Bingaman to President: How To Cut Energy Costs

March 25, 2004
10:09 AM
With fuel prices at or near record highs (and still climbing), Sen. Jeff Bingaman, D-NM, today identified 13 specific steps that President Bush can take immediately -- using existing statutory authority -- to help lower energy prices. Bingaman is concerned about the impact that rising petroleum and petroleum product prices are having on the American economy, on American consumers and on American jobs. Today he sent the President a letter outlining these recommendations. The Senate Energy Committee’s ranking member also detailed these actions in a floor speech this afternoon: Presidential Action to Address High Energy Prices Sen. Jeff Bingaman March 24, 2004 Mr. President, I have come to the floor today to discuss rising natural gas, petroleum and petroleum product prices. I would like to outline 13 concrete steps that the President can take to address and lessen the impacts that these high prices are having on the U.S. economy and American families. Several others here in the Senate have come to the floor in recent days to suggest that the cure-all for current high energy prices would be to simply take up and pass either the failed energy bill conference report from last year, or a new comprehensive energy bill now on the Senate Calendar. Clearly there are a number of specific legislative provisions related to energy that we in Congress should be passing this year. The truth is that neither last year’s or this year’s bill does much to address the high prices we now face in the areas of natural gas and gasoline. That was the conclusion of the Energy Information Administration, or EIA, in a thorough analysis of last year’s conference report that was carried out at the request of Sen. Sununu. The EIA conclusion on the conference report, which applies equally to the energy bill currently on the Senate Calendar, is that, on a fuel-specific basis, changes to production, consumption, imports, and prices are negligible. And, as the Wall Street Journal stated so succinctly yesterday in an editorial on energy legislation, "no [energy] bill has the ability to ease the crunch in oil or natural gas prices before this fall’s election." There are, however, a number of effective steps that the President can take, using existing statutory authority. These steps would actually do more to address current high energy prices, as well as their root causes, than anything in either 1200-page energy bill. Increasing Domestic Supplies of Natural Gas The first set of specific steps the Administration could take to address current high prices involves increasing our domestic supply of natural gas. Those steps would be for the President to reprogram additional funds in FY 2004 to Federal oil and gas programs and request supplemental funds to reverse the cuts to Federal oil and gas programs in the Administration’s FY 2005 Budget Request. Federal programs to support increased domestic oil and gas production have fared poorly in the President’s most recent Budget Request to the Congress. This is in spite of the many public statements of support for increased domestic production by Administration officials. That rhetoric, unfortunately, has not been matched by actual investments in the budget. A case in point is the Oil and Gas Management Program in the Bureau of Land Management (BLM) of the Department of the Interior. This is the program that governs onshore oil and gas production on Federal lands, such as that on Federal lands in New Mexico. The 94,000 Federal onshore oil and gas wells currently account for 11 percent of U.S. natural gas production and 5 percent of our oil production. The Administration’s own figures show that there is a backlog of oil and gas lease applications and drilling permits on Federal lands of about 2,100 for the current fiscal year. That’s a remarkable statistic. It means that we are forgoing additional oil and gas production not because of some environmental restriction, or because we have closed off some promising new area to development, but because the Administration simply won’t hire the people to process the paperwork needed to approve the drilling that companies are anxious and willing to undertake. You would think that getting adequate Federal resources to support oil and gas exploration in the field in areas that are not controversial would be the easiest thing in the world. I can assure my colleagues that it is not. In my own State of New Mexico – and we are a state that produces a substantial amount of oil and gas -- I had to go back to the Bureau of Land Management again and again to get them to hire additional personnel in the Farmington Field Office to process natural gas drilling permits. Farmington is not alone in this respect. This is a problem all throughout the inter-mountain West. Instead of taking aggressive action in this year’s budget to reduce this backlog to zero over the next year, the President’s latest Budget Request cuts $3 million from the budget of the Oil and Gas Management Program, with the difference to be made up by raising fees on the independent oil and gas producers for each lease application or drilling permit that they apply for. Think about that. In the face of very high natural gas prices, the Administration wants to cut the Federal expenditure for the very people needed to approve more drilling, and then make up the difference by bumping up the cost of a drilling permit. Not only do we not get more supply, but the additional costs levied on producers most likely get passed along to consumers, and get reflected in natural gas prices. As a result of this "status quo" level of effort in the BLM, the Administration’s own figures estimate that the bureaucratic backlog in BLM will only decline by 200 in FY 2005, for a net backlog of 1,900 lease applications and drilling permits 18 months from now. This is inadequate in light of current high