Over a Barrel: The Clinton Administration's Failed Energy Policy

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Over a Barrel: The Clinton Administration's Failed Energy Policy

April 4, 2000 11 min read
The Honorable J.C. Watts
Policy Analyst in Empirical Studies
I would like to share with you an important quote from President Clinton: He said, "I am today concurring with the Commerce Department's finding that the nation's growing reliance on imports of crude oil and refined petroleum products threaten the nation's security because they increase U.S. vulnerability to oil supply interruptions."

Let me highlight that: "The nation's growing reliance on imports threatens the nation's security because it increases U.S. vulnerability to oil supply interruptions." That the President recognizes the profound national security implications of our reliance on imported oil is good news, very good news.

But unfortunately, this is a good news-bad news story. The bad news is that statement was made by the President in 1994 when imported oil was less than 51 percent of American consumption. Here we are today, six years later, and not only have we not reduced that demand for foreign oil, not only have we not stabilized that demand, we have actually increased that demand to over 56 percent of our consumption.

In a dangerous world, dependence on foreign oil is an ever-growing threat to America's security. President Clinton stated that fact six years ago, but the facts also reveal that the Clinton-Gore Administration has been AWOL when it comes to encouraging the development of the domestic energy supply that would decrease our reliance on foreign product.

That's what I would like to talk to you about today--the importance of domestic energy production, why it is critical to our national security, and what I propose we do to stimulate exploration and development here at home.

As the former chairman of the Oklahoma Corporation Commission, the governing body in Oklahoma that regulates oil and gas and trucking, I know first hand the challenges of the energy economy. When everyone else in the country is doing well and energy prices are low, we're struggling; when the rest of the nation is smarting over high crude, we're in tall cotton. That's the stuff that John Steinbeck wrote about and the people of Oklahoma have come to know as a boom-or-bust economy all too well.

Still, today under an Oklahoma sky, with some of the prettiest sunsets in the world, you can drive by the state capitol and see a sight that makes a lot of us Oklahomans nostalgic... Petunia No. 1--the first oil rig--still working on the Oklahoma capitol grounds. In my district alone, if you come by my office in the Longworth Building, you can see a U.S. Geological Survey map of my district and Garvin County between Highways 19 and 29, still dotted with so many oil and gas wells that it looks like it has measles. But perhaps that has changed.

Let me tell you the story of Terry Snider, an independent oil producer from Duncan, Oklahoma, in my congressional district back home. At one time, he was producing a mere 400 barrels a day. When the price of a barrel of oil went below $10 this time last year, he could not afford to operate many of the wells he had because it cost more to drill for oil than he could sell it for. Since then, a third of the wells had to be shut down. Running with a skeleton crew today, he is now producing less than half of what he use to.

His entire business is at the mercy of price fluctuations in foreign oil markets, something neither he nor his entire industry here at home can control. Even now with higher prices, few producers are willing to risk the little they have to re-open wells or speculate on new wells. So, many rigs throughout Oklahoma and Texas sit idle, and folks like Terry Snider wonder whether their entire livelihood may be at risk as well.

Terry is the face of domestic oil production in America today. There are more than 6,000 independent producers nationwide, many working out of their homes with few employees. Yet they drill 85 percent of the oil and natural gas wells in America, contributing close to half of our nation's domestic oil and gas output.

From a historical perspective, the oil business began, not in Oklahoma or Texas, but north of here, in Titusville, Pennsylvania, just before the Civil War in 1859. At that time no one was entirely clear as to how this new product was going to be used, beyond lighting oil lamps. By the time the 19th century was ending, American industry was thirsting for more and more oil and, as the 20th century--the American Century--began, demand was fueled even further by the arrival of Henry Ford's first Model T cars off the assembly line. The start of America's love affair with the automobile had begun.

