On Sunday the 12th of March 2023, the world's largest oil and gas producer, Saudi Aramco,
announced earnings of 161 billion dollars for the previous financial year.
That's the largest ever profit recorded in a single year by a fossil fuel company.
The announcement followed similar record results from all the other major fossil fuel producers
that have been hitting the headlines during the latter part of last year.
This is absolutely fantastic news if you happen to be the CEO of one of those companies.
The boss of BP, Bernard Looney for example, netted 10 million dollars for 2022, including
8.4 million in bonuses alone.
Shell CEO, Ben van Beurden's 2022 package jumped 53% to 9.7 million, and it was a similar
story for all the other brave captains of the fossil fuel industry, all of whom had
managed to steadfastly steer their corporate ships through the choppy waters of a captive
monopolistic market where they could charge whatever they felt like with complete impunity.
It must have been a very worrying time for the poor lambs, so I'm sure you can understand
why they all required such a high level of compensation!
But a few weeks prior to the Aramco earnings call, the International Energy Agency or IEA,
published this report which showed that fossil fuel consumption subsidies for 2022 had roughly
doubled to well over a trillion dollars.
Now I don't know about you, but there's something about all of this that just seems like it
could possibly be construed by the average person in the street as being, well, maybe
just not quite right.
So what really is the deal with fossil fuel subsidies?
Are these payments actually an essential measure to ensure the lights stay on and our societies
continue to operate safely and reliably, or are we simply lobbing obscene amounts of taxpayers
money into the war chests of these companies to help them fight the onslaught of the green
transition?
Hello and welcome to Just Have a Think.
Regular viewers will know that I often end my videos with a phrase that goes something
like "this one's quite a contentious issue" or some such pithy comment.
Well, I've got a sneaky suspicion that fossil fuel subsidies may be one of the most contentious
topics we've covered so far, so I thought this week I'd just throw that out there right
from the get-go so you can start sharpening your metaphorical pencils straight away!
Let's start off with a quick look at the two main types of so-called explicit subsidy.
There's actually a third, very hotly debated, implicit category as well, but we'll come
back to that one a bit later on.
The two explicit subsidies are designed to help producers at one end of the supply chain
and consumers at the other.
Production Subsidies are tax breaks or even direct government payments that contribute
towards reducing the cost of producing fossil fuel in the first place.
They can often be less conspicuous activities too, like state loans and guarantees at artificially
low interest rates, or the provision of resources like land and water to fossil fuel companies
at below market rates - a bit like the deal recently agreed between Conoco Phillips and
the U.S government to build three new drill sites up in Alaska that will eventually churn
out nearly two hundred thousand barrels of oil a day.
These production subsidies are most common in Western industrialized countries where
they're increasingly locking in large long-term infrastructure like oil pipelines and gas
fields that could become stranded assets as we transition ever more rapidly towards renewable
technologies like wind, solar and energy storage.
At the other end of the supply chain there are Consumption Subsidies.
As the name suggests, this is government support that essentially keeps fuel prices artificially
low for final consumers like you and me by fixing prices below the true market rate.
Public awareness of these subsidies really came to the fore during 2022.
As the IEA points out in their recent report, prices for fossil fuels during that year were
extraordinarily high and volatile, largely as a result of the situation in Ukraine and
the sharp cuts in Russian fossil gas deliveries to Europe.
The IEA found that in many countries a range of policy interventions insulated consumers
from ballooning prices, but with the rather perverse effect of keeping fossil fuels artificially
competitive against low emission alternatives.
Now, in preparation for this video I checked in with a contact at the IEA, who told me
that figures for 2022 global production subsidies are being worked on right now by the Organization
for Economic Cooperation and development, or OECD, but unfortunately they won't be available
until September 2023.
We do have the IEA's findings for consumption subsidies though, and as you can see from
this chart, in 2022 that number shut up to almost 1.1 trillion dollars.
The International Monetary Fund, or IMF, expresses its view on consumption subsidies at its website.
It says these subsidies are intended to protect consumers by keeping prices low but they come
at a high cost.
"Subsidies have sizable fiscal costs, leading to higher taxes and borrowing or lower spending,
promote inefficient allocation of an economy's resources hindering growth, encourage pollution
contributing to climate change and premature deaths from local air pollution, and are not
well targeted at the poor - mostly benefiting higher income households.
Removing subsidies and using the revenue gained for better targeted social spending, reductions
in inefficient taxes, and productive investments, can promote sustainable and equitable outcomes.
Fossil fuel subsidy removal would also reduce energy security concerns related to volatile
fossil fuel supplies."
Now you might be thinking that that all sounds a bit like naïve, lefty liberal Kumbaya!
But there are examples from countries around the world where these principles have been
adopted without necessarily harming normal working people.
According to a Swiss research group called The Global Subsidies Initiative, or GSI, the
Philippines, Indonesia, Ghana, and Morocco have all introduced cash transfers and social
support, like education funds and health insurance for poor families, that effectively compensate
for the removal of fossil fuel subsidies.
