Deregulation. That’s what’s needed to solve the energy crisis. And everybody knows it. Except, apparently, the United States Congress.
Unfortunately, the U.S. Senate can’t move a ball downhill without taking an opinion poll. So, when we report that bipartisan, compromise legislation that portends to increase domestic oil drilling is a very real possibility, you know the public is in an uproar over gasoline prices, and that they expect the government to stop standing in the way of increased energy production.
Responding to this public pressure, a so-called “Gang of 10” senators has gotten together pitching the “New Energy Reform Act of 2008,” a proposal that combines Democrat and Republican ideas to ostensibly address the energy crisis. It fails (as we will discuss below). Included in the bogus “reform” are such salutary sounding measures as:
- Opening “additional acreage in the Gulf of Mexico for leasing (in consultation with the Defense Department to ensure that drilling is done in a manner consistent with national security) and allows Virginia, North and South Carolina and Georgia to opt in to leasing off their shores. Retains an environmental buffer zone extending 50 miles offshore where new oil production will not be allowed. Requires all new production to be used domestically. Creates a commission to make recommendations to Congress on future areas that should be considered for leasing. Provides for appropriate revenue sharing for states that allow leasing off their shores…”
- Providing “grants and loan guarantees for the development of coal-to-liquid fuel plants with carbon capture capability. Plants must have lifecycle greenhouse gas emissions below those of the petroleum fuels they are replacing…”
- Supporting “nuclear energy by increasing staff at the NRC, providing workforce training, accelerating depreciation for nuclear plants, and supporting R&D on spent fuel recycling to reduce nuclear waste…”
- A “$20 billion ‘Apollo Project’ like effort to support the goal of transitioning 85% of America’s new motor vehicles to non- petroleum-based fuels within 20 years.”
- “Extending renewable energy, carbon mitigation and energy conservation and efficiency tax incentives, including the production tax credit, through 2012 to create greater certainty and spur greater investment…”
- $2,500 tax credits for highly fuel efficient and hybrid electric vehicle purchases.
- $500 million for fuel efficiency research and development.
- $2.5 for biofuel production.
- “Tax incentives for the installation of alternative fueling stations, pipelines and other infrastructure…”
- Provisions for “$84 billion in investments in conservation and efficiency in the New Era bill [to] be fully offset with loophole closers and other revenues. Approximately $30 billion will come from new revenues from the oil and gas industry through such measures as modifying the Section 199 manufacturing deduction for oil and natural gas production and other appropriate measures to ensure that the federal government receives its fair share of revenue from Gulf of Mexico leases. Remaining offsets will be finalized in consultation with the Finance Committee after accounting for interaction effects with other pending legislation.”
The problem with all of this “high- faluting” talk is that, like all compromises, this “Gang of 10” proposal is laden with problems, drawbacks, and outright betrayals. And like most legislation in Washington, it fails to solve the problems it purports to fix, and creates more than a few new problems along the way.
While the legislation does in principle increase off-shore oil drilling, it only does so off the coasts of Florida, Virginia, North Carolina, South Carolina, and Georgia. What about the rest of the east and west coasts? What about Alaska? The off-shore provisions of this grand compromise are woefully inadequate to addressing decades of overregulation in an area wherein Big Government has tied domestic oil production in knots.
Considering the proposal, as it relates to off-shore drilling, Republicans are better off just letting the current moratorium on off-shore drilling expire on October 1st and then simply beginning leasing on those areas to companies, as suggested by NRO’s Phil Kerpen:
“The president can begin by announcing that offshore oil leasing will commence on October 1, 2008, the day after the current congressional ban expires. He then can make it clear to Democrats that he will veto any legislation to impose a new ban in October, even if Democrats attach it to so-called ‘must pass’ legislation to keep government open. In other words, the president can dare the Democratic Congress to shut down the federal government in order to stop offshore oil leasing.
“There is no good reason for the president to back down. We clearly need the oil and gas. According to conservative estimates from the Department of the Interior’s Mineral Management Service, the Outer Continental Shelf — where offshore drilling would take place — contains 86 billion barrels of oil and 420 trillion cubic feet of natural gas. Through the end of September, 97 percent of this area is subject to the congressional ban on offshore exploration and production. And while it is true that energy companies need time to harvest this oil and gas, the mere perception of substantial new future production will break expectations of higher energy prices in the futures markets and bring down prices at the pump today.”
