June 9, 2008

June 9, 2008 | WebMemo on Energy and Environment

The Consumer-First Energy Act of 2008 Will Only Increase Gas Prices and Energy Costs

Good energy policy is easy to distinguish from bad energy policy: Good policy leads to more supplies of affordable energy and bad policy leads to less. A few recently proposed bills, such as the American Energy Production Act of 2008 (S. 2973), introduced by Senator Pete Domenici (R-NM), and the Affordable Fuel for Consumers Act of 2008 (H.R. 6009), introduced by Representative Phil English (R-PA), seek to free up domestic energy supplies by undoing past constraints , including eliminating restrictions on domestic oil production. Unfortunately for consumers, the energy bill on the fast track right now is the Consumer-First Energy Act of 2008 (S. 3044), introduced by Senate Majority Leader Harry Reid (D-NV), which repeats the mistakes of the past by adding constraints that will discourage domestic energy supplies, including:

  • Raising taxes on domestic oil production,
  • Picking winners and losers among energy alternatives, and
  • Imposing price-gouging legislation.

Simply put, the Consumer-First Energy Act is an anti-energy bill that will only add to already-high energy costs.

Fewer Restrictions on Domestic Oil Production

We need fewer restrictions on domestic oil drilling. America remains the only oil-producing nation that has placed a substantial amount of its energy potential off-limits. This includes a few thousand acres of Alaska's 19.6 million acre Arctic National Wildlife Refuge (ANWR). This small portion of ANWR is believed to contain 10 billion barrels of oil-an amount equivalent to 15 years of imports from Saudi Arabia.[1] Even more oil is located in other restricted areas throughout the United States, and even more still in the 85 percent of America's Outer Continental Shelf (OCS) that is off-limits.[2] Environmental concerns militate against drilling, but improvements in technology have greatly reduced the above-ground footprint and the risk of offshore spills.[3] Any new drilling would be subject to the world's strictest standards.

The American Energy Production Act and Affordable Fuel for Consumers Act allow for leasing of ANWR. This would bring more domestic oil online several years from now, and generate hundreds of billions of dollars in revenues. These bills would also allow leasing in most of the OCS, provided the relevant state governor approves. Each participating state would get a share of the leasing revenues generated by energy production. This would provide more oil and more natural gas, which is also badly needed.   

The Consumer-First Energy Act contains no such provisions. In effect, it is an energy bill without any energy in it.

Avoiding the Mistakes of the Past   

The Consumer-First Energy Act of 2008 might as well be called the Repeat-Every-Energy-Policy-Blunder-From-1970-to-1980 Act. Among other mistakes from that period, the government increased the taxes levied on domestic oil producers. The result of this windfall profits tax, according to the Congressional Research Service, was "reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S more dependent upon imported oil."[4]  

There were also many attempts by the federal government to pick winners and losers among emerging energy alternatives-synthetic fuels, solar, ethanol and others-and tilt the playing field in their favor. Virtually all turned out to be big disappointments.

The government also instituted price controls, which only served to create the gas shortages that remain one of the unpleasant memories from that era. Yes, price controls meant consumers could get cheaper gas-but only after waiting in long gas lines, and only if stations didn't run out first. 

No rational energy policy maker should want to repeat the mistakes of that era, yet the Consumer-First Energy Act of 2008 tries to do just that. There are new proposals to increase the effective tax rates on U.S. oil companies, both by bringing back a windfall profits tax and by repealing certain deductions against income for expenses related to domestic oil drilling. As happened before, this will discourage domestic oil drilling, which is the exact opposite of what an energy bill should be doing.

The bill allows oil companies to avoid the windfall profits tax if they invest in congressionally approved alternative energy sources. Though renewable energy sources should be a part of America's energy mix, their pursuit should be done by the private sector without direction from Washington. The federal government has never been adept at picking winners and losers among such alternatives, as the burgeoning problems with the corn ethanol mandate attest.

There are also price-gouging measures, which act the same way as price controls in that they try to make high prices illegal. Like tax hikes, such measures discourage badly needed supply increases, and thus end up doing more harm than good. Even the Federal Trade Commission, the agency charged with implementing this scheme, has warned that it is a bad idea.[5]

Conclusion

Its no coincidence that, despite the massive 2005 energy bill and another big one in 2007, the price at the pump continues upward. Both measures did little to create new oil and gasoline supplies, or untangle the red tape afflicting existing supplies. America needs less of the laws, regulations, taxes, and other government-created impediments to a more affordable gasoline supply. Most of the provisions in the American Energy Production Act and Affordable Fuel for Consumers Act seek to liberate Americans from that morass. In contrast, the Consumer-First Energy Act of 2008 contains just about everything we don't want or need.

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



[1] U.S. Geological Survey, Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment, 1998, Including Economic Analysis, April 2001, p. 4, at /static/reportimages/F8FC2954E9F703EDB27BC6A50331A99F.pdf.

[2] U.S. Department of the Interior, Minerals Management Service, Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural Gas Resources, February 2006, at /static/reportimages/6D9555975094B2EFFC260DDA2E40DA53.pdf; U.S. Department of the Interior, Bureau of Land Management, Scientific Inventory of Onshore Federal Lands' Oil Gas Resources and the Extent and Nature of Restrictions or Impediments to Their Development, November 2006, at /static/reportimages/6428A013C0F402DEE0CCE2BA746E2A59.pdf.

[3] U.S. Department of Energy, Office of Fossil Energy, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, October 1999, at http://fossil.energy.gov/programs/oilgas/
publications/environ_benefits/env_benefits.pdf
.

[4] Congressional Research Service, The Windfall Profit Tax on Crude Oil: Overview of the Issues, September 12, 1990, Summary.

[5] Federal Trade Commission, Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases, Spring 2006, pp. 196-197, at http://ftc.gov/reports/060518PublicGasoline
PricesInvestigationReportFinal.pdf
.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies