Now, after months of limiting access to additional sources of domestic energy, Secretary Salazar has decided to fast track taxpayer-subsidized solar energy development on federal lands. The Bureau of Land Management (BLM), an agency within the Department of Interior, announced earlier this month its intent to use 676,048 acres in six states—California, Nevada, Utah, Arizona, New Mexico, and Colorado—as solar energy study areas. The process to prepare these areas will take 2 years. The first step—soliciting comments via a Federal Register Notice—has already been completed. Comments were due by July 30, 2009. Salazar claims that this action, which will permit the construction of 13 commercial-sized solar facilities on public lands, will create 50,000 jobs.[1]

Salazar failed to mention that because solar power is heavily subsidized by taxpayer dollars, the jobs this plan creates will lead to many jobs lost elsewhere in the economy. He also failed to note that electricity generated by these plants will cost consumers 2.5 to 4 times more than generation from efficient energy sources like coal and natural gas. And solar is subsidized almost 100 times more than petroleum and natural gas, as measured on an electricity production basis (that is, in terms of dollars of subsidy per megawatt-hour produced).

Solar Power Is the Most Expensive Renewable

For decades, advocates of solar power have argued that it will soon be cost-competitive with conventional energy sources. But solar continues to cost much more than other, more efficient, sources of producing electricity. Economist Gilbert Metcalf of Tufts University compiled the table below comparing the cost of electricity from various sources.[2] The column titled “Current Law” shows the price of electricity under current law. However, current law provides for differing tax treatment for each source of electricity. To cancel out the different tax treatments for the different sources of electricity, Metcalf calculated the column titled “Level Playing Field,” which shows the cost of electricity assuming all of the sources were treated equally by the tax code. The last column shows the price if there were no taxes.

Metcalf explains that the costs of wind and solar shown here are actually too low because the cost does not reflect the fact that wind and solar work only intermittently. People demand access to electricity 24 hours a day and become frustrated when the lights go off, even for a short period. To have electricity when clouds cover the sun or the wind is not blowing requires stand-by power that can produce electricity when the renewables are not available.

Solar Power Will Continue to be the Most Expensive Renewable

According to the Energy information Administration (EIA), an independent agency within the Department of Energy, solar will continue to be the most expensive source of renewable electricity. EIA recently calculated the average cost of generating power from new fossil fuel, renewables, and nuclear energy. They estimate that by 2016 solar power will still cost 2.5 to 4 times more than the cheapest alternative, coal, which currently generates almost 50 percent of our electricity.

In reality, solar is even more expensive. EIA applied a three-percentage point increase to the cost of capital for coal-generated electricity to account for the possibility that future coal projects may need to purchase allowances or invest in other greenhouse gas emission-reducing projects to offset their emissions. This three-percent increase is similar to a $15 per ton carbon-dioxide-emissions fee.[3] On the other hand, EIA applied a two percentage point reduction in the cost-of-capital for eligible renewable technologies to take account of the loan guarantee program of the stimulus bill.

Solar Subsidies Are Huge

The federal government provides large subsidies for solar power generation in an effort to make solar more cost-competitive. Solar is eligible for a 10-percent business investment tax credit, which was made permanent as part of the Energy Policy Act of 1992. The Energy Policy Act of 2005 established a 30-percent personal tax credit, capped at $2,000 for the purchase of solar electric and solar water heating property. That tax credit was extended to 2016 by the Emergency Economic Stabilization Act of 2008, which also lifted the $2,000 cap and allowed electric utilities to qualify. [4]

To understand the significance of those subsidies, the EIA compared them to other fuels used for electric generation. The EIA calculated that federal subsidies for solar in fiscal year 2007 were over 55 times higher than those for traditional coal-fired generation and almost 100 times more than those for petroleum and gas generation, on an electricity production basis.[5] Even more stark differences in subsidies were documented by the General Accounting Office (GAO), which found that solar received subsidies over 1,200 times the subsidies provided to coal, on an electricity production basis.[6] The difference is largely in accounting, in that GAO attributes all solar subsidies to electricity generation where EIA attributes the majority of solar subsidies to residential, commercial, and industrial end users.

Solar Development Causes Job Loss Elsewhere

To judge the relevance of Secretary Salazar’s statement about job creation, let’s look at other countries that have more experience with solar technology construction. Spain, for example, requires that 20 percent of its electricity be produced from renewable energy by 2010. Its National Energy Commission estimates that 2,945 megawatts of solar capacity were installed by year-end 2008, making Spain second among nations for installed solar capacity. That capacity generated less than one percent of Spain’s electricity in 2008, and at a price per kilowatt hour that was over seven times higher than the average price of electricity. To attract investors and make renewable energy competitive against other forms of energy, Spain regulated rates and subsidized its renewable market. However, a prominent Spanish researcher found that for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in its economy. While solar energy may appear to employ many workers in the plant’s construction, it consumes a substantial amount of capital that would have created many more jobs in other parts of the economy. [7] Recently, the Spanish government decided to slash subsidies to solar power. The government will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year. [8]

Solar Energy Requires Massive Land Area

The land mass requirement for solar technology is large, which is why Salazar’s BLM is putting aside over 670,000 acres for it. Compared to nuclear power, for example, the acreage requirement is almost 230 times as much.[9] For this reason, some politicians are urging that the size of solar projects be limited. For example, Interior Appropriations Subcommittee Chairwoman Dianne Feinstein (D-Calif.) said solar projects are “huge” and their size should be limited so that they do not “become an enduring blight upon the land.” She said solar installations require fences, troughs, and steam plants. “That has a huge mark on land that we’re trying to conserve.”[10]

Will Energy “Alternatives” Make us Energy Independent?

Some argue we need increased electricity production from solar power to reduce our reliance on oil, coal, and natural gas. Solar currently, however, produces only 0.02 percent of the electricity generated in this country. Its increased production will not displace petroleum or make the United States more energy independent, as 99 percent of our electricity is already produced by non-petroleum sources. [11] Our demonstrated reserve base of coal will last over 436 years, at current consumption levels,[12] and much more coal is known to be available.[13] Nuclear fuel can be reprocessed and used again to generate electricity in our nuclear facilities—something other countries are already doing. And although there is great political desire to force the use of renewable energy to replace fossil fuels, it simply cannot happen anytime soon, as hydrocarbons supply 84 percent of our current energy demand[14] and 71 percent of our electricity generation.[15] The level of manufacturing capacity needed to replace a significant portion of that simply does not exist. For example, new solar installations required to replace just one percent of U.S. fossil fuel generated electricity would consume all of the world’s current solar module manufacturing capacity.[16]

As noted above, while Salazar is fast-tracking solar, in early February, his Interior Department canceled oil and gas leases on 77 parcels of federal land in Utah and launched a review to see whether or not they were appropriate for leasing. Also in February, Salazar halted the previous administration’s oil-shale research and development leasing efforts, saying he would offer new lease terms after seeking public input.[17] In April, a federal circuit court invalidated the 2007–2012 offshore leasing program, saying the most promising sales in Alaska needed more documentation.[18] At the end of July, the court clarified that they were only requiring the Alaska OCS sales to be placed on hold, meaning the Gulf of Mexico sales could proceed. Alaskan OCS areas are the most prospective for new oil and gas discoveries because few wells have been completed there.[19]

Last year, when oil prices exceeded $140 per barrel, over twice the current price, Congress allowed the moratoria on oil and natural gas development in restricted areas in the outer continental shelf to expire.[20] However, all of the recent actions noted above reduce our ability to increase domestic production of oil and natural gas, lessen petroleum imports, and create needed jobs. The outer continental shelf—including sections which have been off limits to drilling since the early 1980s—may contain as much as 115 billion barrels of oil.  Taking full advantage of our potential offshore energy production could generate 1.2 million new jobs, $8 trillion in additional economic output and, $2.2 trillion in extra tax receipts nationwide.[21]

For decades, the federal government has restricted access to vast tracts of our domestic energy resources. Now, the government is mandating politically popular, but inadequate energy sources such as wind and solar. Taken together, these policies will create higher prices for U.S. consumers and restrict job formation. In the case of energy policy, the facts speak for themselves—our government is clearly the problem, not the solution.

[2] Source: Gilbert Metcalf, Federal Tax Policy Toward Energy, p. 22 (Oct. 2007) http://web.mit.edu/globalchange/www/MITJPSPGC_Rpt142.pdf

[3] http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/

[4] http://www.instituteforenergyresearch.org/2009/06/11/facts-on-energy-solar/

[5] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/execsum.pdf, Tables ES5 and ES6.

[6] General Accounting Office, Federal Electricity Subsidies, Oct. 2007, page 21, http://www.gao.gov/new.items/d08102.pdf

[7] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf .

