Your editorial "Confusion over subsidies" begs for a more complete discussion or definition of what subsidies are and why they exist (OGJ, Oct. 5, 2009, p. 24). I have been quite concerned about this for many years as I also look at percentage depletion, 14¢ gasoline in some OPEC countries, ethanol tax credits, sugar support, big auto and textile tariffs, etc.
Webster's Dictionary describes "subsidy" as "a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public."
I believe this discussion centers around this definition from the dictionary. It is a directed funding of money raised from all of society to a specific governmental deemed socially important. However, one should also recognize that subsidies have four characteristics. A subsidy should be:
• Targeted. Percentage depletion is a tax deduction targeted at the US oil and gas producer as a means to support capital formation. Government had deemed that domestic production of oil and gas was needed to give society a secure source of energy. (Note: Targets can change just as easily as new governments are elected.)
• Timely. In the case of General Motors, billions of dollars in bailout money was needed to keep a perceived major firm in a major industry alive. The perception by government was that the cash infusion was deemed to be cheaper than the cost to society of the collapse of this firm and its supporting industries. Timing was deemed critical. This source of funding is similar to venture capital as seed money, with the associated equity interest in the firm that could be liquidated at a latter date. (Note: The timing of any change in any target is as swift as a change in government.)
• Transparent. Here I have a real problem in finding a good example of transparency. Perhaps this is because those who create and those who receive most subsidies would rather not expose this monetary transfer to public scrutiny. Why should the source of those funds have a right to know how they are spent? Isn't that why the US has a representative form of government where "We the People" have assigned that duty to our elected officials knowing that they always act in society's best interest?
• Temporary. This last "T" is the biggest problem with all subsidies. It is politically difficult to stop assisting special interests deemed to help society or, at least, one's reelection coffers. In addition, those who feed at this trough put up such a hew and cry with even the threat of being weaned that the social unrest seen when Iran announced that the controlled 14¢/gal price was about to be doubled, no less moved to global rates, threatened to be truly dangerous.
With this "T" any enterprise deemed to be in the social good still must prove itself. While many actions are best done by government, such as building roads and maintaining a military, the funding of nongovernmental activities should not be allowed an indefinite life span.
Any governmental funding that does not have the characteristic of these four T's is hard to call a subsidy. Rather it is government support of activities that members of society will not support on their own, and if such funding has become engrained in society it evolves into a supposed right that the government is obligated to continue.
So what does this all have to do with the energy industry? Certainly the industry's "subsidies" make it easier to do business. Can it now thrive if any form of subsidy was terminated (along with those subsidies for other forms of energy that are past the start-up phase)? Frankly I hope so. Otherwise why should anyone want to be in this business?
Perhaps looking at subsidies in this manner will put the entire issue into a new light. Of course, the observer still has to be able to see the trees for the forest. And that is an entirely different matter.
John Tobin
The Energy Literacy Project
Evergreen, Colo.
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