prices. Instead of making it more costly for domestic producers to look for oil and gas on Federal lands, and doing little or nothing to make the necessary resources available in the field to speed the processing of leases and permits, the Administration should be asking Congress for a much greater increase in this budget. To address this problem, I recommend that the Administration take the following three actions to boost domestic natural gas production: 1. The Department of the Interior should request that FY 2004 funds be immediately reprogrammed to start reducing the drilling backlog at BLM; 2. The President should submit a supplemental request for an additional $8 million for FY 2005 to get the backlog down to zero; and 3. The President should direct the BLM to abandon the notion of a rulemaking that would erect greater fiscal barriers to the exploration and production of oil and gas on Federal lands. A second set of deep budget cuts affecting natural gas production can be found in the Administration’s Budget Request for the Department of Energy’s oil and gas R&D programs. These programs are focused on providing independent producers with access to new technologies that make domestic production of oil and gas more efficient and more effective. They fund efforts such as the Petroleum Technology Transfer Council, which has a strong demonstrated track record in boosting the productivity of the independent oil and gas producers that account for much of our domestic oil and gas production. The President’s Budget Request for FY 2005 cuts these programs by nearly half. One particularly important program, DOE’s Petroleum Exploration and Production Research Program, would be slashed by 84 percent under the Administration’s proposal. Again, given the need to sustain domestic production and the strong support for these programs shown in the Congress repeatedly on a bipartisan basis, these are difficult funding decisions to justify. So, my fourth recommendation to the President is that, at a minimum, the Administration submit a supplemental request of $37.1 million for FY 2005 for DOE oil and gas R&D programs. All that we’re asking for here is to maintain these programs at their current level of funding. Frankly, these programs should be increased, but at the very least we should not be phasing them out, as the President is currently proposing. Relieving Gasoline Price Pressure for Consumers The next set of steps I would recommend deal with relieving price pressure on gasoline for consumers. My first recommendation in this regard would be for the Administration to temporarily suspend using royalty-in-kind oil to fill the Strategic Petroleum Reserve. The Senate has voted in favor of such a suspension during its consideration of the Budget Resolution. I supported that action, which was proposed on a bipartisan basis by Senators Carl Levin (D-MI), Susan Collins (R-ME), and Hillary Rodham Clinton (D-NY). I recognize that the Senate vote was not binding on the Administration. But, the idea of not diverting oil from the market to fill the Strategic Petroleum Reserve at a time of exceptional tightness in oil markets makes sense at least as a signal to the market that the Administration recognizes the depth of economic hardship being caused by current high prices. The President has the authority and the discretion to either put the government’s royalty share of oil in the SPR, or to let it be sold on the market, where it can help provide more supply. I believe that the President should direct the Secretary of Energy to suspend this policy temporarily, to be reinstated when oil prices return to more normal levels. Some have argued that putting the government’s royalty share of oil on the market is some sort of attack on the SPR, but that is not true. The practice was started during the Clinton Administration, at my urging (and at the urging of others in the industry), because oil prices then were very low, and the extra government oil being placed on the market was threatening the long-term financial viability of small producers. It was started as a counter-cyclical measure; and we should stop it as a counter-cyclical measure, in the same way, in my view. My second recommendation to help reduce high gasoline prices would be for the President to Press the Organization of Petroleum Exporting Countries (OPEC) to increase world oil supply. OPEC has successfully managed the global oil market with an increasing degree of precision since its announcement in March 1998 of a pact to lower output and keep oil prices within a $22-28 per barrel price band. Supply has been tight and prices have remained high - in particular over the past 12 months. On February 10, 2004, OPEC announced a surprise agreement to cut its production quotas by 1 million barrels a day, or 4 percent, starting in March, because of concern that prices may fall once winter ends in the northern hemisphere. Meanwhile, crude oil prices in New York reached a 13-year high of $38.18 a barrel on March 17, two weeks before OPEC's next meeting. Given the economic impact that high energy prices are having on American families and businesses, I believe that the Administration should act more aggressively to combat the mounting economic crisis. With a decrease in supply, the demand for oil could send prices at the gasoline pump well above $2 a gallon this summer. In my view it is time that the Administration uses every means at its disposal to bring down high energy prices. OPEC has limited its production of oil to drive prices higher and collect additional profits. That should not be acceptable. I recommend that the Administration exert diplomatic pressure on OPEC to abandon its agreement of February 10 and to increase oil supplies instead. Doing so would not set some new precedent. The Clinton Administration used its international leverage to encourage OPEC to keep oil prices stable and affordable during