[8] Wall Street Journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html

[9] http://www.instituteforenergyresearch.org/2009/06/11/facts-on-energy-solar/

[10] Environment and Energy Daily, Interior: Senators grill Salazar on renewable energy siting, June 4, 2009, http://www.eenews.net/EEDaily/2009/06/04/archive/3

[11] Energy Information Administration, Annual Energy Review 2008, Table 8.2a, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_8.pdf

[12] Energy Information Administration, Annual Energy Review 2008, Tables 4.11 and 7.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec4_23.pdf and http://www.eia.doe.gov/emeu/aer/pdf/pages/sec7_5.pdf

[13] http://pubs.usgs.gov/dds/dds-077/ and http://www.eia.doe.gov/cneaf/coal/page/acr/table17.html

[14] Energy Information Administration, Annual Energy Review 2008, Table 1.1, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec1_5.pdf

[15] Energy Information Administration, Annual Energy Review 2008, Table 8.2a, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_8.pdf

[16] The Credit Crunch’s Implications for Energy, Robert Goodof, Equity Research Analyst, February 2009. http://www.loomissayles.com/internet/internet.nsf/($DocumentID)/A9D1F278A7F6AD9485257561005A804D/$FILE/ccimplications_energy209.pdf

[17] Environment and Energy Daily, Energy policy, March 16, 2009, http://www.eenews.net/EEDaily/2009/03/16/archive/1?terms=salazar+and+OCS

[18] Environment and Energy News, Offshore drilling, April 17, 2009, http://www.eenews.net/eenewspm/2009/04/17/archive/3?terms=salazar+and+OCS

[19] The Associated Press, Offshore drilling ruling does not apply to the Gulf, http://www.google.com/hostednews/ap/article/ALeqM5ijmzoObcMDyeXXrne4t-7meTNxQwD99OC5V00

[20] http://www.api.org/policy/exploration/index.cfm

[21] The American Energy Tour, Part II, U.S. Rep. Adrian Smith, July 6, 2009, http://www.mccookgazette.com/story/1552538.html

FOR IMMEDIATE RELEASE
February 25, 2009
CONTACT:
Laura Henderson (202) 621-2951

IER: Interior Decision on Oil Shale Locks Away American Energy Resource Larger than Total Reserves of Middle East

WASHINGTON, D.C. – Institute for Energy Research (IER) president Thomas J. Pyle issued the following statement today after the Interior Department announced its plans to withdraw from consideration acreage in Colorado, Utah and Wyoming where research and development of a small portion of our nation’s homegrown oil shale reserves had previously been scheduled to take place:

“Earlier this week, Secretary Salazar suggested America’s massive and homegrown reserves of oil shale held ‘great potential.’ Unfortunately, the Interior Department’s decision today may help ensure that potential never becomes reality – in the process, locking-away an American energy resource larger than the total reserves of the entire Middle East.

“At a time of great economic uncertainty, with millions of Americans out of work and state budgets stretched beyond their breaking point, responsible development of America’s abundant shale resources could be a way out of our current condition, and a way back to a better one. The Interior Department’s announcement today effectively forecloses that opportunity.”

NOTE: In a story posted Sunday by the Salt Lake (City, Utah) Tribune, reporter Thomas Burr quoted Secretary Salazar as saying to a group of western governors gathered in Washington that oil shale had “great potential.”

More from IER on the potential and promise of America’s massive reserves of oil shale:

• Fact Sheet: Canadian Shale Resources a Critical Part of America’s Regional Energy Security

• IER Oil Shale Primer: What Is It? How Much Do We Have? What Can Be Done to Develop It?

• Nov. ’08: IER Applauds BLM on Final Rule for Shale Development

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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www.InstituteforEnergyResearch.org

FOR IMMEDIATE RELEASE
February 18, 2009
CONTACT:
Laura Henderson (202) 621-2951

IER: Embrace Canadian Energy

Washington, D.C. – The Institute for Energy Research (IER) today released the following fact sheet on the important energy trade relationship between the United States and Canada in advance of the President’s trip there tomorrow. President Obama should resist the call from some organizations to antagonize Canada, our largest and most stable trading partner. Today’s economic climate should reinforce that he instead must move to strengthen our important economic ties with our northern neighbors.

We import more energy from Canada than any other country:

• The United States imports more natural gas, refined gasoline, and oil from Canada than any other nation in the world—17 percent of our oil and 18 percent of our natural gas.
• Nearly 100 percent of Canada’s energy exports go to the United States.
• Canada supplies 2.5 million barrels of oil for the U.S. each day, which is roughly the equivalent of what we import from Saudi Arabia and Nigeria combined.
• Oil sands make up 97 percent of Canada’s total proven reserves and 13 percent of total U.S. imports.
• The United States imports 36 percent more oil from Canada than Saudi Arabia and 320 percent more than Iraq.

We export more goods to Canada than any other country:

• According to the U.S. State Department, The United States and Canada share the largest energy trading relationship in the world.
• Among other products, the United States exports 18.4 million short tons of coal to Canada.
• In 2007, 65 percent of Canada’s imports came from the United States.

Our shared resources could provide both nations with an energy and economic boon:

• Canada’s total oil sands resources could be as large as 2.6 trillion barrels.
• According to the Department of Energy, if developed, U.S. oil shale resources—which could total 2.1 trillion barrels—combined with Canada’s tar sands, could allow the U.S. and Canada to claim the largest oil reserves in the world.

NOTE: The important energy trade relationship between the United States and Canada is indisputable. Any attempt to impede on that relationship would further the economic uncertainty in the United States.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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www.InstituteforEnergyResearch.org

Energy is the lifeblood of our economy.  As our competitors around the globe have shown us in recent years, job creation and economic growth begin with access to abundant, affordable energy supplies. 

Unfortunately, the Obama administration’s stimulus proposals are founded on the fundamentally flawed notion that we will achieve prosperity if we make coal, oil, and natural gas, which make up 85 percent [1] of the energy that fuels our economy, more expensive and less available.  Meanwhile, President Obama wishes to spend billions of taxpayer dollars on the most expensive and least efficient energy sources and force American consumers to pay more to purchase them.

Energy is, literally, “the capacity to do work.”  More energy means more work, more jobs, and more economic growth.  Less affordable energy means less work performed here at home.  Affordable energy creates jobs and stimulates investment in America.

IER supports government policies that encourage private investment, foster job creation, and provide American consumers access to the vast, proven, affordable energy supplies they own beneath the 2.3 billion acres of government lands not leased for responsible energy production.  These enormous taxpayer-owned resources, and the American jobs they would create, have been held hostage by a decades-long government policy of saying, “No, we can’t”.

Today, IER is offering a bold economic stimulus plan that will create jobs, strengthen our economy, enhance our national energy security, and make the U.S. more competitive in the world.  Best of all, it won’t cost taxpayers a dime.  In fact, it could generate hundreds of billions of dollars, along with jobs and new energy supplies for the future.

IER’s plan represents the most significant change in government energy policy in more than three decades.  We urge the Obama Administration to say, “Yes, we can” to our two-part plan, which begins by embracing the fundamental medical precept: First, Do No Harm:

• Vow to defend jobs and investments against expensive, job-killing climate regulations.  German Chancellor Angela Merkel recently stated that she would not allow EU climate regulations that “take decisions that would endanger jobs or investments in Germany.”  President Obama should follow suit and vow to defend American jobs against costly climate regulations.
• Halt EPA’s attempt to regulate carbon dioxide using the Clean Air Act. The Clean Air Act was designed to regulate regional air pollutants, not global concentrations of carbon dioxide.  President Obama needs to apply a cost-benefit analysis to EPA’s proposal to make 85 percent of the energy that fuels our economy more expensive and less available, cost Americans $7 trillion over the next 20 years, and accomplish little, if any, real reductions in global temperature.
• Renounce plans to bankrupt coal companies. As a presidential candidate, Obama said he would bankrupt coal-fired power plants with climate regulations. America currently gets 48 percent of our electricity from coal. Unlike wind and solar, coal is reliable, affordable, and proven. Wind and solar cannot power modern society’s always-on electricity needs.
• Join other policymakers in denouncing billions for “project[s] that depend on significant taxpayer subsidies while potentially doubling power costs” for American consumers and abandon all efforts to implement Federal Renewable Fuels Standards, Federal Renewable Portfolio Standards and Low Carbon Fuel Standards.

