Commentary

Stop That Energy Bill!

It’s no surprise to find politicians in Washington frantically working to cobble together some sort of energy bill prior to the November elections. Polls show that high gasoline prices are easily the most important issue on the minds of voters, and legislators who fail to offer some convincing blueprint to bring those prices down are going to be in trouble on Election Day. Unfortunately, what’s being sold as a bipartisan, “best-of-all-worlds” energy compromise ” the so-called “Gang-of-10” (now, “Gang-of-16”) bill in the Senate ” deserves ridicule, not celebration.

The “New Energy Reform Act of 2008” (The “New Era” Act, get it?) would allow for more domestic drilling … sort of. While “Drill Now!” Republicans have called for opening up all federal waters for oil and gas development currently off limits to the industry ” subject to coastal-state approval ” the Senate bill would do the same with the exception of the Pacific Coast, which would remain off-limits.

Now, that probably doesn’t make much difference. California, Washington, and Oregon would likely have blocked drilling off their coasts under the Republican plan anyway. But if minds should change there and those respective state legislatures were willing to allow drilling to go forward, why should the feds say “no”?

Even so, the Senate bill loads some important conditions and caveats onto any prospective off-shore drilling activity. For instance, it would impose and an environmental buffer zone extending 50 miles offshore where new oil and gas production will not be allowed. It’s unclear how much oil would remain locked away under this provision because many of those areas have not been thoroughly explored, but why preemptively take that oil off the table?

Moreover, the bill requires all new production to be used domestically, a provision that is easy to sell to the public but not so easy to sell to economists. Whether that new crude is exported or not, oil and gasoline prices around the world cannot vary by more than the transportation costs from one place to another. If a producer can get a higher price elsewhere, prohibiting him from getting that higher price simply reduces the profits available - and thus the investment dollars available - to domestic producers over the long run. Hence, if it has any price impact at all, the “no exports” provision would increase rather than decrease price.

What will all this mean for oil prices? Nothing of consequence. If the Energy Information Administration (EIA) - the analytic arm of the U.S. Department of Energy - is correct about the reserves at issue, it would mean the ultimate infusion of no more than 8 billion barrels of oil into the market at a rate no higher than about 100,000 barrels per day. If that oil were being produced today (and EIA estimates that it would take ten years for that crude oil to come fully on line), it would represent, at best, a 1/10th of 1 percent increase in global supply and, ultimately, about a 1/5th of 1 percent reduction in crude oil prices. Throw the Pacific coastal reserves into the mix and you can double those figures.

While EIA’s estimates are highly speculative (we can’t know how much economically recoverable oil there might be in areas we haven’t explored) it does tell us that, to the extent we have clues about these things, we’re probably not talking about turning the United States into Saudi Arabia. Republican promises that drilling offers a quick and sure-fire way to reduce gasoline prices are almost certainly fraudulent.

What will all this mean for oil prices? Nothing of consequence. ”

The handouts the Senate bill would send Detroit’s way suggests that the auto companies have taken over the federal government. $7.5 billion of taxpayer money is promised to auto companies engaged in research and development (R&D) of alternative fueled vehicles. Another $7.5 billion is promised for retooling production facilities to make those vehicles. $500 million is pledged to underwrite R&D to enhance automotive fuel efficiency. And those are just the highlights.

It should go without saying, of course, that if those are worthwhile investments, they should and would be made by corporate stockholders, not U.S. taxpayers.

To help guarantee auto sales, the feds will offer a $7,500 tax credit for buying vehicles that run primarily on something other than gasoline, a $2,500 tax credit for retooling existing engines to do the same, $2,500 tax credit for buying super fuel-efficient vehicles, and extend the existing $2,500 tax credit for buying hybrid-electric vehicles.

Of course, car buyers already have plenty of incentive to buy fuel-efficient cars. Lots of money will thus be spent to provide handouts for the purchase of vehicles that would have been purchased anyway. And it’s a regressive handout at that. Poor people are less likely to be in the market for new cars than wealthier people. Finally, it sets up what economists call a “moral hazard.” That is, it rewards - not those who jumped to replace the gas guzzler with a gas sipper - but those who’ve resisted doing so up until now. The message? In the future, don’t conserve on your own; wait for the government to pay you to conserve.

Energy producers also win big … as if they weren’t winning big in the market already. The most obnoxious - and thus, most popular - provision is the extension of a renewable fuels production tax credit that is the thin blue line between profits for investors like T. Boone Pickens and billions of dollars of losses for the same. If renewable energy companies can’t compete after years on the dole and record high energy prices, when can they?

But there’s more. $2.5 billion is dedicated to R&D to produce “next generation” biofuels and infrastructure. Hundreds of millions more are spent on tax incentives for a new fuel delivery infrastructure, new transmission lines to get renewable energy to end-users, and oil producers who are injecting CO2 (a greenhouse gas) into fields to improve recovery rates - something that has gone on and will continue to go on whether there is a tax credit or not. Tax dollars are also used to provide grants and guarantee loans to investors building coal-to-liquid facilities with carbon capture capability. Nuclear-power plant owners get favorable accelerated depreciation tax schedules.

Question: If energy companies are making such stunning profits, why does the taxpayer need to underwrite their investments? Another question: If these targeted technologies are so promising, why won’t profit-hungry investors put their own money on the line? If they won’t, what does Congressman Vote Crazy know that analysts at Goldman Sachs do not? If they will, then isn’t private capital just as good as public capital?

The total cost of these handouts amounts to a cool $84 billion. Most of it will simply be borrowed from foreign lenders. $30 billion, however, will come from a 14 percent “severance tax” on oil production in the Gulf of Mexico and from the elimination of tax breaks afforded to the oil and gas industry under Section 199 of the tax code, which provides for tax breaks to all U.S. manufacturers.

While one can make a good argument for repealing Section 199 in toto - the feds have no business rigging the market to make investments in manufacturing more attractive than investments in something else - targeting the oil and gas companies makes no sense. Morgan Stanley reports that the exploration and development tax rates on “Big Oil” average about 45 percent - substantially higher than the tax rates paid by other U.S. industries. Hence, cutting the taxes paid by oil and gas companies - not increasing them - would make better policy. Alas, it probably would not make better politics.

People who believe that the government should make all decisions about what kind of energy is produced, how that energy is used, and how much energy is consumed will of course be thrilled with a bill like this (unless, of course, their favorite fuel is left without a large and expansive spot at the federal trough). People who doubt the government’s ability to run whole industrial sectors, on the other hand, should be horrified at this advertised “New Era” energy bill.

Unfortunately, Washington is now almost entirely made up of the former, not the latter, so the only real debate we’re likely to get pertains to the provisions surrounding off-shore oil drilling and whether to tax - or borrow - the money necessary for this mountain of corporate welfare. That’s too bad, because even if the bill gave Republicans everything they wanted on those issues, it would still constitute a rebuke to everything Republicans tell us they believe in. Or once told us they believed in.

Jerry Taylor and Peter Van Doren are senior fellows at the Cato Institute in Washington, D.C.