its two terms in office. If President Clinton and his top officials could act in order to deal with that kind of threat to American consumers and the American economy, then I think President Bush can as well. My third and fourth recommendations to help moderate gasoline price pressures on consumers would be for the Administration to fine-tune the current gasoline sulfur regulation to ease price pressures resulting from the transition to low-sulfur gasoline. EPA is in the process of implementing a new rule on sulfur in gasoline. This rule sets the acceptable level of sulfur in gasoline at 120 ppm as of January 1, 2004. Over the next two years, this level will drop to only 30 ppm. The move to cleaner, more sulfur-free transportation fuels is necessary and should continue. The rule rewards companies that achieve early reductions in their operations’ baseline level of sulfur to generate sulfur credits for use in 2005. An additional level of special credits called "allotments" was developed to reward companies which made significant capital investment. The rule, however, does not have a reliable mechanism for independent fuel importers to participate in the system if markets are tight and the number of allotments they need to buy (to stay in compliance) are not available. I recommend that the Administration revise this rule to allow independent importers to carry a small deficit balance in case they are unable to buy enough allotments. By doing so, we will facilitate the ability to move more gasoline that is currently on the world market to U.S. consumers this summer, without compromising environmental protections. If unexpected significant refinery or pipeline disruptions occur, or if gasoline prices rise to levels that cause significant economic harm, I recommend that the Administration be prepared to issue an emergency rule allowing the use of the sulfur credits for 2005 in this year instead. This additional flexibility in the use of sulfur credits would not result in any greater emission of sulfur dioxide over the two-year period of 2004-2005, but would add to the ability to bring more gasoline into the United States so that consumers are not paying more than they should. Develop a national fuels strategy While some of the preceding actions show how fuel prices can be temporarily moderated by lowering barriers to fuels already on world markets this summer, we need to get our national fuels system in order for the longer term. Although the Administration published a general report on national energy policy in 2001, our country still lacks a focused national fuels strategy. Current policies on issues such as the operation of the Strategic Petroleum Reserve (SPR) are outdated. The Administration has made no progress towards stopping and reversing the increasing balkanization of U.S. fuel markets – a balkanization that hits every consumer in the pocketbook with higher fuel prices than are necessary. And there has been no attempt over the past few years to build consensus around a balanced approach to both increase the supply of refined fuels and increase the efficiency of our oil use economy-wide. These changed circumstances and new needs call out for a number of policy initiatives that should be undertaken first as part of a broader national fuels strategy. First, such a strategy should look at how conservation in transportation fuel use can be enhanced. Instead of debating on the merits of any single approach to the problem, it would be more productive if the Administration were to set a policy target for itself of oil savings it would like to achieve economy-wide over the next 10 years. This would give the Administration and the public a yardstick to evaluate the effectiveness of various policy proposals. Such a target would likely be broadly supported across the political spectrum. In the Senate, one such proposal for an oil savings target was supported last year by a vote of 99-1. I recommend that the Administration set such a policy target, after public consultation. Second, the Department of Energy and the Environmental Protection Agency should start addressing the need for further refining capacity in areas, such as the East Coast, that are now importing gasoline to keep pace with demand. States, localities, consumer groups, environmental groups, and industry should all be invited to participate in a process to identify what measures can be taken to facilitate capacity expansion. For such a process to succeed, there would have to be credible actions ongoing at the same time to spur increased conservation. But that is possible. I believe that such a process would identify the current barriers to building additional refining capacity, such as permitting and financial disincentives. I would recommend that the Administration immediately set such a process in motion, and that it issue a report to the Congress and the public within six months, identifying specific options for improving regulatory practices or streamlining permitting processes in order to increase U.S. refining capacity. Third, the Administration needs to review its policies regarding the operation and use of the SPR. Right now, we lack any "rules of the road" for tapping the SPR that are clearly defined and clearly understood. As I have pointed out in previous letters to the Department of Energy, a clearer understanding of how the SPR oil will be managed in a new environment of volatile markets and increasingly higher prices would provide more certainty to the market. That, in turn, would restrain speculative price swings when supplies are tight. I believe that the Administration should initiate a rulemaking on proper management of the SPR in a high-price environment. This should encompass a serious conversation with consumers, producers and public policy makers about how to manage our strategic oil reserves to best benefit our nation, with adequate consideration of the interests