April 11, 1986 | Executive Memorandum on Energy and Environment
A SIX-POINT STRATEGY FOR ENJOYING LOWO IL PRICES WHILE ENHANCING U.S. ENERGY SECURITY Most Americans probably only dimly recall what life was like
before OPEC's extortionist oil prices. Now at last, the U.S. ise xperiencing relief as the OPEC oil cartel crumbles. Consumers are
enjoying the plunging prices at the gas pump and business is welcominga reduction in one of its basic costs. So dramatic and pervasive are
the benefits of the oil price fall that forecasters are raising theire stimates of economic growth for 1986 by as much as 1.5 percentage
Regrettably, of course, every silver lining has a cloud. Low oilp rices help the national economy in the aggregate, but-inflict severe
pain on U.S. oil producing regions. Experts caution that ac ontinuation of current prices, now about $14 per barrel, for an
extended period could threaten the nation's energy industry and energys ecurity. Exploration for new U.S. oil supplies has ground to a
halt. In addition, imports from Saudi Arabia have climbed from 27,000b arrels per day in September 1985 to 664,000 barrels in January 1986.
Aggressive Saudi Arabian price cutting could wipe out permanently as ignificant proportion of domestic U.S. oil production capability if
low Saudi prices force American drillers to abandon their so-called" stripper" wells (those producing less than 10 barrels per day) and
other high-cost wells. This could leave the U.S. increasinglyd ependent on OPEC. But while U.S. domestic sources of oil must be
preserved, many proposed "solutions" would undermine the benefits froml ow oil prices, and do little to help the U.S. domestic energy
Calls for an oil import tax are one example of grievously flawedp olicy. A tax would shatter Ronald Reagan's pledge not to raise taxes
and would send a shock wave through the economy, slowing growth. Andw ith the production costs lower than those in the U.S., OPEC producers
could absorb an import fee and still undersell U.S. producers.
Yet actions could be taken to enhance U.S. energy security byr emoving federal barriers preventing the U.S. energy industry from
responding to the new era of lower and fluctuating world prices.A mong them:
1) Waive regulations that lead to early abandonment of marginalw ells. State and federal regulations now require a producer who
ceases production for more than 60 days to relinquish his lease to thew ell and "reclaim" the well. This forces the owner to plug the well
with concrete, often making it very uneconomic to restart the well,s ince a now hole must be drilled, should oil prices start to climb.
Texas and Oklahoma already have modified some of their rules. Others tates and the federal government should follow suit. This would
allow marginal producers to halt production only as long as the priceo f oil remains below their production costs, without having to abandon
their wells. This would give the U.S. a reserve of wells that couldb e reactivated if world conditions change. 2) Abolish the Windfall Profits Tax on oil. At current prices,
at any rate, the U.S. Treasury will collect no revenue from this tax.E ven so, producers bear an enormous cost for the paperwork required by
the tax law--as much as $1 per barrel for a small producer.
3) Restore the depletion allowance to its pre-1969 level. It isa mong the most important capital formation tools the oil industry ever
had and would spur new drilling.
4) Eliminate the minimum tax on so-called intangible drillingc osts. This would provide more incentives for domestic exploration. 5) Decontrol natural gas prices. This would improve the revenue
available to producers from oil well by-products, giving an additionale ncouragement to drill for oil. 6) Lift the restriction on purchases of domestic oil for the
Strategic Petroleum Reserve. Allowing domestic producers to bid on SPRp urchases would help to enhance their cash flow. Collapsing world oil prices do carry the risk that the U.S. could
again become vulnerable to the OPEC cartel. These dangers cannot bea verted by oil import taxes or jawboning the sheiks to raise their
prices. To confront the danger effectively, the White House andC ongress should take steps to encourage exploration and forestall the
premature abandonment of marginal wells. So doing would allow theA merican consumer to enjoy the benefits of low energy prices without
flirting with either renewed dependency on the Middle East or sendingt he economies of oil producing states into a permanent tailspin. Milton R. Copulos
Senior Policy AnalystFor further information: Monetary Perwective (Drexel Burnham Lambert, Inc.), February 24, 1986. "Repeal of Windfall Profits Tax on Oil Urged by Baker," The Wall Street Journal, April 7, 1986.