And second, say “Yes, we can” and pursue the following landmark changes in federal energy policy:

• End subsidies for all forms of energy and return the money to American taxpayers. The government should not be in the business of picking winners and losers in energy production.  Furthermore, according to the Congressional Budget Office (CBO), direct payments to individuals and cutting taxes have the fastest and most significant impacts on the economy.
• Continue our progress on the most significant change in energy policy in decades: Streamline regulations to produce energy from American resources on American lands and coastal waters.  ICF International recently released a study that shows developing America’s abundant but currently off-limits domestic energy supply would create 160,000 new jobs alone and generate $1.7 trillion for local, state, and federal tax revenue.
• Provide coastal states with 50 percent of revenue from offshore and onshore energy leasing.  Last year alone, the U.S. raised over $23 billion from energy leasing on federal lands.
• Support exploration and energy production in ANWR. According to the Energy Information Administration, ANWR “is the largest unexplored, potentially productive geological onshore basin in the United States.”  It contains a mean expected value of 10.4 billion barrels of oil. Opening ANWR would create hundreds of thousands of American jobs, generate billions of dollars in state and federal revenue, and enhance our energy security.
• Expedite job creation by waiving all regulations on federal lands for the expedited construction of the Alaska natural gas pipeline.  Congress did this in 1973 for the 800 mile-long Trans-Alaska Oil Pipeline, which was built in just three years and has since delivered 16 billion barrels of oil to American consumers. Russia, Iran, and Qatar control 60 percent of the world’s natural gas supplies. We should use our abundant supplies of natural gas, and not allow another OPEC-style cartel to limit our energy sources.
• Allow the exploration and experimentation necessary to produce affordable energy from America’s oil shale resources. The western United States is home to an estimated 800 billion barrels of recoverable oil equivalent in oil shale. This is about three times the amount of proven oil reserves in Saudi Arabia. This resource is untapped and needs research to develop economically.
• Permit the exploration and experimentation necessary to produce affordable energy from methane hydrates.  A 2007 study found that the U.S. has about 5,700 trillion cubic feet of methane hydrates—about 900 times the current annual gas consumption in the U.S. Like oil shale, this resource is untapped, and companies need to research ways to bring it to market.
• Limit frivolous lawsuits designed to thwart responsible development of American energy and the American jobs it creates. The following quote sums up this problem best.  In an interview with Dow Jones Newswires in January 2003, The Wilderness Society’s Peter Morton threatened:  “If you bid on a lease on public land, you can expect (environmental litigation).“
• Remove regulatory impediments and repeal punitive laws that make it increasingly difficult to build or expand refineries.  While existing refineries have gone to great lengths to expand their capacity to meet growing domestic demand, refinery expansions are becoming more and more difficult due in part to regulatory impediments, bureaucratic red tape and a barrage of punitive federal legislation in recent years.
• Resolve issues involving the Yucca Mountain Repository for spent nuclear fuel.  The Federal government has been studying Yucca Mountain as a fuel repository for the last 30 years.  Ratepayers have paid billions to the Nuclear Waste Fund—it’s time for the Federal government to move forward and provide a return on that investment.
• Remove regulatory barriers to building the next generation of nuclear power plants. The Federal government should not stand in the way of developing nuclear fuel reprocessing, pebble-bed reactors, or whatever forms of nuclear energy are economical.

[1] According to EIA, in 2007 39 percent of our energy came from petroleum, 22 percent from coal, 23 percent from natural gas, 8 percent from nuclear, 2.4 percent from hydroelectric, 2.1 percent from wood derived fuels, 1.0 percent from biofuel, 0.3 percent from geothermal, 0.3 percent from wind, and 0.1 percent from solar. The latest data from EIA is available here: http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html

FOR IMMEDIATE RELEASE
December 17, 2008
CONTACT:
Brian Kennedy (202) 346-8826
Chris Tucker (202) 346-8825

IER: Obama Interior Pick Will Have “Plenty to Say” on When, Whether American Economy Can Make Its Way Back

IER president urges Sec.-designate Salazar to leverage power of affordable energy to deliver jobs, revenue and energy Americans need

WASHINGTON – Institute for Energy Research president Thomas J. Pyle issued the following statement today after the president-elect formally announced his intention to nominate U.S. Senator Ken Salazar (D-Colo.) to serve as our nation’s 50th secretary of the Interior:

“As a cabinet officer soon to be charged with managing one of every five acres of land in the United States, along with nearly two billion acres of submerged land offshore, Senator Salazar will have a crucial role to play in strengthening our country’s energy security. He’ll also have plenty to say on whether access to affordable, reliable energy continues to be available to all Americans. We congratulate Senator Salazar on this important nomination, and look forward to working with him to ensure his office diligently works toward these goals.

“Senator Salazar’s legislative record suggests these twin national priorities of energy security and affordability may end up playing second fiddle to the desire to lock these resources away. As a Senator, Salazar has been a persistent critic of granting basic energy access to the people of this country who own it, whether that energy resides under Alaska’s North Slope, Colorado’s Roan Plateau, or in massive deepwater reserves far offshore. That will have to change if our economy has any hope of making a full and swift recovery.

“Never before in our nation’s history has the role of Interior Secretary been as central to the long-term health and well being of our country. It’s our hope that Senator Salazar comes to understand the gravity of this new role, better appreciate the benefits of expanding access to reliable energy sources, and fully consider the consequences we can expect for choosing not to.”

The facts on Sen. Salazar:

• Voted against the responsible development of at least 10.4 billion barrels of American oil on Alaska’s north slope, preventing what would’ve resulted in a 50 percent increase in U.S. proven reserves.
  (http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=1&vote=00288)

• Fought attempts by the federal government to expand production of clean-burning domestic natural gas on Colorado’s Roan Plateau, impeding the safe development of nine trillion cubic feet of natural gas – enough to heat and cool four million American homes for 20 years.
  (http://salazar.senate.gov/news/releases/080609roan.htm)

• Struck a backroom deal with Senate appropriators to prevent billions of barrels of oil shale energy from being produced, calling his effort a “victory for responsible oil shale development.”
  (http://salazar.senate.gov/news/releases/080313oilshale.htm)

• After failing to extend the shale ban into the new year, Salazar castigated the federal government for following the law and beginning the process of issuing leases.
  (http://salazar.senate.gov/news/releases/080904shale.htm)

• Proudly announced his support for a so-called energy bill that would’ve permanently locked away nearly 75 percent of America’s known offshore energy resources, increased utility rates for all Americans, and expanded the reach of the federal government in the day-to-day decisions of American energy consumers.
  (http://salazar.senate.gov/news/releases/080813enjnt.htm)

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

#####

www.InstituteforEnergyResearch.org

FOR IMMEDIATE RELEASE
November 18, 2008
CONTACT:
Brian Kennedy (202) 346-8826

IER Applauds BLM on Final Rule for Shale Development

Washington, DC – Daniel Kish, senior vice president of the Institute for Energy Research (IER), issued the following statement applauding The Bureau of Land Management’s final rule to govern commercial oil shale development on federal lands, announced today:

“By issuing this final rule, the federal government has issued a challenge to American industry that will spur innovation, competition, and the development of a domestic energy resource larger than any other in the entire world. The United States has more oil shale than Saudi Arabia has crude oil, but the lack of an official leasing program has precluded substantial investment in and production of this resource to date. This rule will effectively change that, and could change the global energy landscape in a way that secures both our economic and energy security for a century to come.”

Oil shale is a fine-grained sedimentary rock rich in organic sedimentary material called kerogen. The shale is heated to separate the kerogen from the rock and the resultant liquid is converted to superior quality jet fuel, diesel fuel, kerosene, and other high value products. The United States has 2 trillion barrels of oil shale – more than 7 times the amount of crude oil reserves found in Saudi Arabia, and is enough to meet current U.S. demand for over 250 years. In 2007, however, Congress adopted a rider that prohibited the Department of Interior from completing the task it was assigned in 2005. This prohibition expired at the end of September of this year, along with the outer continental shelf (OCS) energy production ban. The issuance of a final rule gives the United States an official program to bring this massive resource to market for American consumers.

According to the U.S Department of Energy (DOE), “Once developed, U.S. oil shale resources will be similar in extent and energy potential to Alberta’s tar sand reserves. When oil shale and tar sands are considered together, the United States and Canada will be able to claim the largest oil reserves in the world.”

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

#####

www.InstituteforEnergyResearch.org

Some lawmakers view earnings reports as an opportunity to beat up on oil companies for having the nerve to earn a profit.  This week was no different.  Senator John McCain, for example, made an oft-repeated claim today that the 2005 Energy Policy Act contained “billions in corporate giveaways to the oil companies.”  The truth is that taxes on oil companies increased under the Energy Policy Act, a fact that seems to have eluded many in the national media and on Capitol Hill.

Senator McCain’s rhetoric regarding the 2005 energy law is both misguided and misdirected.  According to a report by the Congressional Research Service, the Energy Policy Act of 2005 (EPACT05, P.L. 109-58) indeed included several oil and gas tax incentives, providing about $2.6 billion in tax cuts for the industry.  However, the measure also imposed $2.9 billion of tax increases on the oil and gas industry, for a net tax increase of nearly $300 million.  Meanwhile, the largess of the tax credits and subsidies in the 2005 measure actually went to other industries, most notably to those who call themselves “alternative” energy sources.