of all parties, but particularly that of consumers and the taxpayer. Fourth, when fuel markets are tight, product flexibility is crucial. If a region needs more gasoline than its refineries can produce, or if a refinery or pipeline shuts down unexpectedly, flexibility becomes the key factor determining the speed at which motor fuels can be supplied from other regions to meet the shortfall and dampen price spikes to consumers. The proliferation of "boutique" fuel specifications across the country has greatly reduced the overall flexibility and efficiency of our fuels system. It is a major factor in the increasing fragility of our fuels system to price spikes. The Clean Air Act authorized states to regulate fuels (through Federally-approved state implementation plans) in order to attain a national air quality standard. That was the right policy, but the implementation of the policy has been flawed. There are now dozens of different kinds of fuels being required by different States, all with Federal approval, leading to more than 110 different formulations of these boutique fuels throughout the United States. These 110-plus different fuel types make the use of existing transportation infrastructure for fuels much less efficient, and correspondingly more expensive to run. Those costs get passed directly on to consumers. The large number of fuel types also limits flexibility in product distribution, particularly if a disruption occurs. Consumers pay for that lack of flexibility whenever there is a price spike. The President’s 2001 energy policy report directed the Environmental Protection Agency (EPA) to study "opportunities to maintain or improve the environmental benefits of state and local boutique clean fuel programs while exploring ways to increase the flexibility of the fuels distribution infrastructure, improve fungibility, and provide added gasoline markets liquidity." Despite that three-year-old directive, the Administration has not taken any significant steps to reduce the growth of these boutique fuels. This is a major failing which we need to address at this time. I believe it is time for the Administration to take real action to reduce the proliferation of boutique fuels. This is necessary if we are to increase the ability to provide adequate supply of gasoline and other fuels in times of disruption or in tight markets, such as those we will see this summer. As a cornerstone of a national fuels policy, I believe that the President should direct the Administrator of the EPA, with technical assistance as needed from the Secretary of Energy, to require revisions of state implementation plans to reduce the overall number of fuel specifications by at least a factor of five, and preferably closer to a factor of ten. My final recommendation, aimed at preventing future price shocks in gasoline and other fuels, would be for the Administration to encourage the International Energy Agency, or IEA, to correct its strategic stock modeling methods. The International Energy Agency’s monthly oil market report is critically important to the global oil market. The supply, demand and stock figures that IEA projects each month literally turn markets. Energy experts tell us that the method IEA uses to calculate monthly demand and supply figures is flawed, and that it encourages OPEC to "undershoot" the market in terms of the amount of crude oil it supplies to the world market. A revision to the strategic stock calculation methodology could fix this. The root of this flaw lies in the fact that the current IEA market report treats stocks of oil in the major consuming countries as a fixed, invariable amount. But this treatment of stocks is not realistic, and its effect on IEA’s models is to bias them towards understating the amount of oil that OPEC needs to produce for the world market – the so-called "Call on OPEC." Recently it appears that OPEC has given great credence to the "Call on OPEC" in determining what it should supply to the market. Further, key OPEC nations such as Saudi Arabia have at times interpreted IEA data to mean that the IEA will not punish certain behavior by the cartel to maintain high prices, so long as they meet the “Call on OPEC” levels. Given the importance of this IEA forecast methodology, it is crucial that it be based on the best possible real-world data, and not on a static and unrealistic treatment of stock levels. A more real-world treatment of stocks in IEA’s oil forecast methodologies would alleviate some of the tension which many analysts believe is keeping crude prices higher than they otherwise might have be. For this reason, I would recommend that the Administration engage vigorously with the IEA to improve the realism of the models underlying its monthly oil market report. That change, though seemingly esoteric, could make a real difference at the pump to Americans. And the United States is a leading member of IEA,  so our ability to influence and improve this key market driver is very great. I believe that carrying out the 13 recommendations I have outlined today will help to relieve some of the pressure in our fuels markets that is adversely affecting consumers and will set the stage for a long-term improvement in our fuels security. My colleagues should know that none of these 13 recommendations requires new legislative authority from Congress. The President already has the power to implement these recommendations. I would urge that he do so without delay. I have put these recommendations in a letter to the President that I have sent to him earlier today. I hope that he will consider these common-sense and effective recommendations and promptly take action on them. I will come back to the Senate floor once I have received a reply to my letter, with a report on whether the President is willing to take these actions to reduce gasoline price pressures this summer.

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