Policy Analysis No. 390

“Big Oil” at the Public Trough? An Examination of Petroleum Subsidies

By Ronald J. Sutherland
February 1, 2001

Executive Summary

Critics of the oil industry allege that the industry receives large and unwarranted government subsidies and that rival technologies, such as those for ethanol, renewable energy, and energy efficiency, deserve compensating government preferences. The evidence indicates that, on balance, the oil industry is not a net beneficiary of government subsidies. The facts point in the opposite direction. The oil industry is more harmed than helped by government intervention in energy markets.

Special tax deductions, direct expenditures, net excise taxes, and research and development expenditures are constantly targeted by oil critics. However, those subsidies are a small share of oil revenues and far less generous than the preferences and subsidies provided for rival businesses and technologies such as mass transit and alternative fuels. Moreover, most energy subsidies are wealth transfers that do not significantly distort energy prices or affect energy markets.

The contention that oil consumers do not pay their fair share of the environmental and national defense costs they impose on society is dubious. There is little evidence to suggest that the environmental externalities imposed by oil consumption exceed the taxes and regulatory costs paid by consumers. The contention that national defense costs would be lower if domestic oil consumption were taxed is also not supported by the evidence.

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Ronald J. Sutherland is an energy economist who has worked at Argonne National Laboratory and the American Petroleum Institute. He is currently with the Center for the Advancement of Energy Markets.