But perhaps the biggest flaw of the 2005 Energy Policy Act was its failure to meaningfully increase domestic supplies of oil and natural gas by continuing to prohibit access to the 1002 area of the Arctic National Wildlife Refuge (ANWR), oil shale, oil sands, and the majority of the Lower 48 Outer Continental Shelf.  Currently less than 4% of the government’s lands and waters are leased for energy production, even as American families and their employers struggle to pay their energy costs and remain competitive in this ongoing recession.

Synopsis (104KB)

Complete Analysis (60KB)

The following comparison of Barack Obama’s and John McCain’s energy and environmental plans comes from the statements of their plans on their official web sites. The text first indicates what the respective plans say on each topic, and then provides IER’s analysis of each topic within the program.

Table of Contents

CAFE
Advanced Vehicle R&D
Electricity Grid
Energy Efficiency
Biofuels
Energy Tech
Energy Independence
Global Warming
• Synopsis
• Nuclear Power
• Windfall Profits Tax
• Renewable Electricity
• Clean Coal Technology
• Domestic Oil Production
• Alaskan Gas Pipeline
• SPR/Tax Holiday
• Energy Speculation

Nuclear Power

Obama: Acknowledges that nuclear power is needed to meet greenhouse gas emissions reduction goals. Says it is necessary to address the security of nuclear fuel and waste, waste storage, and proliferation before expansion of nuclear power can be considered. Does not believe that Yucca Mountain is a suitable site for waste storage. Will lead Federal efforts to look for safe, long-term disposal solutions based on objective, scientific analysis. Will develop requirements to ensure that the waste stored at current reactor sites is contained using the most advanced dry cask storage technology available [1].

McCain: Wants to construct 45 new nuclear power plants by 2030 with an ultimate goal of constructing 100 new plants. Does not want to be dependent on foreign suppliers for nuclear reactors or plant components, supporting their construction in the U.S. [2] Supports Yucca Mountain and research into nuclear-waste reprocessing [3].

Analysis: Analyses of climate change proposals by EIA, EPA, NAM/ACCF and others have shown that nuclear power is needed to meet greenhouse gas emission reduction goals [4]. Nuclear power currently generates about 20% of the electricity in the U.S. [5] but over 75% of the electricity in France [6]. DOE has been working on Yucca Mountain as the waste disposal facility since 1987 but the process has been slowed because of opposition, and recently it was disclosed that it will not be opened before 2025. The Carter Administration banned reprocessing of waste, a “recycling” process. To require, as Senator Obama proposes, that waste storage and other issues be resolved before expansion of nuclear power can occur, would essentially remove the nuclear option from the generation mix in the near and mid-term period when technology options for mitigating greenhouse gas emissions are limited.
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Windfall Profits Tax

Obama: Will require oil companies to take a reasonable share of their windfall profits and use it to provide a rebate to help pay for higher energy costs to U.S. consumers. The rebate would be $500 per individual and $1000 per married couple and would be paid for through 5 years of the “tax” on oil companies [7].

McCain: Does not support a windfall profits tax, which “will hinder investment in exploration and new production.”[8]

Analysis: President Carter enacted a windfall profits tax in 1980. The Congressional Research Service indicated that the tax, which was repealed by President Reagan in 1988, lowered domestic energy production by 1.2% to 4.8%, resulting in increased foreign oil imports [9]. According to the Energy Information Administration, the major oil companies already pay a substantial amount of taxes, which in 2006, totaled $90 billion [10].
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Renewable Electricity

Obama: Ensure that 10% of our electricity comes from renewable sources by 2012, and 25% by 2025. Extend the Federal production tax credit for 5 years to encourage the production of renewable energy [11].

McCain: Encourages the market for alternative, low carbon fuels such as wind, hydro, and solar. He believes in an even-handed system of tax credits that will remain in place until the market transforms sufficiently so that renewable energy no longer merits taxpayers’ dollars [12]. Does not believe in a Federal Renewable Portfolio Standard; believes targets for renewables are best adopted at the state level [13].

Analysis: The production tax credit for wind and other renewables has been extended 6 times, and most recently by the “bailout” bill [14]. Twenty-five states and the District of Columbia currently have renewable portfolio standards, but they differ widely on what they consider a renewable to be and the dates for the targets to be met [15]. Only Texas has met its targets for renewable generation [16]. There are areas, particularly in the south, which do not have good wind resources and would have a harder time meeting Federal targets [17]. Their utilities would have to purchase credits to make up for the shortfall in renewable capacity [18]. The “Renewable Portfolio Standard” is a semantic device, as it is not a standard so much as it is a mandate. By compelling utilities to produce or purchase a certain percentage of their electricity from renewable sources, laws and/or regulations may be requiring consumers ultimately to purchase more expensive energy than they would otherwise choose to do in a free market. Making energy more expensive deliberately is a matter that deserves more public debate. Moreover, making energy more expensive in the U.S. affects American competitiveness in trade and other matters.
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Clean Coal Technology

Obama: Will provide incentives to accelerate private sector investment in commercial scale zero-carbon coal facilities, by instructing DOE to enter into public private partnerships to develop 5 “first-of-a-kind” commercial scale coal-fired plants with carbon capture and sequestration [19].

McCain: Will commit $2 billion annually to advancing clean coal technologies. When commercialized will also export them to developing world economies to promote an international green economy [20].

Analysis: Coal produces almost 50 percent of U.S. electricity [21]. Climate change studies by Government and private agencies have shown that since carbon capture and sequestration (CCS) technology is not currently commercially available, most of today’s coal generating plants would need to be replaced by non-carbon or lower-carbon emitting technologies to meet greenhouse gas targets. This will come at a major expense to the U.S. economy [22]. DOE had been funding a Future Gen clean coal project, but has withdrawn support due to the huge increases in cost. Instead, DOE plans to support only the CCS portion of future projects [23]. The U.S. has the largest supplies of coal in the world. Any comprehensive energy policy must include coal given its predominant role in our electrical supply system.
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Domestic Oil Production

Obama: Wants oil companies to drill in the 68 million acres that they have leased but from which they are not producing energy. Promotes energy production in Bakken Shale in Montana and North Dakota, and in the National Petroleum Reserve-Alaska [24]. Contends companies could produce 4.8 million barrels more per day domestic oil if oil companies were currently producing on all currently-leased areas [25]. Supported limited Outer Continental Shelf (OCS) energy production in formerly-banned areas as part of a broader energy package including concessions for renewable technologies [26]. Opposes energy production in the Alaska National Wildlife Refuge (ANWR) [27].

McCain: Wants to expand domestic oil exploration and production to the previously banned areas of the OCS to lessen U.S. imports of foreign oil, increase U.S. domestic supplies, and reduce the U.S. Federal Trade deficit [28]. Does not support drilling in ANWR at this time [29].

Analysis: Until the U.S. Congress allowed the OCS moratoria to expire at the end of September, American oil leasing had been prohibited on most of the OCS in the lower 48 states since 1982. The moratoria had limited energy exploration and production to a mere 3% of America’s offshore OCS lands. This made the U.S. the only developed nation in the World to restrict access to its offshore energy resources. The Minerals Management Service (MMS) estimates that the outer continental shelf contains 86 billion barrels of oil and 420 trillion cubic feet of natural gas, both conservative estimates since bans on offshore leasing have made it illegal to explore [30]. It is now necessary to ensure that Congress does not reinstate the moratoria as they are threatening to do and that the leases are not tied up in legal disputes.

While neither candidate currently advocates exploration in ANWR, U.S. Geological Survey (USGS) estimates that the “1002 Area” contains a mean expected value of 10.4 billion barrels of technically recoverable oil [31]. The 1002 Area is not designated as wilderness; there are no trees, deepwater lakes, or mountain peaks. The 1002 area could produce about one million barrels of oil per day, which is about 20 percent of our daily domestic production and would make ANWR the single largest producing field in North America [32]. It would also extend the life of the Trans Alaskan Pipeline, which is currently operating at 1/3 of its original capacity. ANWR would generate large amounts of revenue for the federal government from royalties, as well as corporate income taxes. For example, a recent Congressional Research Service Report found that developing ANWR would produce $191 billion in new federal revenues from corporate income taxes and royalties [33].

Additionally, the United States has significant quantities of energy potential in its onshore federal lands that are not leased, as well as in its oil shale deposits, the world’s largest. Unlike other energy sources which require subsidies and/or mandates, the use of government resources to meet our energy needs not only creates jobs, but also enormous quantities of revenue.

