IMF Math Gymnastics

“A lie can travel halfway around the world before the truth can get its boots on.” – (author unknown)

“The Stone Age ended but not for lack of stones, and the oil age will end one day but not for lack of oil”.  Some version of the statement appears to have entered the world’s energy dialogue in the 1970s. 

When “peak oil” talk is in vogue, the quote seems to find its way back into the conversation. It has been increasingly trotted out in the last twenty years to suggest “alternative” energy is one breakthrough away from replacing the services provided to humanity by hydrocarbons.

The quote’s source is unclear. New York Times columnist Thomas Friedman attributes the earliest use to Ahmed Zaki Yamani in the 1970s.  Yamani, who served as Saudi Arabia’s Minister of Petroleum and Mineral Resources from 1962 – 1986, was quoted similarly in a 2000 UK Telegraph article. Don Huberts, former head of Shell Hydrogen, is quoted analogously in a 1999 article in The Economist. Ironically, Huberts was (in hindsight, overly) optimistic about hydrogen fuel cell technology soon replacing hydrocarbon combustion for power plants and cars.  

Declining production returns for each unit of energy expended producing hydrocarbons in the world’s developed oil plays are a long-term trend. It is possible fracking may have only bought us a few decades of increasing or stable steady oil and gas production. Still, we are dubious of claims of “peak oil”. 

In the 21^st century era of “Just Stop Oil”, “Extinction Rebellion”, and “climate change is the greatest crisis facing humanity”, are more likely possibility is that western governments artificially legislate their way to peak oil. Even if this is possible, as Doomberg has routinely pointed out, every molecule of oil and natural gas western nations forgo in their misbegotten attempts to transition to “alternative” energy will be consumed by the developing world. Happily.

Western Charlaticians™, government regulators, global institutions (United Nations, International Monetary Fund), environmental non-profits, and activist scientists routinely attempt to justify policy initiatives in support of a rapid alternative energy transition by attributing exorbitant costs/damages – known as “externalities” - to our use of oil, gas, and coal. Externalities are economic consequences (negative or positive) of an activity impacting others (not involved in that activity) which are not captured or reflected in the price paid by participants.

The most obvious and relevant example has to do with CO2 emissions. Any increase in weather damage directly attributed to human emissions of CO2 from hydrocarbon combustion would be considered an “externality”.  In the real world, attribution is not so easy and as a result, pricing such externalities is extremely complicated, tricky and necessarily subjective.

Externalities exist, are real, and are a fact of life. How we account for them, or more precisely, how well and honestly we account for them, is another matter.

Future climate change externality modeler | MattoMatteo iStock

The externality cost associated with CO2 emissions from the combustion of hydrocarbons has become an “all pain, no gain” approach to energy. The method is deviously simple: theorize enormous cost damages from hydrocarbons while simultaneously pretending as if they provide absolutely zero value to human society. This is precisely how absurd measures like “Levelized Cost of Energy” (LCOE) and “Social Cost of Carbon” (SCC) gain purchase and become woven into western energy and environmental policy.  

LCOE, SCC and the outrageous prevarication that the fossil fuel industry “receives trillions of dollars in annual subsidies” travel around the world, shaping energy, environmental and economic policy. This is clearly evident in Europe, and in particular Germany, over the last 15 years and the consequences are still unfolding. And compounding.

In late August, the International Monetary Fund (IMF) issued a Working Paper detailing global fossil fuel subsidies, finding a total of $7 trillion annually (2021 US$). We have reviewed the Working Paper, IMF Fossil Fuel Subsidies Data: 2023 Update, and offer our brief analysis to help readers get a higher resolution view of these “subsidies”.  Spoiler alert: externalities are the star of the show.

On cue, because it supports the political narrative on which their survival depends, the world’s traditional media reported the IMF findings breathlessly and largely devoid of critical analysis.  As such, their headlines were hardly surprising.

Environmental industry publications reported the IMF findings in a similarly uncritical fashion. The usual cast of non-profits issued statements castigating the evil fossil fuel companies.  In their September 13^th weekly news compendium, the National Association of Environmental Professionals included an article by Yale 360 on the IMF Working Paper in their “Best Reads of the Month”.

Ordinary folks reading traditional media reports could be forgiven for believing that the world’s governments handed $7 trillion - 7% of world GDP - to oil and gas companies.  Conveying such messages is hardly accidental.

