Introduction:

When Congress tried to create a comprehensive "Energy Bill" the opposition cried loudly that it was a tremendous U.S. cave-in to big oil or that the Energy Bill's subsidies cost the Federal Government billions of dollars in Tax Revenues.

The real question is, who is really being subsidized? Are the subsidies going to the developers of projects or are they actually going to the general population? I would submit that a properly crafted and comprehensive energy policy goes directly to the general population in the form of lower overall product and commodity prices. To substantiate that, at least to a very small degree, please review the following examples:

I believe that energy, when both direct and indirect energy consumption is computed, is a very large percentage of most people’s budget. It also very “regressive” in the way it is applied to the population in general. In that the middle income wage earners appear to contribute a larger percentage of their income to energy costs than the highest income earners. I support this with the following:

Example: A home owner with a $60K income who has a family including two children, under the current tax provisions, probably pays little or no Federal Income Tax. That would mean that in many States they would also pay very little in State Income Taxes.

Therefore, they would pay property taxes; value added taxes and social security taxes. This would mean that their total tax burden would, in all likelihood not exceed 20% of their total income or no more than $12,000/year in total taxes.

This same family, if they owned two cars, a home and other normal items might pay the following in total Energy Costs:

Two cars going 20,000 miles/year each at 22 MPG each at an average price of $1.75/gallon of gasoline would purchase $3,180/year in gasoline.

If they owned or rented a home and their average electrical bill was $200/month they would spend $2,400/year in Electricity.

If their home was heated with natural gas and they spent an average of $80/month it would cost them $960/year in natural gas.

In addition to the $6,540/year in direct energy costs, this family would purchase goods and services during the year. These goods and services would have imbedded energy costs included in their pricing.

If they purchased $3,000/month in other goods and services, most of which were made in the U.S., all of these goods would have utilized energy in their production, distribution and sales. I would estimate that fully 20% of the delivered total cost of the average goods produced is some form of energy cost. Therefore, 20% of $36,000/year equals $7,200/year.

When this figure is added to the $6,540/year in direct energy purchases the total energy cost paid for by this family is $13,740/year or 22.7% of their total income.

If this figure appears out of line, a second example is offered:

If the assumption is made that the total population in the U.S. is 300 million people and that they ultimately pay all of the costs for energy, then you can use the following general logic:

An average of 18 trillion cubic feet of natural gas is annually utilized for producing products other than electricity. At the current price level of over $5.00/million btus it creates an annual cost of approximately $100 billion/year. This therefore amounts to a per capita cost of approximately $333.33/person/year.

If the average amount of electricity produced is approximately 500 GW/hour at an average retail price of about $0.075/KwH+ then the total cost of electricity sold is approximately $330 billion/year or approximately $1,000/person/year. (I am certain the actual amount of retail electricity sold is considerably higher priced than the figure used)

In addition to electricity and natural gas, the U.S. consumers use a significant amount of transportation fuel as their primary means of transport, or indirectly as a part of all of the products and services they purchase. This petroleum ultimately costs over $300 billion/year or approximately $1,000/person/year.

When these figures are accumulated together it means that $2,433.33/person/year is being spent on direct or indirect energy costs. Based on this very crude analysis, our family of four would spend about $10,000/year in energy related costs.

If all of these figures are examined based on income groupings it should yield even more interesting data. I believe the results will be that middle income families will bear the highest percentage of these costs. Upper income families will tend to bear a larger actual cost but a lower percentage of their income. Lower income families will bear a lower actual cost because they will tend to have much smaller living quarters and may use public transportation, but they will spend a very high percentage of their income on energy.

Based on the two examples used above, it is clear that every increase in energy cost is on par with an increase in taxation as far as the economy is concerned.

President Bush worked to cut taxes, but the increases in the cost of energy over the past three years may actually have wiped out almost all of the benefits associated with the tax reductions. The higher cost of energy would have had a significant impact on the price of goods and transportation, thereby impacting the middle and lower income wage earners the most.

