I would like to take a few minutes to discuss what has become a tortured topic for this country: oil, gasoline, and diesel prices. I’d first like to respond to the President’s misstatements about Congress’s role in U.S. energy policy, made at his press conference Tuesday. I will then talk about the real causes of the energy situation, and what constructive steps we could take to address it.
The President has suggested that Congress is to blame for the current price situation for three reasons: for preventing oil companies from exploring for oil and gas in the United States; for blocking efforts to build more refineries in the United States; and for blocking increases in U.S. nuclear electricity production capacity.
I am disappointed in the President’s comments – first, because energy policy should not be a partisan issue, and second, because the charges the President makes are simply wrong.
Turning first to the issue of exploration and production, Congress has taken significant steps on a bi-partisan basis to enhance domestic oil and gas.
Through enacting the Gulf of Mexico Energy Security Act of 2006, Congress made available an estimated 4.74 trillion cubic feet of natural gas and 1.26 billion barrels of oil off the Florida panhandle.
Ironically, Congress needed to pass this law because of steps taken by the Bush Administration. In her first year in office in 2001, Secretary of Interior Gale Norton cut the size of the scheduled OCS lease sale in the area by 75 percent. With the stroke of a pen, she put off limits over 6 trillion cubic feet of natural gas and over a billion barrels of oil, from an area that had been proposed for leasing by the Clinton Administration.
While undoubtedly a politically popular stance for the Bush Administration in Florida, this was hardly an action that enhanced oil and gas production. In fact, large areas of the OCS are currently off limits to oil and gas development and production not just because of Congressional moratoria but because of Presidential withdrawals -- first put in place in 1990 by then-President Bush.
This President Bush could exercise real leadership by eliminating these Presidential withdrawals. As it stands now, some 574 million acres of the OCS are unavailable for leasing, containing estimated undiscovered technically recoverable resources of approximately 18 billion barrels of oil and 76 trillion cubic feet of natural gas. The President could take the first step toward making these resources available any time he chooses to by simply issuing the appropriate order revoking the Presidential withdrawals.
The Arctic Refuge is another issue raised by the President – but he failed to mention that drilling in the Refuge will do nothing to address the high price of gasoline.
If opened for development, not one drop of oil will come from the Arctic Refuge for 10 years, and we will have to wait for 20 years for maximum production. The Energy Information Administration has estimated that production from the Arctic Refuge would, at its peak, reduce our reliance on imports by only 4 percent, from 68 percent to 64 percent.
Other areas of Federal land that are much more appropriate for development can and should be drilled. In fact, of the 45.5 million acres of Federal onshore lands currently under lease by industry, over 31 million acres are not producing.
Likewise, there are 33 million acres of the Federal OCS that are under lease but not producing. Processing of drilling permits on Federal lands has surged over the past several years, more than doubling from 2001 to 2006. At the same time, the Administration reported that in five key basins in the Rocky Mountain states, 85 percent of oil resources and 88 percent of natural gas resources are available for leasing and development.
Congress has also funded important research and development programs to enhance domestic production. It is simply inaccurate finger-pointing to say the Congress is impeding oil and gas development and production in our Nation.
Refinery capacity has increased by about 1 million barrels per day during President Bush’s tenure -- from 16.6 million barrels per day in 2001 to 17.5 million barrels per day in 2007, through capacity expansion at existing refineries. There have been no efforts from Congress to try to slow down this expansion.
Refiners have been asked whether they would like to build new refineries, as opposed to expanding capacity at existing refineries, and the refiners have told us that they would rather expand capacity at existing refineries. We have never heard support from anyone inside the oil industry regarding the President’s curious plan to build refineries on former U.S. military bases.
The economics of refining are not very good at the moment, as gasoline prices are not yet fully reflecting the jump in crude oil prices. U.S. refinery capacity is at about 85 percent utilization at the moment, as many refiners are losing money on every gallon of gasoline that they produce. Clearly, constrained refinery capacity is not our current problem.