The claim that oil companies are deliberately withholding production on 68 million acres has been debunked and is no longer taken seriously by energy analysts [34]. Oil companies do not know exactly where profitable deposits of oil and natural gas will be found until they actually drill, and so naturally at any given time, a portion of leased land will not be in production. If the oil companies were truly withholding 4.8 million barrels per day, that would imply they were ignoring $140 billion in gross revenues per year (assuming a price of $80 per barrel). It would also be curious that oil companies were lobbying for the ability to pay for additional leases on previously banned lands, if they had already paid for access to more oil and gas than they wanted to sell.
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Alaskan Gas Pipeline

Obama: Wants to work with stakeholders to facilitate construction of this natural gas pipeline [35].

McCain: Believes in promoting and expanding the use of our domestic supplies of natural gas, including building the infrastructure needed to transport it [36].

Analysis: Natural gas currently supplies 23 percent of our energy needs [37]. Besides heating many U.S. homes, it is used for electricity production and in industrial processes. It is the least carbon-intensive of the fossil fuels. The Energy Information Administration predicts that natural gas use will grow [38], and many studies have shown that natural gas is needed as a transitional fuel under scenarios to reduce greenhouse gases [39]. Alaska has 35 trillion cubic feet of known quantities of natural gas and experts expect the potential is much greater. These supplies of natural gas could be used in the lower 48 states if construction of the pipeline were undertaken.
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SPR or tax holiday

Obama: Supports releasing 70 million barrels of oil from the government’s Strategic Petroleum Reserve (SPR) to increase oil supplies and reduce gasoline prices [40]. The light oil released from the SPR would be replaced later with heavier oil [41].

McCain: Opposes the use of the SPR to reduce gasoline prices, believing it should be used in the event of an emergency cutoff of imports. Instead, he suggested reducing gasoline prices by temporarily suspending the 18-cents-per-gallon Federal gasoline tax [42].

Analysis: The SPR was developed in 1975 as a response to the 1973 oil embargo against the West. The U.S., in conjunction with other OECD nations, keeps spare stocks of oil in case oil is used as an economic weapon. The President has the authority to release crude from the SPR in time of a national emergency. President Bush has done so in the aftermath of Hurricanes Katrina and Ike, when offshore production facilities and refineries were temporarily closed for repair, replacing the crude once the facilities were operational. Both the SPR withdrawal and temporary Federal tax holiday would have, at best, short-run benefits, and they would come at the cost of reduced security against another oil embargo (for the SPR drawdown) and an increased Federal budget deficit (for the tax holiday). We believe that a better solution than either of these proposals is adding new domestic supplies from the more than 96% of government owned lands and waters currently not leased for energy. This achieves the goal of price relief for consumers, because increased supplies lead to lower oil prices, and it turns the two negatives of the Obama and McCain plans into positives: That is, increasing domestic production reduces U.S. vulnerability to foreign embargoes, and it also would provide extra revenue for the Treasury.
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Energy Speculation

Obama: Plans to enact legislation to close loopholes in Commodity Futures Trading Commission regulations and increase market transparency [43].

McCain: Wants to reform the laws and regulations governing the oil futures market and provide oversight [44].

Analysis: Studies by the Commodity Futures Trading Commission showed that there was no evidence that speculators were responsible for high oil prices [45]. Also, if the price of oil were above the levels that fundamentals of supply and demand could support, there would be growing inventories, which there were not. Successful speculators actually make oil prices less volatile, by buying when prices are low and selling when prices are high (or ”shorting” when prices are high and then covering when prices are low). Major producers and consumers of oil use futures markets to “hedge” themselves against future volatility by locking in a fixed “futures price” of oil. Large investment funds provide liquidity to the commodities futures markets, and allow producers and physical consumers (such as airlines and refiners) to concentrate on their core businesses.

Government restrictions on investment in the oil futures market would only hurt consumers by making the oil market less efficient. New regulations will do nothing to ease oil prices in the long term [46]. Additional supplies help temper any speculation, also. Since President Bush announced the lifting of the presidential moratorium on July 14, 2008, oil prices have fallen by almost 50%. Congress’ decision to allow the OCS energy moratorium to expire October 1, 2008 has further sent a message to markets about American willingness to produce its own energy.
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CAFE

Obama: Will increase fuel economy standards 4 percent per year, going beyond the 35 mpg requirement in 2020 mandated by the Energy Independence and Security Act of 2007 [47].

McCain: Will enforce existing CAFE standards by increasing the penalties for not complying with the standards, which many auto manufacturers currently pay and add to the price of their cars [48].

Analysis: Like all markets, automakers will supply the market with vehicles that consumers demand. In the past, consumers preferred increased horsepower and larger vehicles rather than more fuel efficient and smaller vehicles. In the past, consumers have preferred more sport utility vehicles and light trucks, than smaller vehicles. Higher oil and gasoline prices have moved the car purchasing market to more fuel efficient vehicles, though some consumers still prefer the safety features in the heavier vehicles. The issue related to increasing the CAFE standard beyond the current legislated level is whether technologies exist to meet a higher standard. Also of note, by restricting consumer choice CAFE standards have lead to more deaths and injuries than otherwise because CAFE forces carmakers to build smaller cars than consumers would prefer. CAFE may save gasoline, but it costs lives [49].
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R&D and Tax Credits for Advanced Transportation Vehicles

Obama: Wants to mandate that all new vehicles are flex-fuel vehicles. Spend U.S. tax dollars on advanced vehicle technology; put 1 million plug-in electric vehicles on the road by 2015. Provide a $7,000 tax credit for the purchase of advanced technology vehicles and conversion tax credits. Convert the White House fleet to plug-ins within one year of becoming President. Make half of all cars purchased by the Federal Government be plug-in hybrids or all-electric by 2012. Provide $4 billion in retooling tax credits and loan guarantees for domestic auto plants and plant manufacturers so that new fuel-efficient cars are built in the U.S. rather than overseas [50].

McCain: Supports flex-fuel vehicles and wants automakers to make a more rapid switch to flex-fuel vehicles than their current commitment. Proposes a $300 million prize to improve battery technology for full commercial development. Provides a $5,000 tax credit for purchase of a zero emission car and a graduated tax credit for other vehicles based on their carbon emission levels [51].

Analysis: Studies regarding tax credits show that they have limited ability to spur change compared to their cost to the U.S. Treasury and the American taxpayer. The Energy Information Administration, for example, evaluated the impact of tax credits on the energy system on both a cost and carbon emission basis finding their cost per unit high and their benefit to lowering carbon emissions and energy consumption low [52]. IER believes that prizes for technology development should be privately funded, not taxpayer funded. Prizes should be awarded by private foundations and they would receive the patent rights for their nonprofit.
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Electricity Grid

Obama: Will spend U.S. tax dollars on smart metering, distributed storage and other advanced technologies. Will establish a Grid Modernization Commission to facilitate adoption of Smart Grid practices. Will instruct the Secretary of Energy to: 1.) establish a Smart Grid Matching Grant Program to provide a subsidy of one-fourth of qualifying investments; 2.) conduct programs to deploy advanced technologies for managing peak load reductions and energy efficiency savings; and 3.) establish demonstration projects [53].

McCain: Wants to upgrade the national grid to meet the electricity demands of the 21st century, including a capacity to charge electric vehicles. Promotes deployment of SmartMeter technologies that provide consumers with real-time energy consumption usage to encourage cost-efficient use of power [54].

Analysis: The candidates appear to be silent on the issue of grid instability related to delays, lawsuits and red tape associated with upgrading the grid and building sufficient power capacity to ensure grid stability. In a technology driven modern economy, this is a foundation of economic strength. A recent USDA study of rural community electric demands pointed out a need to double capacity in rural areas by 2020 [55]. The North American Electricity Reliability Council reports that the capacity margins (the amount of electricity necessary to maintain the reliability of the electrical grid) are low and could drop below target capacity margins as soon as 2009 in many areas of the country [56]. The Independent Service Operators throughout the nation predict looming shortfalls in production and transmission capability in urban areas, and new demands from non-dispatchable sources (intermittent sources like new wind and solar projects) only complicate that. Moreover, there is little discussion by the candidates about the inherent conflicts of siting new alternative energy sources.
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Energy Efficiency

Obama: Reduce electricity demand 15 percent from DOE’s projected levels by 2020 by setting demand reduction targets for utilities and more stringent building and appliance standards.