The data supporting the IMF paper identifies explicit subsidies for three different fossil fuel types (coal, natural gas, and oil) and the electricity they generate.  It breaks the implicit subsidies for each of these down into six different categories of damages:

• Accidents

• Congestion

• Forgone VAT (“Value-Added” Tax, a form of federal sales tax in some countries)

• Global warming (IMF’s choice of terms, not ours!)

• Local air pollution

• Road damage (ironically, likely worsened by electric vehicles’ > average weight)

The IMF’s Working Paper claims $5.7 trillion (77%) of the total are implicit subsidies and $1.3 trillion (23%) are explicit subsidies.  This first layer of important detail is conspicuously by its absence in most traditional media reporting on the paper.

Excellent analysis by Art Berman finds only $51 billion (4%) of the explicit subsidies go directly to support fossil fuel companies. The figure represents under 1% (0.73%) of the supposed $7 trillion in subsidies reported by the IMF paper. The latter figure is, naturally, the one regurgitated by the world’s media, Charlaticians, environmental non-profits and activists.  The rounding error percentage of the ginormous figure is conveniently left out of the discussion in these civilized and enlightened circles. Over 96% of the total explicit fossil fuel subsidies identified in the IMF Working Paper were expended by governments to make fossil fuels more affordable for consumers, largely in the developing world.

Of the $51 billion Berman’s work identified in explicit subsidies to fossil fuel companies, the overwhelming majority are in the form of tax credits. Virtually all of these merely allow specified costs to be deducted from income prior to taxation, similar to other businesses (i.e., expensing of exploration and development costs, depreciation, amortization, etc.).

Given the IMF’s math gymnastics and perception-twisting, you might be wondering: “Surely the fossil fuel industry must benefit from these tax credits to a far greater extent than renewables, right?” Data from the U.S. Energy Information Administration (EIA) proves the reverse is true - by a factor of almost 6X!

U.S. Quantified Energy-Specific Subsidies and Support by Type - 2022 (in millions)

Our analysis of the IMF paper’s supporting data suggests the percentage of implicit subsidies is even higher - a whopping 89% or over $6.2 trillion of the $7 trillion total fossil fuel subsidies claimed.

Our review of the data found $6.2 trillion in total “implicit” fossil fuel subsidies. Almost $2 trillion (32%) of that total is attributed to the damage category “global warming”. 

With 2022 global CO2 emissions estimated at about 36.8 billion tons, the IMF “implicit” subsidy works out to about $53/ton of emissions, a figure in line with the Biden administration’s current Social Cost of Carbon (SCC) estimate of $51/ton. Over the last twenty years, we have seen estimates of these costs range from negative (implying net benefit) to ~$200/ton. In November 2022, U.S. Environmental Protection Agency (EPA) proposed an increase to $190/ton for regulatory rulemaking.

As readers will appreciate, IMF’s $1.96 trillion in estimated damages from global warming is highly sensitive to the cost/ton of CO2 emissions value chosen.  At a cost of $5/ton, IMF’s global damage estimate would be 90% lower (~$185 billion).  At EPA’s proposed $190/ton, the global warming damage cost would be $7 trillion, equal to 7% of the value of all good/services produced on planet earth.  It would increase the global “cost” of all fossil fuel subsidies in the IMF report to around $12 trillion, or about 12% of global GDP.  It stands to reason that one would expect to see greater evidence of damage that could be directly attributed to human emissions of CO2 from fossil fuel burning if the damages were over $10 trillion annually.

A cursory examination of the IMF data also reveals some ironies that the IMF, legacy media, and environmental non-profits have avoided discussing at all costs. Our analysis found that over $300 billion of the explicit fossil fuel subsidies originate in the top 10 OPEC producers plus Russia and China.   This represents over 23% of IMF’s stated figure of $1.3 trillion (or ~37% of the global explicit subsidy total by our analysis).

By now it is clear that no amount of “global unity” happy talk or UN mandates are going to stop Russia from producing and China from consuming fossil fuels in order to meet rich nation’s climate objectives. The ten OPEC countries who, with China and Russia, account for >$300 billion in explicit subsidies include Saudi Arabia, Iraq, UAE, Iran, Kuwait, Nigeria, Algeria, Angola, Libya and Venezuela.

We can confidently predict that exactly none of the countries on this list will be risking economic hardship to their citizens to satisfy UN climate objectives. In Saudi Arabia, Iran and Venezuela, existing political regimes will not hitch their survival to these objectives.