The oil industry grew up with American industry and globalized; and then, in 1939, when the world exploded into war, perhaps for the first time, the importance of oil to national security became starkly evident. Neither Germany nor Japan had sufficient domestic production to maintain their war machine. They had to rely on the production in the nations they overran. Our military strategists knew that once the enemy was starved of that fuel, the war would quickly end. So, we sent Allied pilots deep into Europe to cut off Germany's oil sources in Romania, and we sent Allied sailors deep into the Pacific to cut off Japan's oil sources in Indonesia.

Those brave pilots and sailors, many of whom lost their lives, were fueled by America's oil production, and that was the key to our final victory. After the war, American prosperity and American oil consumption grew again. In the 1960s when America was watching Jed Clampett discover "bubbling crude--oil, that is--black gold" and when our oil imports were under 20 percent of consumption, probably no one noticed the formation of a small cartel of oil-producing nations known as OPEC.

By the 1970s Americans waiting in long gas lines certainly knew what OPEC was, and they were shocked to learn that American dependence on foreign oil had risen to 35 percent. OPEC choked off our supplies, and the American economy stagnated, inflation soared out of control, unemployment went into the doubledigits, the Iranians took over our Embassy in Tehran, the Soviet Union invaded Afghanistan, and America seemed powerless to do anything about it.

I want to tell you today that we are facing that problem again. We are now 56 percent--not 35 percent, but 56 percent--dependent on foreign product. We need only look at our lessons from the past--from the victories of World War II in the 1940s to the defeats of the oil crisis in the 1970s to understand the national security ramifications of leaving our energy dependence in the hands of foreigners.

Through supply and pricing manipulation, they can send our economy into a tailspin. They can influence political events around the world. And they can even increase their support to terrorist groups like those that sent bomb-laden Algerians across our border with Canada this past year.

This is why domestic production and exploration is vital to preserving our national security. It's twenty years this year since our hostages in Iran were released, and our domestic production continues to plummet. Domestic production has dropped to the lowest levels since 1951. More than 136,000 oil wells--25 percent of total U.S. oil wells--and 57,000 gas wells have been shut down since 1997. Since 1992 our crude oil production is down 17 percent and our consumption is up 15 percent. And in the face of this crisis, America's Secretary of Energy says: "It's obvious that the federal government was not prepared. We were caught napping. We got complacent."

The head of the nation's multi-billion dollar agency tasked with strengthening our domestic oil supplies should not be caught napping. Now, I believe all those Cabinet Secretaries have limousines with drivers to pump the gas, so I can see how our Energy Secretary may have missed the increase at the pump that the rest of America has been watching with shock.

But somewhere in that gigantic Department of Energy budget they have got to find a few bucks for an alarm clock because it is time for the Clinton-Gore Administration to wake up to the very dangerous position in which they have placed this nation. Somewhere, somehow, in that giant complex, some one should have sounded an alarm.

It wasn't always that way. In 1992, President Bush put together an alliance of nations from Europe, Asia, and the Middle East not simply to assure Kuwait's independence, but to reassure Saudi Arabia, the Persian Gulf states, and our European allies that the United States will stand by them in a crisis. Operation Desert Storm brought security to an entire region and national security to the United States.

Only eight years later, the declining credibility of the Clinton-Gore foreign policy, and specifically its weak-handed policy toward Iraq's weapons development, has led a now nervous Saudi Arabia to extend a hand to its former arch-rival Iran. Since together Iran and Saudi Arabia control over 40 percent of OPEC oil production, this is a significant development that is now showing up at your local gas pump.

When America looks outside our borders for more and more of the energy it needs, we slowly weaken our national security here at home. In the wake of recent higher gas prices, the Administration rushed off to the Middle East with our national tin cup and sought a commitment from Saudi Arabia for specific production increases. At the same time, Saddam Hussein's government, next door in Iraq was calling any production boost to help America a sin against God.

In that same neighborhood, our Secretary of State is sending out apologies to Iran for our past sins. I'm sorry, but I remember watching our American diplomats held hostage on TV for over a year until Ronald Reagan got elected. I don't think we owe Iran an apology. But this is all part of the slapdash, ad hoc energy policy that is reflective of the Clinton-Gore Administration's casual attitude towards the nation's ever-expanding energy security crisis.