Establish a goal to make all new buildings carbon neutral by 2030. Establish a goal to improve new building efficiency by 50 percent and existing building efficiency by 25 percent. Overhaul the process for setting appliance efficiency standards to eliminate the missed deadlines by the Department of Energy for setting updated appliance efficiency standards. Achieve a 40 percent increase in efficiency in all new federal buildings within 5 years and ensure all new federal buildings are zero-emissions by 2025. Invest in cost-effective retrofits to achieve a 25 percent increase in efficiency of existing federal buildings within 5 years. Provide resources to achieve a 15 percent reduction in federal energy consumption by 2015. Work with states to flip the profit model for the utility sector so that shareholder profit is based on reliability and performance as opposed to total production. Commit to weatherize one million low-income homes each year for the next decade [57].

McCain: Will make greening of the Federal Government a priority by applying a higher efficiency standard to new buildings leased or purchased or retrofitting existing buildings [58].

Analysis: Both candidates support compelling the federal government to use less energy in its operations, strategies that may pay dividends for the largest consumer of energy in the nation. But these strategies will come at a cost. Already, some Federal buildings are kept uncomfortably hot in the summer, and uncomfortably cool in the winter to save energy. The imposition of demand reduction targets for the nation may result in significant additional economic burdens on consumers of energy which would affect consumer prices as well as the prices of the goods and service produced in the U.S. which must compete with other nations’ goods.
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Biofuels, Mandates, & Subsidies

Obama: Will require at least 60 billion gallons of advanced biofuels by 2030. Will spend federal tax dollars, provide tax incentives and government contracts into developing the most promising technologies and their infrastructure. Will mandate all new vehicles are flex-fuel [59].

McCain: Believes alcohol-based fuels hold great promise as both an alternative to gasoline and as a means of expanding consumers’ choices. But, believes a level playing field is needed and will eliminate mandates, subsidies, tariffs, and price supports that focus exclusively on corn-based ethanol and prevent the development of market-based solutions that would provide better solutions [60].

Analysis: The Energy Independence and Security Act of 2007 (EISA) requires 36 billion gallons of biofuels by 2022–15 billion gallons of corn-based ethanol and 21 billion gallons of advanced biofuels [61]. Currently there are no commercially-available advanced biofuels on the market. Based on the lower mandates in the Energy Policy Act of 2005, EIA’s Annual Energy Outlook 2007 [62] showed that economic levels of biofuels were projected to be 7.6 percent (or 14.6 billion gallons) of the 192 billion gallon gasoline market in 2030. Their Annual Energy Outlook 2008 [63], which incorporated the EISA mandate by requiring that the provisions of EISA be met, reached 32.5 billion gallons in 2022, slightly below the target due to the application of waivers and modification of credit volumes resulting from inadequate quantities of biofuels to meet the initial targets.

That forecast was also dependent on the commercial availability of cellulosic ethanol, which is not commercially viable today. Currently there are multiple mandates and subsidies that encourage the sale of ethanol. For example, in many areas of the country retailers are required to sell gasoline that is 10 percent ethanol to meet clean air regulations.

Also there is a 51 cents per gallon of ethanol subsidy for ethanol [64]. Without these subsidies and mandates, the ethanol industry would not have developed as much. This is especially true because there is less energy is a gallon of ethanol than in a gallon of gasoline, it is more expensive to produce ethanol than gasoline, and there are other negative factors such as its impact on water and land usage and food prices. Mandating 60 billion gallons by 2030, 67 percent higher than the current mandate in just 8 additional years is making an already difficult task harder, and could have even more dramatic impacts on food prices and water and land usage issue.

Government mandates of any kind distort markets, and ethanol is no exception. The ethanol mandate is already leading to higher food prices [65]. Higher food prices have led to food riots around the world [66]. Increasing food prices are making life more difficult for the world’s poor, leading UN Special Rapporteur for the Right to Food, Jean Ziegler, to call using food crops to produce ethanol “a crime against humanity.”[67]

Not only are there serious human costs to the current ethanol mandates, but there are large environmental costs as well. Recent studies published in Nature argue that biofuel production releases 17 to 420 times more carbon dioxide than the fossil fuels they replace.”[68] Increased carbon dioxide emissions are not the only environmental harm biofuel production promotes. Biofuel production has also led to converting millions of acres of rainforest into biofuel plantations [69].

Besides the human and environmental products ethanol mandates produce, it is difficult to comprehend how it is possible to mandate the use of a product in the future that cannot presently be produced commercially, such as cellulosic ethanol. The U.S. has the world’s largest oil shale deposits, from which DOE estimates 800 billion barrels are recoverable. Currently it is not produced commercially, and no candidate has supported a mandate for its production by a date certain. The purpose of this comparison is to demonstrate that mandates are by definition, the government picking winners and losers as opposed to freely motivated individuals operating in a free market.
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Energy Technology Development

Obama: Wants to spend $150 billion over 10 years to accelerate the commercialization of plug-in hybrids, promote development of commercial scale renewable energy, encourage energy efficiency, invest in low emission coal plants, advance the next generation of biofuels and infrastructure, and begin transition to a new digital electricity grid [70].

McCain: Will spend $2 billion annually to advancing clean coal technology. Will establish a permanent tax credit equal to 10 percent of wages spent on R&D, which will simplify the tax code, provide an incentive to innovation, make the U.S. more competitive with other countries, and remove the uncertainty facing businesses in their R&D decisions. Faces a level playing field for mandates, subsidies, tariffs, and price supports that promote the development of market-based solutions [71].

Analysis: Markets work better than government-directed programs to finding solutions to problems. This is because government programs are driven by political considerations not economic effectiveness like markets. Since 1978, the DOE has spent over $75 billion on research and development into various energy sources, and our energy problems are more acute than ever [72]. Far larger amounts have been dedicated to energy programs through the tax system, to the same end. During the same period of time, the amount of acreage made available for leasing for energy production to the private sector has plunged dramatically, with the ultimate result of less domestic production of oil and gas.

Meanwhile, permitting of electrical transmission lines, energy pipelines and energy facilities has grown more difficult and time consuming, and in capital intensive industries such as energy, time equals money, which the consumer of energy eventually pays. Even today, large subsidies for alternative energy generation exist on the one hand, while on the other hand, government laws and regulations have led to delays in the deployment of new wind farms or solar energy production facilities. Neither candidate has addressed the schizophrenic nature of the government’s policies upon energy production, transmission and use in the U.S.
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Energy Independence

Obama: Wants to save more oil than we currently import from the Middle East and Venezuela combined within ten years [73].

McCain: Wants to achieve strategic energy independence by 2025. Will continue to import oil from our North American neighbors, Canada and Mexico [74].

Analysis: Imports of oil from the Middle East and Venezuela were 3.53 million barrels per day in 2007 or 26 percent of our total oil imports of 13.47 million barrels per day [75]. The U.S. has sufficient domestic energy resources to replace these imported sources, as about 97% of offshore government lands and 94% of onshore government lands have not been leased for energy production [76]. Furthermore, our oil shale resources have not been touched, with over 800 billion barrels of recoverable shale oil that can be made commercially available with the properly structured Government leasing program. To meet the goals, the candidates will need to remove the red tape from Government restricting and/or delaying the use of these resources [77]. Government actions have for several decades led to severe reductions in the quantity and quality of government lands leased for energy production [78]. By letting energy exploration occur on much less lands, the government has been effectively stockpiling energy at a time when energy prices have hurt the American economy. Allowing more energy production is proven to make a significant difference in energy supplies, as the Energy Information Administration recently reported [79]. When more wells are drilled, more supplies are found. The candidates have not directly addressed this simple fact in a fashion that the American people can understand.
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Global Warming

Obama: Implement a cap and trade program to reduce greenhouse gas emissions 80 percent below 1990 levels by 2050. Require all emission credits to be auctioned. Use $15 billion per year of the auctioned receipts to subsidize the development of clean energy and energy efficiency improvements. Use remaining receipts as rebates and other transition relief for families and communities. Engage with the U.N. Framework Convention on Climate Change and make the U.S. a leader on climate change. Establish a Low Carbon Fuel Standard that requires fuel suppliers in 2010 to begin to reduce the carbon content in their fuel by 5 percent within 5 years and 10 percent within 10 years [80].

McCain: Implement a cap and trade system to reduce greenhouse gas emissions 66 percent below 1990 levels by 2050. Emission permits will eventually be auctioned to support the development of advanced technologies and reduce impacts on low-income American families. Will reform federal government research funding and infrastructure to emphasize the commercialization of low-carbon technologies. Will provide leadership for effective international efforts through actively engaging to lead United Nations Negotiations [81].

Analysis: Under a cap-and-trade system, there is a limit set on total greenhouse gas emissions. Each regulated entity is required to hold an allowance (essentially an entitlement) for the total amount of greenhouse gases they are allowed to emit. Allowances are distributed to emitters by some criterion (e.g. historic emissions), auctioned, or by some combination of the two. Entities are allowed to buy and sell allowances, creating a market price for them. Several cap-and-trade bills have been proposed in Congress, but none has passed to date. Many studies have been done on the various proposals. The studies show that mandates limiting GHG emissions will impose very large costs on the economy in terms of lost GDP, and higher costs to consumers, particularly in the cost of electricity [82].