In other words, Congress would achieve more off-shore drilling by simply doing nothing this year on the subject and allowing the off-shore drilling moratorium to expire. This “compromise” would only be a partial rollback of the moratorium, and actually would allow for less new drilling than would the expiration of the moratorium.
Yet another flaw is that this “Gang of 10” has taken proven oil reserves in Alaska—the nation’s largest state—off the table. Senators in this makeshift gang have made clear that any action on drilling in the Arctic National Wildlife Refuge (ANWR) would hopelessly shut down any prospect for a compromise. In other words, the “Gang of 10” is more than willing to kowtow to Democrat threats to filibuster any approach that includes authorizing drilling in ANWR.
This is yet again an example of duplicity on the part of Congress. Everybody agrees that America needs to put more oil on the market as soon as possible. And yet Congress seeks to move forward with a grand compromise on energy—where one of the largest proven oil reserves in the nation is not even on the table. This is the height of treachery. Alaska is one of the greatest oil producers in the world, and yet Congress still seeks to keep its oil resources located in ANWR off the market.
A better option is to force lawmakers to vote up or down on drilling in ANWR. If Democrats want to go down in the annals of history as standing in the way of a sure-fire way to increase oil production in 2008 when high prices are killing hard-working Americans’ purchasing power, they should be granted the opportunity to tie their own nooses.
Problems with the legislation are compounded when one considers the curious requirement that “all new production to be used domestically.” What would that mean? That any new domestic oil exploration from now on could not be sold on global oil markets. Therefore, there would be a barrier between this new supply and the market itself.
So, there would need to be a new U.S.-only oil futures market in order to sell this new oil, thus creating two prices for oil: those from lands prior to lifting the ban, and those from after. This sort of energy protectionism would horribly distort markets, and consequently would be a bad show of faith by a nation so dependent upon foreign sources of fuel.
Hoarding—for that’s precisely what this would be—could also result in the unintended consequence of other oil-producing nations either hoarding their own oil supplies for their domestic economies or simply selling less oil to the U.S., thus reducing supplies further on global markets despite the likelihood of further demand increases worldwide in the future.
Clearly, the “Gang of 10” has never heard of—or, more likely—chooses to ignore the hard lessons of the Smoot-Hawley Tariff. Someone needs to teach the gang how to say “Great Depression.”
The real solution is to remove all restrictions on drilling everywhere in America, start drilling, and get the product to all markets. That would have the most definitive impact upon long-term prices.
The compromise also says nothing about speeding along the process for building new gasoline refineries. If there is to be new oil production, there is also going to need to be an increased number of gasoline refineries in order to bring the product to market. This startling omission by the “Gang of 10” probably demonstrates that these lawmakers either forgot that the lack of new gasoline refineries is a big part of the current energy crisis, or that they are not serious about getting new gasoline to the market. Either way, where’s the provision for new refineries?
Another problem is that the proposal says nothing about increased oil shale exploration in the Rocky Mountains. According to the National Oil Shale Association, there are still legal barriers to getting at that resource, too:
“Federal lands administered by the Bureau of Land Management (BLM) contain some 80% of the oil shale resources in the western United States. Access to these resources has been limited since they were withdrawn from leasing in 1930. These vast deposits of federally controlled oil shale are in locations where prospectors were not able to obtain ownership of claims in the early part of the 20th century before oil shale became a leasable mineral…
“The Energy Policy Act of 2005 (EPACT 2005) instructed the BLM to prepare to lease these resources by preparing an environmental impact statement and leasing regulations. A draft Preliminary Environmental Impact Statement (PEIS) for commercial leasing of oil shale and tar sands has been completed and offered to the public for review. In 2007 Congress passed legislation to limit BLM’s authority to complete both the PEIS and regulations.”
Any energy legislation this year ought to repeal restrictions on oil shale exploration. Currently the Interior Department is ready to move forward with regulations allowing for such exploration, but they are blocked by the above-mentioned Congressional restrictions. So, what gives? And why doesn’t the “Gang of 10”?
Yet another problem with the legislation is that it raises taxes on oil and gas producers in order to pay for some $84 billion in completely unnecessary federal spending. A $20 billion “Apollo-like project” to have non-petroleum based cars in 20 years? $500 million for fuel efficiency research? Another $2.5 billion for biofuels? Despite lawmakers’ much-ballyhooed best intentions, these measures will not do a thing to reduce demand for oil-based gasoline for Americans’ cars. They’re simply a formula for more money down the drain—not less gasoline in the tank.