When the Clinton-Gore Administration is willing to sacrifice the domestic oil industry under pressure from the environmental wing of their party, yet pursues lower oil prices by increasing our dependency on foreign oil, we slowly lose our global leverage as a world power.

This Administration's policy has been to chase down every bad idea, but do nothing to increase domestic energy production. For example, they have over-emphasized the short-term potential of subsidizing alternative fuels. The Congressional Research Service has accurately stated that subsidizing these alternatives to the level required to eliminate the need for defense of the world oil market would be prohibitively expensive.

But last year, when the Congress passed the Taxpayer Refund and Relief Act of 1999 which included incentives for increased domestic oil and gas production, the President vetoed this measure just three months before oil prices began to soar. The Clinton-Gore domestic energy agenda has been a series of short-sighted adventures against domestic producers. Whether it's their war against users of domestic coal, their silence on increasing gas availability to the Northeast, their threats against nuclear energy development, or their onerous land use plans to prevent locating new sources, in all cases, their policies have moved us toward greater dependence on foreign oil.

Let us not grow complacent in our new dot-com, cyber-economy, that is only marginally less dependent on oil than the old economy. The tractors still need fuel on the farm to grow the food, the trucks still need fuel to deliver the products you buy on eBay, and America does actually still make things at factories that still use fuel.

And as only one of two members of Republican leadership with little children still at home, I can assure you, these prices affect my wife as she drives our mini-van to soccer games, dance lessons, and Bible study.

Let me tell you what I believe we need to do to start turning around the domestic oil industry before it's too late, because once that infrastructure is gone, it takes years to rebuild it. And these foreign nations may not give us that long. So, I want to challenge the President to take action.

First, I am calling on President Clinton to create a crisis management team at the Department of Energy--something that I call "kNEE-DEEP": the National Emergency Executive on Domestic Energy Exploration and Production. This distinguished body of experts will look at the options we have to enhance our domestic energy development and report back to the President and the Congress with recommendations and targets to restore the national domestic energy industry. And, we do have options.

We need a tax policy that removes existing tax penalties on domestic oil and gas production, that would include expensing of geological and geophysical costs and delayed rental payments, would include a 5-year net operating loss carry back for independent producers, would include elimination of the net income limitation and the 65 percent net taxable income limit on percentage depletion, and would include changing the way the Alternative Minimum Tax penalizes production.

Then we need to go a step further and save marginal oil production through an aggressive tax incentive program. We need to look at tax credits for marginal wells. We need to responsibly open access to federal lands. We need to explore the production potential of the 16 billion barrels under the Arctic National Refuge in Alaska.

We need to look at royalty reductions or holidays to encourage production in more expensive federal mineral holdings. We need to increase the margin requirements for doing business on NYMEX to the same standards as are in effect on the stock exchanges to reduce the volatility and the speculators.

Secondly, I would call for the kNEE-DEEP report to be placed on a fasttrack. Their report should be delivered to the President and Congress by Independence Day, July 4, 2000. And finally, I would call upon the President and Congress to follow through on kNEE-DEEP's legislative and regulatory recommendations before another winter passes. While it is always easy to govern during good times, the current complacency our Administration has found themselves in is because they failed to provide the crisis management leadership that always must flow from the top.

For eight years they've been leading without direction, without a goal. In the first century, the Roman statesman and philosopher Seneca warned: "When a man does not know what harbor he is making for, no wind is the right wind."

The kNEE-DEEP goals and action plan will focus our aim so that we can find our safe harbor in a dangerous world. Energy security is the most important component of our national security and our families' security and our future security. We need the Clinton-Gore Administration to set an aggressive and rational energy course today for our children and for our future. We have the resources to do that. All we are lacking is the determination and focus--the "right wind" that guides us toward strengthening our domestic energy exploration, protecting our national security, and preserving our prosperity for generations to come.

--The Honorable J.C. Watts represents the fourth district of Oklahoma in the U.S. House of Representatives and is the Republican Conference Chairman.


The Honorable J.C. Watts

Policy Analyst in Empirical Studies