The combined population of those countries is almost half a billion, so we're not talking
about some obscure unrepresentative island in the middle of nowhere.
These are fairly significant numbers.
Egypt is another example of how to remove subsidies well.
According to analysis from the World Bank, a decade ago the Egyptian government was spending
about seven percent of its GDP on fossil fuel subsidies, which was more than its combined
spending on health and education.
But in its 2016-17 budget it slashed that number to just 2.7 percent.
The administration took the trouble to communicate every stage of the transition to its 109 million
citizens so that they understood how and why the changes were taking place.
And, again, the money saved was used to support health and education to help protect the long-term
prosperity of the country.
Like all initiatives though, the human beings running them don't always get it right.
In 2020, India decreased its subsidies for liquefied petroleum gas or LPG.
That meant higher prices which, while quite irritating, were nevertheless fairly manageable
for relatively wealthy urban citizens.
The same could not be said for poorer rural families though, for whom these price hikes
could have been extremely damaging.
So the plan was to provide free LPG cylinders to those rural populations that would insulate
them somewhat from higher costs.
It was a very fine concept.
The only problem was the government underestimated how many cylinders would be needed and it
didn't provide enough.
So people had no choice but to go back to burning wood and other biofuels which led
to higher carbon emissions - precisely the opposite of what the policy was designed to
achieve!
In 2019, President Lenin Moreno of Ecuador introduced a rapid fuel tax hike in a radical
attempt to completely eliminate fossil fuel subsidies altogether.
But the policy was badly thought through, and it was simply too much of a shock to the
social system of that country.
As a result there were weeks of serious demonstrations, mainly by poorer indigenous protesters, and
Moreno had to walk back the proposal and promise dialogue to find a better solution.
And of course just stripping out a layer of financial support that has, in some cases,
become a fundamental bedrock of corporate fiscal security, doesn't usually prompt the
leaders of those businesses to cut their own salary packages and tell their shareholders
the annual dividends will have to be slashed!
The much more likely outcome is that the jobs of thousands of hard-working employees will
be destroyed in order to keep the bottom line looking healthy.
Governments need to understand that challenge and ensure there's a plan in place to mitigate
those redundancies.
Denmark provides us with a potential template in this case.
Public investment in technology and the expansion of the wind market, combined with the development
of companies that have the necessary capabilities, as well as pressure from within both the business
community and civil society, were all factors that persuaded the Danish government to remove
fossil fuel subsidies and put in place a regulatory regime that allowed the state-owned energy
company, Orsted, to make a radical and rapid strategic shift away from fossil fuel production
and towards renewable energy.
But what about those implicit subsidies that I briefly mentioned right at the start of
the video?
Well that's a topic that appears to have split market analysts into two distinct camps.
Some argue that because big polluters have no obligation to pay for the hidden impacts
of fossil fuels on air pollution and the overall warming of our climate, those unpaid costs
effectively represent another completely separate subsidy.
According to this 2021 report from the International Monetary Fund, if those implicit environmental,
health and climate costs were added in, then the real level of subsidy being enjoyed by
fossil fuel companies would have worked out at 5.9 trillion dollars in 2020, or 6.8 percent
of global GDP, rising to 7.4 percent by 2025 as the share of fuel consumption in emerging
markets, where price gaps are generally larger, continues to climb.
Only eight percent of the 2020 subsidy is explicit subsidization of supply costs.
92 percent is made up of environmental costs and foregone consumption taxes.
The IMF calculation showed that if all countries raised their fuel prices to what they call
'fully efficient levels', then the result would be a 36% reduction in projected global
fossil fuel carbon dioxide emissions by 2025, which is actually in line with the reductions
needed by 2030 to keep atmospheric warming to between 1.5 and 2 degrees Celsius this
century.
And it's perhaps worth finishing with this page from a November 2022 publication by the
Canadian Institute for Sustainable Development, or IISD, called Navigating Energy Transitions
which says this...
"Estimates show that the capital and operational expenditures for the exploration and extraction
of oil and gas in new fields, incompatible with IPCC, IEA 1.5 degrees Celsius pathways,
are expected to reach 570 billion dollars a year by 2030, which will mean a cumulative
total of 4.2 trillion dollars this decade.
By themselves, these investments would suffice to bridge the entire investment gap for wind
and solar by 2030."
You should have your virtual electronic pencils well and truly sharpened by now I suspect,
so I'll see you in the comments section below, and in the words of the immortal British chat
show host Mrs Merton "let's have a heated debate!"
That's it for this week though.
I'm taking a short break next week, not to recover from what I'm about to face in the
comments section, but actually to do a few early spring tidy up jobs around my home and
garden.
So there'll be no video next weekend, but I'll be back on Sunday the 16th of April with
more news from the world of climate change and sustainable energy.
In the meantime a huge thank you as always to our amazing Patreon supporters who make
this channel possible and who you can join by visiting patreon.com/justhaveathink And
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As always, thanks very much for watching.
Have a great couple of weeks, and remember to just have a think.
See you next time