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WebMemo #868 on Energy and Environment

September 29, 2005

More Domestic Energy: The Right Response to Katrina and Rita

By

Two House committees have approved energy legislation that will receive floor votes as soon as next week. The Resources Committee bill seeks to expand domestic oil and natural gas production, while the Energy and Commerce Committee bill seeks to facilitate construction of additional oil refining capacity. Increased production and refining capacity are both crucial to reducing the volatility of energy prices in the years ahead.

 

From an energy standpoint, Hurricane Katrina hit America in the worst possible place, and then Rita made it the worst one-two punch the U.S. energy industry ever experienced. The central and western Gulf of Mexico, America's major center for oil and natural gas production and refining capacity, suffered back-to-back outages, and energy supplies and prices may not reach pre-hurricane levels for months.

 

While hurricanes are unavoidable, their impact on energy prices would be less severe if the government allowed more energy production throughout the country. The House bills try to address this weakness by opening up greater supplies as well as reducing the nation's energy vulnerability the next time a natural disaster knocks out any one particular energy-producing region.

 

The central and western Gulf of Mexico is home to 25 percent of the nation's domestic oil production, 20 percent of its natural gas, and over 40 percent of its oil refining capacity. And even before hurricane season, all three were barely adequate to meet the nation's growing demand.

 

Domestic oil and gas production has been flat or declining in recent years. Similarly, refining capacity has proven barely adequate. Before the hurricanes, oil and gasoline prices were at their highest levels since the early 1980s, and natural gas had quadrupled in price over the past five years. Refining capacity was so tight in the weeks before Katrina that even minor, unexpected downtime at a handful of refineries was enough to have a noticeable impact at the pump.

 

Then Katrina and Rita came along, and both shut down Gulf energy production for days and caused enough long-term damage that it will take months to return to already high pre-hurricane prices. Higher natural gas and home heating oil prices could make this winter one of the most expensive ever.

 

There is no reason for America to be so energy-dependent on just one part of the country. The impacted areas off the shores of east Texas and Louisiana are not, as many assume, the only ones with rich oil and natural gas deposits. To the contrary, there is offshore oil and natural gas in Alaska, the Pacific, the eastern Gulf of Mexico, and the Atlantic. In addition, there is considerable untapped onshore potential, including the estimated 10 billion barrels of oil in the Arctic National Wildlife Refuge (ANWR). Cumulatively, this potential energy is greater than that in the Katrina and Rita-ravaged areas. As well, refineries could be built (and existing ones expanded) in a number of areas far from the hurricane-prone Gulf.

 

Laws will have to be changed to make this extra energy and energy infrastructure available. Federal restrictions on exploration and drilling put most offshore and many onshore areas off-limits, and a host of costly regulations have made it difficult to increase refining capacity.

 

Fortunately, Congress is trying to change this. The House Resources Committee has approved the National Energy Supply Diversification and Disruption Prevention Act.The bill's main provision would permit states that want oil or gas drilling off their coasts to opt out of the current federal restrictions. Participating states would receive a share of the leasing revenues. This could open up additional production from new offshore areas, depending on the number of states that participate. The bill would also open up a small portion of ANWR to oil drilling. Also included in the bill are measures designed to encourage alternative and renewable energy projects, but these are far less likely to help solve current energy problems.

 

Meanwhile, the Energy and Commerce Committee has approved a package that would streamline the regulations that impede the construction of new refineries and the expansion of existing ones. In particular, the Gasoline for America's Security Act of 2005 (H.R. 3893) seeks to encourage the construction of America's first new refineries since 1976 by, among other things, making closed military bases available as potential locations. It also has provisions to speed the regulatory review process, thereby facilitating needed expansions at existing refineries. While both approaches have merit, many consider streamlining expansion approvals to be more promising in terms of increasing capacity. Other provisions in the bill are not worth the cost, such as the creation of a government-run refinery for military use and programs that encourage carpooling. Provisions prohibiting price gouging are also problematic because they interfere with market forces and are unlikely to benefit consumers. Still, the bill, overall, is a good effort to break the refining capacity bottleneck that has contributed to high gasoline prices.

 

While these House bills are on a fast track, the Senate is moving more slowly. Nonetheless, similar provisions will be considered by the Senate in the weeks ahead.

 

Even before Hurricane Katrina and the House Resources bill, Congress was poised, after decades of debate, to open ANWR to drilling. When fully operational, ANWR alone will provide an estimated one million barrels per day of additional domestic output-a good start. By comparison, the central and western Gulf produced 1.5 million barrels per day before the hurricanes. ANWR represents but a fraction of America's untapped energy reserves.

 

Notwithstanding the high cost of energy, passing these measures will not be easy. Environmental activists are assailing them as dangerous rollbacks, and many in Congress have expressed their opposition. Indeed, ANWR is being included in the budget reconciliation process to avoid a certain Senate filibuster. Filibuster threats are already being made against both proposals currently under consideration in the House.

 

The hurricanes and resultant price spikes have made it much easier to sell the economic case for greater domestic energy supplies. There is still work to be done, however, convincing the public-especially those who live near coastal areas or potential new refinery locations-that the environmental and public health safeguards in place are more than ample-as evidenced by the minimum of oil spills caused by these two powerful hurricanes. Offshore drilling has become increasingly safe in recent decades, and any new wells would be subject to strict requirements. Similarly, refineries have reduced emissions substantially under the Clean Air Act, and expanded capacity could be brought online without jeopardizing the continued declining trend in emissions. The environmental activist community and its allies will forcefully argue otherwise, but they bring no proposals to increase production to the table, either.

 

The unfortunate coincidence of two major natural disasters striking at the only location where America has not put handcuffs on energy production should serve as a lesson. Only if Congress takes steps now to allow more domestic energy production are we likely to enjoy more affordable and less volatile energy prices in the years ahead.

 

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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