And, by increasing taxes on oil companies, Congress would guarantee that the additional costs will be passed on to consumers in the form of increased gasoline prices. Once more, Congress has taken a decidedly schizophrenic approach to move forward with a grand compromise. And as usual, they wind up just including a myriad of contradictory proposals so as to appeal to the broadest possible spectrum of disparate voters.
Here’s a suggestion: When proceeding with legislation to decrease gasoline prices, it’s probably not a good idea to do things that would have the contrary effect of increasing the costs of producing gasoline. Somebody has to pay—and one way or the other, that somebody is John and Jane Q. Public.
The flaws continue: the bill would provide “grants and loan guarantees for the development of coal-to-liquid fuel plants with carbon capture capability.” Coal-to-liquid—a proven technology—is a very good option, but there is a major flaw here: Carbon capture “capability”, or so-called carbon sequestration, does not even exist in a commercially viable form yet. So, what’s the sense throwing grants and loans at an unproven technology—carbon sequestration—that has the effect of getting in the way of a proven technology—coal-to-liquid?
It would seem more prudent to move ahead with coal-to-liquid plants without requiring carbon sequestration, which has nothing to do with increasing energy supplies or decreasing prices anyway. It is simply a feel good measure for global warming fanatics who would never support the increased energy production that the bill does offer and is necessary for America’s continued economic viability.
Next, the compromise fails to address the obstructionist role that courts play in derailing the construction of new power plants and other energy production facilities. Ever since a 2007 Supreme Court ruling that carbon dioxide is a “pollutant” under the provisions of the Clean Air Act, the process for building new power plants has become ever-more mired in litigation.
Instead, Congress should be bold and define carbon dioxide as “harmless gas necessary for biological processes” and restrict the jurisdiction of courts to hear questions on whether to build new power plants and other energy production facilities. As it is, whether or not to build new power plants or generally increase energy production are political questions that the courts have no role in overseeing.
A big part of deregulation is removing the role of courts to oversee and lawyers to profit off of throwing monkey wrenches into what could be a national, low-cost energy policy.
One very good measure in the compromise has to do with nuclear energy. It would deregulate the process by which new nuclear power plants are built and would support research and development for spent nuclear fuel recycling. But even here, the Gang has settled for only half a loaf.
Lawmakers should go further and once-and-for-all legalize nuclear reprocessing within a regulatory framework that mirrors France’s approach to recycling nuclear fuel to address proliferation concerns. The technology is already available for reprocessing, and what is necessary is to remove federal restrictions on the practice. Markets will move to bring the technology into America’s repertoire of nuclear capabilities.
Thankfully, the proposal also avoids the issue of regulating the commodities futures markets until the Commodities Futures Trading Commission returns with findings on the alleged, unproven role of “overspeculation” in increasing prices of oil. This is fortuitous, as speculators are now playing a tremendous role in helping oil prices to decrease dramatically in the past month.
Overall, this bipartisan proposal on energy proceeds from the premise that it takes 60 senators to get anything done in the Senate, and that therefore, a Swiss cheese compromise is necessary that tries to please everybody. The trouble is that bipartisan approaches to issues requiring free market solutions almost always result in outcomes weighted down by Big Government regulations, restrictions, half-measures, and full-nelson strangleholds.
When you try to please everyone, you wind up pleasing no one.
The more one reads through this grand compromise, the more it seems like they’re more interested in saying they did something than in doing the right thing.
There can be real solutions under current circumstances. If Republicans in Congress stick together and work with President Bush, they can block any effort to reinstate the moratorium on off-shore drilling. They can then begin leasing off-shore sites starting in October while simultaneously forcing votes on drilling in ANWR and other federal lands. They can remove restrictions on oil shale exploration, open the doors for coal-to-liquid facilities without requiring carbon sequestration, legalize nuclear reprocessing domestically, and allow free markets to respond to the above deregulation.
As President Reagan once stated, “[G]overnment is not the solution to our problem; government is the problem.” The truth is, all of the solutions to the energy crisis are to government-created problems. Every problem outlined above requires deregulation by the federal government in some shape, manner, or form. And everyone knows it. Except, of course, Congress.