Congress is not standing in the way of increased nuclear production capacity. In fact, Congress, over the past three years, has put in place one of the most favorable sets of incentives for nuclear power development anywhere in the world. For example, if a nuclear power plant is proposed for licensing, and is delayed because of a lack of action by Federal regulators, the proponents of the plant can get Federal payments to compensate for the delay. No wind power developer can get that kind of subsidy.
If the Congress passes global warming legislation, it will serve as a powerful added incentive to promote nuclear power.
Real Causes of Current Oil Prices
If we are to move beyond the President’s mischaracterizations of our energy situation to a real understanding of what is going on, it’s critical that we put these oil prices in a broader economic context. The current increase in oil prices is, to a large degree, a symptom of an ailing economy. Oil prices and the value of the U.S. dollar have been very strongly linked over the last year – as the value of the dollar sinks, oil prices climb.
We have heard recent testimony before the Senate Energy and Natural Resources Committee that confirms that investors are seeking protection from inflationary risk associated with the weak dollar, and from credit and wider financial markets in which they have lost confidence. As one witness put it, oil has become “the new gold.”
Higher oil prices, in turn, weaken our economy. We are caught in a spiral, in which a weak economy is resulting in high oil prices, and high oil prices are in turn further weakening the economy.
How do we stop this downward spiral? This is a large task that requires first and foremost, a return to rational fiscal policies that will restore balance and investor confidence in our markets. That includes an honest accounting of the costs of the war in Iraq—a figure that hovers in the trillions of dollars.
This spending has also been accompanied by this Administration’s tax policies, which are very damaging to our long term national fiscal health. Every family in America that sits around the kitchen table and tries to balance a budget recognizes the simple fact that spending more than you earn results in a time when the creditors come calling. Apparently the stewards of the U.S. economy this Administration have failed to absorb this simple reality.
Policies to Reduce Oil Prices
In the short term, there are modest but important measures that will increase our oil supply and reduce our demand. On the supply side, we need to immediately stop removing oil from the market to fill the Strategic Petroleum Reserve. It simply makes no sense to be putting $120 oil underground.
According to the most recent EIA forecast, oil demand in the U.S. is expected to decline by 90,000 barrels per day in 2008. This is the kind of signal we need to send to the market in order to see some relief from current prices. However, we are taking 70,000 barrels per day off the market to add to the SPR – basically wiping out any positive affects from the decrease in demand. This is a policy that is completely wrongheaded, which should be stopped immediately.
On the demand side, we need to decide whether we’re ready to get serious about educating consumers on the steps they can take to use gasoline more efficiently and save money. We know that every five miles per hour slower we drive, we increase our fuel efficiency by about 7.5 percent. We also know that energy efficient, properly-inflated tires increase fuel efficiency by about 4 percent. Regular car maintenance can increase fuel efficiency by about 2 percent. So Americans could use about 10-15 percent less gasoline just by adopting these common sense measures. But they won’t do so unless there is a lot of publicity out there that makes clear that they can save the equivalent of 50 cents per gallon by taking these simple steps.
In the medium term, we need to ensure that there is a cop on the beat on the oil markets. There are two key steps that we should take to improve government oversight of the oil market.
First, the Secretary of Energy needs to have a role in overseeing oil markets.
It troubles me that the people at the New York Mercantile Exchange, on which oil is traded, and the Commodity Futures Trading Commission, which regulates that exchange, seem to be the only people who think that speculators are not influencing oil prices. It does make one wonder whether we have the ideal regulators and regulatory environment in place. Here is a quote from The Wall Street Journal on March 21, 2008. It says, “Hedge funds are taking even larger bets in a futures market that’s smaller than the stock or bond markets, and the funds are using borrowed money to maximize their bets, magnifying the impact on energy market prices.”