The IMF Working Paper’s fossil fuel subsidy findings are a house of mirrors, built on a foundation of sand, with the appearance of legitimacy by virtue of plausible acronyms and captured institutions. It is merely an example of what is to be expected when concepts like “Levelized Cost of Energy” and “Social Cost of Carbon” are given scientific and economic credibility while bastardizing reason, physics, and economics. The Working Paper would be comical but for the downstream consequences of its findings.

The top 10 OPEC oil producing nations include some of sub-Saharan Africa’s poorest, including Angola, ranked ~66^th in global GDP.  As the chart below shows, Angola’s ~35 million people have a per capita GDP around $6,000 (~90% lower than the U.S.)

Angola’s total electricity production is around 17 terawatt hours annually. Setting aside corruption and other domestic problems, Angola clearly needs more electricity generation to develop and reduce poverty.

According to World Bank data (2021), Angola ranks in the bottom 22 countries globally in percent of population with access to electricity, two spots above Haiti and one below Rwanda.

But instead of financing major electric infrastructure projects that could serve millions of Angolans, helping to alleviate poverty, raise living standards, industrialize, and provide low-cost, high capacity-factor electricity, what did the US Export-Import Bank (EXIM) approve in July this year? A $900 million loan for  two solar photovoltaic plants with a combined capacity of 500 megawatts (meaning, intermittent production of low-quality/value electricity, averaging about 150 megawatts annually).  This is a real-world example of the consequences of “externalities” associated with CO2 emissions and climate change driving energy policy.

On a recent episode of The Great Simplification podcast, host Nate Hagens framed the intellectual dishonesty on display in the IMF Working Paper over the issue of “externalities” nicely. Hagens, a peak-oiler who believes climate change is an existential crisis for the biosphere and humanity, said:

This is not a subsidy to fossil fuels. This is an externality that society is not paying. Blaming Exxon or Shell for the externalities and calling them subsidies is equivalent to calculating the cost of obesity and diabetes and metabolic syndrome to society and labeling that a subsidy to the food companies.”

The IMF Working Paper is a thinly veiled outrage-generation tactic and attempt to legitimize LCOE, SCC, and similar machinations to override the laws of physics and economics to justify alternative energy deployment.  In the end, these attempts will fail under the weight of the very immutable laws they are trying to overcome with mathematical gymnastics.

None of this is to suggest that the extraction, refining and combustion of fossil fuels is without significant environmental impact. Or that human emissions of CO2 from burning fossil fuels don’t cause some warming, or that anthropogenic climate change is a “hoax”.

What is a hoax is the idea that the IMF or any other institution, scientist, or economist can pretend to turn unaccounted for costs in everyday behavior and transactions into a form of subsidy. And that such a form of faux subsidy makes a preferred form of energy cheaper while making a disfavored form artificially expensive, by magic bean accounting and computer modeling.

Lost in the “externality” noise is the fact that the $51 billion in explicit global fossil fuel subsidies Berman finds represents a mere .051% of global GDP. Consider the services humans receive from that subsidy: Hydrocarbons provide ~80% of global primary energy (nearly 100% of transportation), energy consumption is almost perfectly correlated with GDP, and GDP is highly correlated with living standards. Ignoring this reality has consequences for humanity, particularly for billions living below our standards in the developing world.

The laws of physics and economics will have the last word. The misfortunes of the former Danish oil and natural gas company (Danske Olie og Naturgas A/S) now known as Orsted are early evidence of the coming reckoning.  The recent “no bids” on offshore wind projects in August in the US Gulf of Mexico (TX waters) and in September in the UK are further evidence.

In the last month, major offshore wind developers were reduced to begging for price increases for electricity they may generate. Some are seeking price increases >70%, with requested electricity rates nearly double the present US average price per Kwh. Some threatened to abandon the projects without the rate concessions.  

This week UK Prime Minister Rishi Sunak signaled his intent to “backtrack on some climate goals” (AP’s choice of headline), saying he would set out a “proportionate” approach to energy and the environment. All of these examples are symbolic of the emerging realpolitik. Winds of change are coming.

If we were cynical, we would almost wonder whether the timing of the IMF Working Paper wasn’t a bit more than coincidental. If so, squirrelly subsidy math is not covering what otherwise appears to be an act of obfuscation, if not desperation.

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