Because the major growth in greenhouse gases are in developing countries like China, India, and the Middle East, U.S. emission reductions are likely to have little impact on global emissions. For example, if the U.S. were to eliminate all carbon dioxide emissions by 2030, world-wide CO2 emissions would still increase by about 30 percent [83]. In addition, many economists argue that an appropriately calibrated, explicit tax on carbon could achieve the same long-run emissions reductions as a cap-and-trade program, but with less scope for corruption and with lower total compliance costs [84]. (IER does not endorse a carbon tax, [85] but it would be more straightforward than the “stealth tax” of the cap-and-trade approach endorsed by both presidential candidates).
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Citations

1. http://my.barackobama.com/page/content/newenergy
2. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
3. http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
4. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html
5. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
6. Energy Information Administration, International Energy Annual, http://www.eia.doe.gov/iea/.
7. http://my.barackobama.com/page/content/newenergy
8. http://www.johnmccain.com/Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
9. Congressional Research Service, Energy Tax Policy: History and Current Issues, http://assets.opencrs.com/rpts/RL33578_20080917.pdf
10. EIA, Financial Reporting System, http://www.eia.doe.gov/emeu/perfpro/btab02.html
11. http://my.barackobama.com/page/content/newenergy
12. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
13. http://news.cnet.com/8301-11128_3-10031450-54.html
14. Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html.
15. Energy Information Administration, Annual Energy Outlook 2008, page 27, http://www.eia.doe.gov/oiaf/aeo/index.html
16. “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Robert J. Michaels, April 2008 Electricity Journal.
17. For example, see this map showing the potential for wind generation http://www.windpoweringamerica.gov/wind_maps.asp and this map showing the potential for solar generation: http://www.nrel.gov/gis/images/us_csp_annual_may2004.jpg.
18. Democrats Challenge Each Other In Battle Over Energy Bill, Ian Talley, Dow Jones Newswires, September 11, 2007.
19. http://my.barackobama.com/page/content/newenergy
20. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
21. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
22. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
23. http://www.energy.gov/news/5912.htm, http://www.fossil.energy.gov/news/techlines/2008/08030-CO2_Capture_Projects_Selected.html
24. http://my.barackobama.com/page/content/newenergy
25. http://thepage.time.com/obama-response-to-mccain-ad/
26. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
27. Institute for 21st Century Energy, U.S. Chamber of Commerce, Washington D.C., http://www.energyxxi.org/NR/rdonlyres/eam4biljadknpedoyypgej2y2lf2df2y5mob4f5hyhzfs7ah577l26gskcrcphj5fy2dq4jaflz4ofushfcv2fwgwgb/PresidentialEnergyPositions20080618.pdf
28. http://www.johnmccain.com/Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
29. Institute for 21st Century Energy, U.S. Chamber of Commerce, Washington D.C., http://www.energyxxi.org/NR/rdonlyres/eam4biljadknpedoyypgej2y2lf2df2y5mob4f5hyhzfs7ah577l26gskcrcphj5fy2dq4jaflz4ofushfcv2fwgwgb/PresidentialEnergyPositions20080618.pdf
30. Offshore Energy & Minerals Management (OEMM), The Minerals Management Service, http://www.mms.gov/offshore/, July 7, 2008.
31. U.S. Geological Survey, http://pubs.usgs.gov/fs/fs-0028-01/
32. http://tonto.eia.doe.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm
33. http://www.usembassy.at/en/download/pdf/anwr_revenue.pdf
34. http://www.instituteforenergyresearch.org/2008/08/15/bogus-lease-claims-in-use-it-or-lose-it-proposal-stymie-real-energy-security/
35. http://my.barackobama.com/page/content/newenergy
36. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
37. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
38. Energy Information Administration, Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/index.html
39. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
40. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
41. http://my.barackobama.com/page/content/newenergy
42. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
43. http://my.barackobama.com/page/content/newenergy
44. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
45. Interim Report on Crude Oil, Interagency Task Force on Commodity Markets, July 2008, http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf, and http://www.marketwatch.com/news/story/cftc-report-undercuts-claim-investors/story.aspx?guid={06B5DBFD-CC90-41A2-A3C0-6F18A3DBC03A}&dist=hppr
46. http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/oil_speculators.pdf
47. http://my.barackobama.com/page/content/newenergy
48. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
49. See e.g., Sam Kazman, CAFE is Bad for Your Helath, Wall Street Journal (Nov. 13, 2005) http://cei.org/gencon/019,04970.cfm .
50. http://my.barackobama.com/page/content/newenergy
51. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
52. Energy Information Administration, Analysis of the Climate Change Technology Initiative, April 1999, and Analysis of the Climate Change Technology Initiative: Fiscal Year 2001, April 2000.
53. http://my.barackobama.com/page/content/newenergy
54. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
55. http://www.nreca.org/PublicPolicy/issuespotlight/20081013.htm
56. North American Electricity Reliability Council, 2007 Long-Term Reliability Assessment (Nov. 16, 2007) http://www.nerc.com/files/LTRA2007.pdf.
57. http://my.barackobama.com/page/content/newenergy
58. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
59. http://my.barackobama.com/page/content/newenergy
60. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
61. Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
62. Energy Information Administration, Annual Energy Outlook 2007, http://www.eia.doe.gov/oiaf/archive/aeo07/index.html
63. Energy information Administration, Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/index.html
64. Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
65. http://web.worldbank.org/WBSITE/EXTERNAL/EXTSITETOOLS/0,,contentMDK:21845834~pagePK:98400~piPK:98424~theSitePK:95474,00.html
66. CNN, Riots, instability spread as food prices skyrocket, Apr. 14, 2008, http://www.cnn.com/2008/WORLD/americas/04/14/world.food.crisis/index.html?eref=rss_topstories.
67. CNN, Riots, instability spread as food prices skyrocket, Apr. 14, 2008, http://www.cnn.com/2008/WORLD/americas/04/14/world.food.crisis/index.html?eref=rss_topstories.
68. The Nature Conservancy, Climate Change and Energy: The True Cost of Biofuel, http://www.nature.org/initiatives/climatechange/features/art23819.html.
69. Mongabay.com, Why is oil palm replacing tropical rainforests?, http://news.mongabay.com/2006/0425-oil_palm.html.
70. http://my.barackobama.com/page/content/newenergy
71. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
72. Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/chap3.pdf
73. http://my.barackobama.com/page/content/newenergy
74. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
75. http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm
76. http://www.instituteforenergyresearch.org/2008/07/16/who-benefits-from-federal-lease-hoarding/
77. See, for example, http://www.eenews.net/eenewspm/2008/10/17/2
78. http://www.instituteforenergyresearch.org/wp-content/uploads/2008/10/OCSacresleased.jpg, and http://www.instituteforenergyresearch.org/wp-content/uploads/2008/10/FederalLeaseOfferingsAcreageaLeased60-2006.pdf
79. http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/advanced_summary/current/adsum.pdf
80. http://my.barackobama.com/page/content/newenergy
81. http://www.johnmccain.com/Informing/Issues/da151a1c-733a-4dc1-9cd3-f9ca5caba1de.htm
82. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
83. Energy Information Administration, International Energy Outlook 2007, http://www.eia.doe.gov/oiaf/archive/ieo07/index.html
84. See for example Chapter 8, “The Many Advantages of Carbon Taxes,” in the prepublication proofs of Yale economist William Nordhaus’ book, A Question of Balance: Weighing the Options on Global Warming Policies (New Haven: Yale University Press, 2008), available at: http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf.
85. See IER’s critique of Nordhaus’ case at: http://www.instituteforenergyresearch.org/2008/06/05/ier-economist-murphy-takes-on-nordhaus-case-for-a-carbon-tax/.

Large Earnings a Welcome Sign of Economic Health

High profits are the market’s signal that a company is efficient, that it is taking resources and transforming them into products that consumers value.  In contrast, a company suffering losses is wasting scarce resources, and needs to get its act together or else go out of business.  If the major oil companies report large earnings as expected, this will demonstrate that their shareholders and management made wise decisions in the preceding years, as they built and maintained the infrastructure needed to bring vital product to market.

The wise decisions of the oil industry stand in sharp contrast to the investments made by the banking and real estate sectors during the last few years.  Academics and pundits will no doubt argue about the exact causes for decades to come, but the fact remains that too many mortgages were given to unqualified applicants, and too many financial institutions bought the derivative assets tied to these risky loans.  Because of these errors, the American financial sector has suffered billions in losses, and the S&P 500 is down more than 30% year-to-date.