Maintaining reasonably priced energy in all sectors of the economy is one of the two keys to the economic health of the nation. The second key is to provide not just full employment but an expanding work base that takes in willing workers as they become available.

The following discussion is about “Energy Subsidies” and what they really mean.

Public Policies and How They Vary from Nation to Nation:

Public policy can alter many different things, especially the quality and style of living standards. An interesting comparison between Europe and the U.S. relative to public policy differences and their associated affect on life style illustrates the point:

 

1. In Europe most countries have extensive mass transit systems that are reasonably priced for the vast majority of the population. The very elaborate transit systems in Europe are funded by the taxing of transportation fuels at levels that would not be possible or tolerated in the U.S.
2. Automobiles are treated as luxury items in Europe and typically taxed using Value Added Taxes of more than 20%.

    

3. The result of these two tax structures is that many families have no automobile and most other families have only one automobile.

    

4. Most European countries have universal health care programs that are funded through high taxation of both industry and individuals. The funding for these programs comes from the taxes that are placed on income. This places a distinct ceiling on medical services that results in a form of rationing of many specific medical procedures. In order for the system to further control costs, Doctor’s salaries are generally controlled and recovery for malpractice situations is impossible.

    

5. Property taxes in most European countries are high and, in some instances, actually tax the number of rooms in houses. An odd result of this taxation is that many homes have no closets because they count as rooms. The very high property taxes and other taxes are used to provide free education including university education.

    

6. Because of the high taxation, most families live in very small homes with few rooms. Individual homes are not the norm in most European countries.

    

7. Public education continues to be touted as a good idea since it is funded from various tax programs. The result of this is that children must take competitive tests at a young age to determine if they are qualified for higher education. Higher education becomes rationed except for the very wealthy.
8. Energy is also heavily taxed along with most other common services.

As clearly demonstrated by the above points, the result of all of these differences is a very different life style from that enjoyed in the U.S...

Public Policy in the U.S. creates a different structure:

 

1. Gasoline in the U.S., although fairly heavily taxed, remains at prices that are a fraction of those in Europe. The U.S. is married to families with several automobiles many of which are heavy consumers of gasoline. Changing from the U.S. system to the European system would put all of the major automobile companies into bankruptcy.

    

2. The U.S. is a large “company” that depends heavily on transportation for its industrial and commercial activities. Moving to the European system would significantly alter the way goods get to the market and the prices that people would need to pay for those goods.

    

3. While it is clear that Mass Transit in many areas of the U.S. would be desirable, there is currently no clear way to fund the programs. Because of the size of the U.S. and the wide separation of the population centers, mass transit, similar to Europe’s, is only practical in specific areas.

    

4. The U.S. has resisted the lure of Universal Health Care programs in favor of privately funded programs. There are clearly a number of shortcomings to this system but it appears to favor continued research and provide high quality services that are available on demand. To provide Universal Health Care would require Income Tax rates that would literally stifle the expansion of the U.S. economy. Politicians have called for higher taxes on the “rich” to fund Medicare, pay for the Prescription Drug Benefit, and save Social Security. At the same time other Politicians have called for limiting of Medical Liability recoveries. While some call for a conversion to the European model of universal medical coverage. It is clear that the system needs changing, but finding a direction that works on the U.S. private model is a real challenge. The benefits that have already been promised to people in the form of Medicare and Medicaid along with the new Prescription Drug benefit will place some real pressure on officials to make changes in the system. The most important change that is required is to expand the job base so that more people are paying into the system than are taking out of it.

    

5. Finally, property taxes are used to support public education. Many State Owned Colleges and Universities receive State funding, but most individuals are required to pay for a significant amount of their educational costs. If property taxes were raised to levels that would pay for everyone’s college and university education, it would alter the private housing market dramatically.

What does all this have to do with energy policy? Everything.

Federal and State Energy Policies:

To individuals, energy is a retail product that is purchased and used in automobiles, in homes and is a major monthly cost endured by most families. To change the pricing structure dramatically would have profound impacts on most families.

