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Energy Policy at the Crossroads

Posted By Rich Trzupek On January 5, 2011 @ 12:43 am In FrontPage | 6 Comments

WASHINGTON, D.C. – The American Petroleum Institute released its “State of American Energy” report today at a media event held at the Newseum in Washington. API President and CEO Jack Gerard outlined the oil and gas industry’s perspective on energy policy and released details of an API commissioned study looking at the effects of natural resource access and tax policy. This reporter was invited to attend the event by API, which paid for my travel expenses.

There is little doubt that America has arrived at another energy policy crossroads. Oil prices are rising because worldwide supply has remained relatively flat while China and India demand more and more crude to fuel their economic growth. While America has far more proven crude oil reserves than anyone suspected even a decade ago, a good deal of those reserves lie offshore in areas that are currently off limits for new drilling. Offsetting that somewhat, domestic natural gas production is robust and supplies and prices have remained very stable. Much of the good news about natural gas supply can be tied to tapping vast reserves of “shale gas” trapped in huge underground formations.

American energy policy will follow one of two roads. The Obama administration’s preferred approach is to continue to ban most new offshore oil exploration and, perhaps, to levy an energy tax as a means of both reducing consumption and raising federal revenues. The other path, of course, runs in exactly the opposite direction: aggressively pursue offshore exploration, in both deep and shallow waters, and avoid any new taxes on petroleum and natural gas. In releasing the “State of American Energy” Gerard and API made their case for the latter course.

Gerard argued that the United States will continue to consume vast amounts of oil and natural gas, far into the future. Industry estimates project that fifty percent of all energy used in America will come from the combustion of natural gas and petroleum products by the year 2035. (Currently, sixty percent of all domestic energy use involves oil and natural gas). “Our nation will require more oil and natural gas for decades to come,” Gerard said. “A lot of it will come from deep sea well – and if it doesn’t come from here, then we’ll import it.” The industry’s perspective is that increased domestic oil and natural gas production can lead the way to economic recovery, but only if it has access to these natural resources and if additional taxes are not imposed on energy production and distribution.

Total recoverable United State offshore oil reserves are estimated to be over 100 billion barrels. As a point of comparison, consider that total Saudi Arabian oil reserves are estimated at a little more than 250 billion barrels. If one counts oil that is potentially recoverable from western shale formations, total United States reserves are close to one trillion barrels. Natural gas reserves in the United States are now estimated at over 650 trillion cubic feet, leading some to describe America as the “Saudi Arabia of natural gas”.

According to the API commissioned study conducted by the consulting firm Wood Mackenzie, allowing the industry access to those resources and keeping energy taxes where they are would: increase domestic energy production by the energy equivalent of 4 million barrels of oil per day , increase government revenues (through taxes and leases) by $150 billion per year and create over 700,000 new jobs – all by the year 2025. On the other hand, continuing to restrict access or levying new energy taxes could be disastrous, according to API and Wood Mackenzie.

“Here’s what this study shows: increasing taxes on the oil and natural gas industry actually decreases government revenue,” Gerard said. “In the long run, the negative economic consequences of higher taxes more than offset any short-term tax revenue gains. An additional $5 billion in new, annual taxes – similar to what’s been proposed by the administration, or some in Congress – could actually decrease cumulative government revenue by $128 billion by 2025.”

Industry critics will undoubtedly be skeptical of API’s positions and of the study that it is using to support those positions – and that’s fair. Free market advocates who are not particularly concerned about global warming like myself will find Gerard’s arguments familiar and compelling. Those on the other end of the ideological spectrum will instinctively find his comments and the Wood Mackenzie study self serving and flawed. Both reactions are predictable, but hopefully what API has done in releasing this study is to alter the nature of the debate. Or, more properly, we can think of this discussion as two successive debates.

The first involves the proposition that we are going to use oil and natural gas derived energy in large amounts anyway. If that is the case, doesn’t it make a lot more sense to use domestic resources instead of paying foreign countries and making them rich? And, if we answer that question in the affirmative, then how much will increasing energy taxes actually hurt the economy and decrease revenues? If Congress can approach and answer those two questions in a truly bi-partisan manner, we could have an energy policy that would take America to a much brighter future. If not? Well, nobody is going to invent a windmill-powered car or solar panels that will heat your home in the winter anytime soon. So we’re going to need oil and natural gas for a long time to come and it’s hard to see how buying more of it abroad is going to help our economy or to create jobs.

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