Oil industry subsidies: A reality check

It’s one thing when environmental activists complain about the big, bad Canadian oil industry and the allegedly massive subsidies it receives. It’s quite another when certain politicians who should know better repeat these specious claims as fact.

In a speech last December, for instance, NDP Leader Thomas Mulcair pledged to “redirect a billion dollars a year in fossil fuel subsidies, and reinvest that money in clean energy.” Former Ontario premier Dalton McGuinty famously angered his counterparts in Alberta and Saskatchewan a while back by complaining about his province subsidizing Western Canada’s oil and gas industry.

As it turns out, such critics are in need of a reality check, as shown in the Montreal Economic Institute report, entitled: "Is the Canadian Oil Industry Subsidized?"

First of all, consumption subsidies, which are found in other countries, do not exist in Canada. Far from encouraging the consumption of fossil fuels, our governments levy taxes on these energy sources, representing around 31 per cent of the prices we pay when we fill up our tanks at the gas station.

As for production subsidies to the oil industry, these are far less generous than some studies claim. This is because many of the programs that are identified as subsidies are actually just a particular tax treatment that is common to the natural resources sector as a whole, which is faced with a specific economic reality.

Like mining, the oil industry requires large amounts of startup capital. Its activities also entail a high degree of risk. And many years go by between the initial investment and the profits that, if all goes according to plan, come with commercial production.

Since the exploration stage does not lead immediately to production revenue, companies have to rely on investors who are ready to support an activity with a high risk of failure, but for which success can mean sizable profits. In response to this reality, certain government programs allow companies that develop natural resources to reduce the taxes they have to pay in the short term and defer them until later in the production cycle.

But to call this a subsidy is to be disingenuous. This is just a common sense measure whose purpose is to ensure the neutrality of the tax system between different industries. Governments get less revenue initially, but they ensure the economic viability of certain projects that would not otherwise have seen the light of day. This means more tax revenue down the line when these projects are finally carried through and wealth is created.

As for actual subsidy programs, the largest of these are in the process of being eliminated, and will disappear within the next two years. Their abolition means that of the approximately $211 million of subsidies that currently exist, just $71 million will remain as of 2016. Of this amount, $39 million is for the Hibernia project in Newfoundland, $29 million is devoted to research and development, and $3 million is for industrial development programs.

Now, one could argue, and I would agree, that $71 million of subsidies is still $71 million too much. The oil industry does not need government help to survive and thrive, and those tax dollars could certainly be put to better use.

But to put things in perspective, the industry that develops oil and gas resources in this country pays on average $18 billion a year in taxes and royalties to different governments across Canada. This means that by 2016, when the subsidy phase-outs are complete, it will pay about 250 times more in taxes and royalties than it receives in subsidies. Clearly, the Canadian oil industry is not a net beneficiary of governmental largesse.

Another way of looking at this $71 million is as a very small fraction of all subsidies handed out by the federal and provincial governments to various sectors of the economy. In 2009, these totalled a whopping $15.8 billion.

Admittedly, it would make more sense economically to reduce the limited oil subsidy programs that do exist as much as possible, and even to eliminate them altogether. They’re bad for consumers and taxpayers and they distort investment decisions, just like most other types of subsidies, including those to clean energy sources that many would like to encourage even more.

The transition to renewables like solar and wind should be done on the basis of the increasing productivity and competitiveness of these types of energy, not by artificially supporting them with billions of dollars of (in this case, real) subsidies, an approach that is being called into question today around the world.

In any case, the small and shrinking amounts of subsidies we’re talking about do not justify the kinds of attacks levelled at the oil industry by activists and parroted by certain politicians. Rather, the oil industry deserves our thanks, not just for its contribution to government coffers, but even more importantly for its contribution to economic growth.

Michel Kelly-Gagnon and Youri Chassin are respectively president and economist at the Montreal Economic Institute. The views reflected in this column are their own.


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