Energy Policies at the Federal level have consistently tended to favor programs that maintain reasonable energy costs to consumers. Maintaining reasonable energy costs is a way of “subsidizing” the automobile industry, oil industry and housing industry. Eliminating the subsidies for these industries would have a dramatic and negative impact on the U.S. economy.

To most commercial and industrial energy users, energy is an intermediate commodity that is a part of their production costs. Higher energy costs mean higher product costs. Maintaining low energy costs helps to offset higher personnel costs that exist in the U.S. and helps to keep jobs from going offshore. U.S. products need to compete with offshore products while U.S. wages continue to climb. Providing “subsidies” through controlling energy costs is a way to keep the jobs in the U.S. and allow for higher wages.

What should the “Federal Energy Policy” accomplish:

Unless the policy makers are actually determined to convert to the European model for housing, transportation, education and medical care, it is important to maintain low energy costs.

How is it possible to keep low energy costs for the homeowners, transportation, commercial and industrial users of energy? Who pays for keeping energy costs low and how does the system function?

The Federal Government has always provided subsidies for exploration and production of transportation fuels, fossil fuels for electricity production and nuclear energy production. Without these subsidies the price of electricity, gasoline and other fuel related products would be significantly higher than they are now. These prices would then be passed on to consumers in the form of product costs.

For homeowners and automobile/truck owners paying the full cost for energy would have a significant impact on purchasing decisions. If fuel costs were doubled, the type and nature of many transportation purchase decisions might be different. There are many people that would contend that the movement to smaller cars with much lower fuel consumption would be good, but the fact is, it would alter the auto manufacturing business in significant ways.

If energy costs were not subsidized, homeowners would have less available income and would be forced to purchase smaller homes and to move to the “European Condo” dominated homeowner system. Again, some people would argue that this would be a good change, but it would be a major change in the way homeownership takes place.

U.S. citizens do need to change the way they purchase automobiles. But, U.S. citizens appear determined to purchase bigger, faster, more powerful automobiles. The challenge is to satisfy this desire while reducing the impact on fuel consumption. The hybrid automobile has the highest potential for reducing overall fuel consumption. Convincing citizens and auto makers to move in the direction of the hybrid can take two directions.

 

1. The government can place a luxury tax on automobiles that have high consumption levels. This is the negative approach to purchasing decisions and generally does not work. The reason it doesn’t work is that most purchasers of this class of automobile would simply pay the additional cost of this “luxury” purchase. This decision making process could change if a reasonable alternative was available.

    

2. The government can provide tax relief to people who purchase hybrid automobiles and light trucks. This direction tends to work better since it encourages savings and ultimately provides individuals with more available cash flow.

Energy Legislation:

If the nation is going to retain the existing system of ownership and transportation, then energy policy must be directed to maintain reasonably priced electricity and transportation fuels. How can this be done?

 

1. The development of a sound energy policy that keeps the price of electricity at or near the current levels while limiting the impact that foreign powers’ can have is critical. This can only be done by subsidizing the development of domestic fuels such as coal and nuclear energy as well as various renewable resources (Wind, Solar, Biomass, Geothermal, Hydro-Electric).

    

2. The development of a sound transportation energy policy that keeps the price of fuel at a reasonable level that is below the current price while limiting the impact of foreign powers can be critical. It is necessary for the Federal Government to displace a significant amount of imported oil with “subsidized’ ethanol and biofuel/bio-diesel. Clearly, this action creates many domestic jobs while reducing foreign influences. At the same time it is necessary that specific actions be taken to decrease demand for imported oil. This can be done by providing specific subsidies associated with purchases of hybrid vehicles.

In other words, “Energy Subsidies” do not cost the Federal Government anything. They control commodity costs and stimulate economic expansion in all segments of the economy. Without appropriate energy subsidies the U.S. economy will stall and contract.