The Secretary of Energy, and the 500-plus employees of the Energy Information Administration who work every day to analyze energy data, and forecast energy supply, demand and prices, should at a minimum provide insight and advice to the market regulators at the CFTC. Perhaps this could help the CFTC come to understand the role of speculators in the market in a manner that is more in line with conventional thinking among oil analysts.
Second, we should shed light on the ‘dark markets.’ Markets that trade U.S. oil, or are located in the United States, should be subject to U.S. regulation.
It is unacceptable that an exchange that is based in Atlanta, Georgia, and trades U.S. crude oil that is delivered in Oklahoma is regulated in the United Kingdom, not subject to the laws and regulations that we in Congress put in place to govern the U.S. futures industry. It is also unacceptable that over-the-counter markets are regulated neither here in the U.S. nor in the U.K. – there is no regulatory body that can see these over-the-counter transactions.
Policy that Will NOT Reduce Gasoline Prices
Let me say a few words about policies that will not reduce prices, such as the proposal for a holiday on gasoline and diesel taxes. While I can appreciate the temporary public relations success that might accompany a temporary suspension of gasoline and diesel taxes, it would come at the expense of fiscal common sense and sound energy policy.
I agree that high gasoline and diesel prices are hurting consumers. But additional deficit spending will only help accelerate the downward trajectory of our economy as a whole. This is simply the latest in a long line of proposals that seek to score political points during election years at the expense of good energy policy.
I have three main objections to this proposal: First, it would increase deficit spending by approximately $10.8 billion, while saving motorists only about $25 per person. If you do the math, you’ll find that even if all of the savings are passed on to consumers – an unlikely outcome, but we’ll be generous and make that assumption to simplify the math – the savings per person are negligible. If you assume that the average motorist drives 12,000 miles per year, and gets 22 miles per gallon, you can calculate that the amount the average person would save in a three-month period is $25.50. Adopting the fuel efficiency measures that I discussed earlier – including shaving a few miles per hour off our top highway speed, and keeping our cars and tires in good shape – could result in savings to consumers that are more than double the savings of this tax suspension.
Second, re-instating the tax in September, when prices might well be as high or higher than they are today, would be very difficult, likely resulting in extensions and further deficit spending. It would not be politically feasible to have a single-day price increase, on Sept. 1, of 18.4 cents per gallon for gasoline and 24.4 cents for diesel. Prices could easily be as high, or higher, on Sept. 1 than they are today. It is simply not plausible to me that Congress will then choose to increase the price that consumers pay at the pump. Third, this tax suspension would stimulate demand for motor fuels without increasing supply, likely resulting in an oil, gasoline and diesel price increase.
Because gasoline and diesel would be less expensive during the summer driving season, demand would be higher than what forecasters are currently predicting. Unless this provision also suspends the laws of economics, increased demand without increased supply will result in higher oil, gasoline, and diesel prices. This provision is nothing but a transfer of wealth from the Highway Trust Fund to the oil companies.
I think the best explanation of this was done by Paul Krugman, who is a respected economist. He writes for the New York Times and teaches at Princeton. In an article he did on the April 29, he said, “The McCain gas tax is a giveaway to oil companies disguised as a gift to consumers." The obvious point he was making is that under the basic rules of economics, the fact that Congress would suspend the gas tax would do nothing to ensure that consumers benefited from the suspension of the gas tax. The notion that you're going to see the price of gas at the pump drop 18 cents because Congress says that the taxes are all of a sudden suspended is just not realistic.
We need to get serious about energy policy. It is an election year, and while there is always a tendency to take rhetorical stands in the run-up to an election, the American people understand that. That’s one reason why they don’t always hold Congress in the highest esteem. Proposals that are mostly feel-good propositions will not fool voters for long, if at all.
That said, there are a number of concrete steps that we can take that can help. Let’s freeze the filling of the SPR. Let’s take some effective action to bring the oil market under the control of U.S. laws and regulations. Let’s empower our consumers to use energy more efficiently. I hope that with oil at $110 or $120 per barrel, we will give this topic the serious attention it deserves.
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