sep 17 07:47 PM

[jerrydd:]

Troy, my stand is patriotic and economic. We can't afford to police the world. Better get off imported oil other than Canada and just let them kill themselves, solving the problem. In fact our being there prevents them from having to solve it. Plus it takes a lot of their money away so they can't use it to hurt, dominate people.

For the $1T/yr we would save would easily pay for us switching off oil and pay off the national debt.

It is not technical problem , just a political problem. There is no shortage of energy, just the equipment to catch, make it. I guaranty getting off oil will cost far less than staying on it.

Sep 17 09:04 PM

[yen4pesos:]

Wow!!! I heard manufacturing was up today but I didn't think that included data for Economics101 papers. Stick to prose or at the most,.. pure Math.... The only thing that would cap off this thriller is if you would of also included the fact that instead of enduring this slow cancer over the next 20 yrsPN....(pre nirvana). Another set of numbers shows we could roll across the region and control it all in about 30 hours.... Now that would stimulate some thought by the old proff,.. Wouldn't it.......... Hmmm wait aminute ..I think I;ve solved the problem!!!!!

Sep 17 09:48 PM

[yen4pesos:]

PS... I agree wiyh user 422495 These guys aren't going to the G20 to do buisness.. It's a party... The got more accomplished at "Tail Hook" than these bunch of drunks will accomplish if they stay in session 6 months...

Sep 17 09:56 PM

[root:]

I can see what your saying but just to note i was not saying we should eliminate our military but we can like you say, decrease our spending by 25% and healthcare wouldn't be an issue. Moreover, we'd still have the largest military. A lot of people fail to realize the proportions the gov't spends on things.


On Sep 17 07:47 PM Troy Jensen wrote:

> Just gotta comment here - those wasteful billions ensure global stability.
> Our very presence in the Middle East ensures the lights stay on so
> you can tap that comment on your laptop or fully-charged PDA. Israel
> remains an important piece in maintaining that stability. And assuredly,
> there is nothing random about the countries on the receiving end
> of US military action. Morally, it may be wrong, unjustified, corrupt...take
> your pick, if you like. But maintaining objectivity is critical.
> There is an absolute, critical reason for that projection-of-power
> in the Middle East, and to simply eliminate the United States military
> would be catastrophic for not just the US, but for the world. <br/>
>
> Not taking a stance on the morality of it - them's just the facts,
> and they are absolute. I'm an Objectivist when studying any marketplace
> - I leave politics for arguments with my rather strongly opinionated
> grandmother. ;)
>
> Decrease our military budget by 25% or more, and we won't have to
> worry about any sort of health care debate, to be sure. There would
> be no money for the debate, and far more urgent matters for our leaders
> to then have to attend to. I wish there was a counter-force to help
> maintain order, and we could place those freed budgetary funds into
> whatever would be more beneficial...but we can't.
>
> I do, however, applaud your strong moral stand. It shows conviction
> of the heart and mind, no matter which side of the fence anyone stands
> on. I just think when evaluating an article about G20 oil subsidies
> and their corresponding effect on the economy, politics goes out
> the window - if we are trying to objectively analyze, not further
> any one agenda.
>
> Cheers to all!

Sep 18 12:19 PM

[akapital:]

This is one of the most interesting articles that I have read on SA for some time. Granted it is speculative in nature (e.g. that the G8 will be ending subsidies for fossil fuels) but that is precisely what makes it so interesting. And further more, aren't we all here speculating about something or other?

I also happen to agree with most of the premises and conclusions of the author. Subsidies for fossil fuels are no longer giving us a valuable return on our investment. We need to diversify. Some might argue that it is not even a choice; we have to diversify.

I think the diversification argument holds as true for the individual investor as well as our gov't energy policy. We will see that played out in the coming years.

Sep 18 12:47 PM

[Donald Ingram:]

The ending of oil subsidies will NOT be the first priority of the G20 meeting taking place this weekend. I propose that trade protectionism will be the number one priority for discussion amongst the members, along with the pressure being put on the USD by the Americans themselves by devaluation, via quantitative easing, by both overt and covert means - those Caribbean banks sure like buying US debt!
Oh to be a fly on the wall during these so-called 'discussions'!

Sep 19 01:46 PM

[oilsands:]

Thanks for a very interesting article. As usual jerrydd makes essential points. We have to end our addiction to oil. The ANWR will not make any difference. It has been used as a red herring by the last administration. We have unlimited free clean energy to harness. We already have the necessary technology. We can make changes to the way we do things.
There is no silver bullet; the success of our transition depends upon multiple sources. But continued dependence upon oil is poison. I received both oil and natural gas money, but the future of our country is way more important.
We must stop putting a millstone (incredible debt levels) around the necks of our grandchildren. Business as usual will turn this country into a second rate power and lead to a much lower standard living. The military can not save us from our own folly.
Disclosure: long oil and gas and royalties in both.

Sep 29 12:52 PM