To revisit the Universal Health Care concept along with support of Social Security and Medicare/Medicaid (M/M), let us examine the following two scenarios:

 

1. The nation allows energy costs to rise and decides to tax energy more heavily. This is done to increase tax revenues to pay for Social Security and M/M. The result is increasing costs for homeowners and a decrease in available income. Housing construction stalls and consumer spending decreases. At the same time more jobs move offshore because manufacturing is more expensive in the U.S. Unemployment increases and therefore the number of people paying into Social Security/M/M decreases. Obviously, this example could go on and on.

    

2. The nation chooses to find ways to keep energy costs lower than in other developed nations. The government finds ways to “subsidize” ethanol, biofuel/bio-diesel, hydro-electric expansion, geothermal expansion, wind, solar and biomass expansion in the U.S... The result is the creation of more than one million new jobs. These people move off of the unemployment roles and into the tax paying roles. They pay Social Security and Medicare/Medicaid taxes along with property taxes, value added taxes (VAT) and other taxes. In short, these people help to sustain and expand the system that currently exists. It is critical that job growth continues in the U.S. or the system will collapse because of the weight that Social Security and Medicare/Medicaid places on the system.

The Federal Government needs to improve the supply of electricity to make it more reliable and affordable. It needs to stimulate the economy through improvements in the electrical and fuels infrastructure. This means to the Federal Government must improve the transmission and distribution system, utilize available supplies of coal and nuclear energy in clean and safe ways, and develop all of the renewable energy that can practically be developed. The amount of economic stimulation and new jobs that will be created will far surpass the amount of subsidy that is required.

The same standard should be applied to transportation fuels. The subsidies provided to Ethanol and biofuel/bio-diesel are insignificant when compared to the number of jobs and economic expansion that will be created. In fact, the subsidies will be completely off-set by the reductions in imported oil alone!

The conversion from standard automobiles to hybrid cars is more difficult to assess. If a tax subsidy of $3,000 was enacted for purchasing a hybrid automobile and it increased the mileage from 20 mph to 30 mpg it would reduce the amount of fuel consumed over a 100,000 mile distance by 1,667 gallons, at a price of oil of $40/bbl this would save $1,587. In other words, one-half of the subsidy would be absorbed through reductions in foreign oil purchases.

If, at the same time the tax carrot was used to encourage the purchase of hybrid automobiles and light trucks, a tax stick was applied to high consumers of gasoline, then the hybrid subsidy would be completely off-set.

We must assess this entire issue from the standpoint of the overall benefits to the nation’s economy. Keeping energy costs at a reasonable level helps the economy. Developing “domestic renewable energy” creates more positive economic benefits than it costs in Federal subsidies. Expanding the use of ethanol and biofuel/bio-diesel decreases imports while creating a significant number of new domestic jobs. This leads toward full employment and increases the number of individuals supporting Social Security and Medicare/Medicaid.

Conclusions:

 

1. Energy policies and tax policies help to fashion the way people live, move and work.

    

2. Energy subsidies are important in maintaining reasonable energy pricing for gasoline, diesel fuel and electricity.

    

3. Energy subsidies actually save more money for the economy than they cost.

    

4. Without energy subsidies that enable the development of renewable energy products such as ethanol, biofuel/bio-diesel, solar, wind, biomass and geothermal energy, the nation will be subject to increasing influence from foreign suppliers of energy products, especially including imported natural gas.

    

5. A good energy policy can result in a significant amount of job creation that supports the future needs of Social Security, Medicare and Medicaid.

There are many people that want to move toward the more socialized economic systems that are used in Europe, but conversion to these systems would require major, and generally unacceptable changes in the way U.S. citizens move, live and work.

Let’s make sure we understand what a subsidy is, how it works and which sectors of the economy that it actually subsidizes before we make critical decisions about subsidies.

Keeping energy costs at reasonable levels is not “The solution” but it is a part of a solution that can create new jobs and help to sustain economic growth and provide ways to pay for needed changes in Medicare/Medicaid and Social Security. Not to mention the positive benefits that a good energy policy would have on the environment and the nations security.

Why, then are not our nations Legislators and Executive using the opportunities that are available in this arena?