Profitable companies are always a sign of economic strength, but they are especially welcome during a general downturn.  Oil industry earnings show that not every corporation was asleep at the switch during the last few years.

Who Owns Big Oil? You Do!

Populist pledges to stick it to “Big Oil” conjure up images of Texas tycoons in back rooms, puffing on cigars while stuffing piles of money into their pockets. In reality, more than 70% of the shares of large oil companies are owned by mutual funds, IRAs, pensions, and other such institutional investors. Solid earnings reports by the oil industry translate into more money for retirement.

Higher Taxes Hurt Consumers

As noted earlier, some lawmakers have proposed a windfall profits tax as a way to being relief to motorists.  They see large profits and high oil prices, and assume that the greedy oil companies are successful only because they gouge their customers.  But this mentality gets things exactly backwards.  Large industry profits aren’t causing high oil prices; rather, it is the high price of oil—set in the world market by supply and demand—that is partly responsible for the large earnings in the oil industry.

Slapping producers with a windfall profits tax won’t bring relief at the pump.  On the contrary, new taxes will increase oil and gasoline prices, by reducing the incentives for producers to supply oil.  This is Economics 101:  When the government wants less of an activity, it taxes it.  (For example, to discourage people from smoking, the government slaps a hefty tax on cigarettes.)  So if the government wants oil companies to bring fewer barrels to market, reducing supply and raising the price of oil, then by all means, it should follow politicians’ plans to raise taxes on oil production.

We have been down this road before.  As part of a compromise to phase-out price controls, President Carter enacted a windfall profits tax on oil companies in 1980.  From 1981-1983, the count of rotary rigs (used to drill the vast majority of wells) in the U.S. fell in half. A Congressional Research Service report found that the 1980s windfall profits tax reduced domestic output between 1.2 and 4.8 percent, and increased American reliance on foreign oil imports. This time around, the effects could be even worse, because the new windfall tax would not be coupled with a lifting of price controls.

As the following chart illustrates, the oil industry is already paying many billions of dollars into the Treasury.  Even without tinkering with the tax code, higher earnings lead to larger payments.  It is bad policy for the IRS to target the most successful companies and slap them with punitive taxes, simply because they have deep pockets.

Total Worldwide Income Tax Expense

For FRS Oil and Gas Companies

(millions $US, source: EIA)

More Supply Is a Realistic Solution

Although more taxes and regulations aren’t the answer, there are steps the federal government can take to help.  Specifically, the government can give its permission for American energy companies to develop American resources.  The federal government recently let expire the decades-long moratorium on offshore drilling and oil shale development, but there still remain significant regulatory and legal hurdles to actual production, and naturally the politicians are looking to renew the ban after the elections.  Policymakers must realize that encouraging new domestic energy production will help on several fronts.

A recent Congressional Research Service (CRS) report [pdf] estimates that by lifting the embargo on Outer Continental Shelf (OCS) production, the federal government would generate almost $615 billion in royalties and corporate income taxes.  However, the results would actually mean even more, since the Department of Interior admits readily that its estimates of embargoed oil and gas resources are conservative, and the CRS report assumes the coastal states adjacent to the OCS areas would receive an additional $260 billion in royalties (is California listening?).

In addition to offshore resources, ANWR, oil shale and other domestic energy resources have been systematically put off limits through outright statutory ban and through crippling legal action by environmental groups.  Legalizing and then streamlining the development process on these sources of domestic energy would yield still more in royalties, direct and indirect jobs, and corporate taxes receipts.  Note that the extra revenues flowing to the government from these sources would not constitute a new drain on the American economy, as would the tax hikes proposed by some politicians.  If it is illegal to produce a valuable product for consumers, and then the government changes the rules and says it is now legal but the producer must give a cut to the Treasury, on net that is a boon to production.

Besides creating thousands of new jobs and easing the government’s budget deficit, opening up American resources to development would bring immediate price relief, even though the new production might take several years to reach full capacity.  This is because the promise of more barrels of oil in the future will cause current producers to ramp up their output in the present, while the new competing American sources are still in their infancy.  The chart below illustrates just how much policy changes can influence prices today.

Conclusion

American citizens should welcome reports of profitable companies. The news signifies the efficient use of resources, but it also helps to offset the tremendous losses being incurred in other sectors. Rather than punishing success with higher taxes, the government should instead pursue policies that speed the development of American energy resources. Such development will create jobs, strengthen the US dollar (through reduced oil imports), help defray the costs of the Wall Street bailout, and reduce oil prices even further.

See Robert Bradley’s Oil, Gas, and Government: The U.S. Experience.

Lazzari, Salvatore, “The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service Report# RL33305, March, 9, 2006.

Income tax expenses obtained from EIA’s Performance Profiles Tables, Table B12, at: http://www.eia.doe.gov/emeu/perfpro/btab12.html. Accessed August 4, 2008.

Congress has decided to end the moratorium on energy exploration and production on the Outer Continental Shelf (OCS). This is a victory for the American people, but the question is, what does ending the moratorium really mean and when should we expect to see production on the OCS?

The moratorium banned any energy leasing off the West Coast and East Coast. Ending the moratorium will allow the first exploration off the West and East Coast in over 20 years. As spelled out below, however, there is a lot of red tape that needs to be cut through before that exploration can actually occur. Also, ending the moratorium does not ease the ban on exploration and production 125 miles off Florida’s coast in the Gulf of Mexico. This ban was created by the Gulf of Mexico Energy Security Act of 2006 and it will not expire until 2022.

Besides banning offshore production, the moratorium also banned the development of oil shale in Utah, Wyoming, and Colorado. Lifting the moratorium will allow oil shale exploration and development activities to move forward. This is critically important because there is more oil locked up in oil shale than Saudi Arabia’s oil reserves.

Ending the moratorium will allow energy exploration and production to move forward, but there are many activities that need to occur for actual production to take place.

Step 1: The Minerals Management Service (MMS) Prepares a 5-Year Leasing Program

MMS, a part of the Department of the Interior, regulates the OCS under the Outer Continental Shelf Lands Act (OCSLA). Section 18 of OCSLA requires MMS to adopt a 5-year leasing program which describes the scheduled lease sales for a 5-year period, along with policies pertaining to the size and location of sales and the receipt of fair-market value. To develop the five-year program, MMS takes the following steps:

1. Publishes a Request for Comment and Information in the Federal Register
2. 45-day Comment Period (the comment period closed last week on MMS’s new 5-year plan starting in 2010)
3. Publishes a Draft Proposed Program in the Federal Register
4. 60-day Comment Period
5. Publishes a Proposed Leasing Program and Draft Environmental Impact Statement Published in the Federal Register
6. 90-day Comment Period
7. Publishes a Proposed Final Leasing Program and Final Environmental Impact Statement in the Federal Register
8. 60-day Period in which Congress can object
9. 5-year Program Announced

This process usually takes 18-36 months to complete.[1] In the case of offshore exploration on the West and East coasts, it is likely the process will take longer than 36 months. First, environmental special interest groups would likely sue MMS on the Environmental Impact Statements. Environmental Impact Statements are especially lawsuit prone because the National Environmental Policy Act (NEPA) calls for “a detailed statement” on the environmental impacts of an action and alternatives to that action. These “detailed statements” now run thousands of papers because over time, judges have added to the list of things that need to be studied in the Environmental Impact Statement.

Second, while Congress may allow the moratorium to expire at the end of September, there will likely be a fight during the 60-day period in which Congress can object to a final leasing plan.

Step 2: MMS Conducts Actual Lease Sales

The 5-year leasing plan selects broad areas in which MMS will offer leases. After MMS completes the 5-year plan, the next step is to go through the process of selecting the actual lease areas and offering the leases for sale. To conduct actual lease sales, MMS takes the following steps:

1. Publishes Request for Information in the Federal Register
2. 45-day comment period
3. Defines proposed sale area
4. Publishes Environmental Impact Statement for the specific sale
5. 60-day comment period

[Steps 6-11 occur concurrently]

1. Publishes Final Environmental Impact Statement
2. 30-day period
3. Publishes Proposed Notice of Sale
4. 60-day period
5. Sends a Consistency Determination (as required by the Coastal Zone Management Act) to Governors of affected states
6. 90-day period
7. Publishes notice of actual sale
8. 30-day period
9. Sale
10. Leases issued

If everything goes well, this entire process from the request for information to the actual sale may take two or more years.[2] But as with the development of the 5-year plan, there are many ways to slow down the process, especially through litigation. For example, earlier this year environmental special interest groups sued to stop a lease sale on the Chukchi Sea. Environmental activists would likely sue on all new lease sales on the West and East Coast, slowing down any new energy production.

Step 3: Energy Companies Work to Produce Oil and Natural Gas

After MMS has produced a 5-year plan and carried out the lease sales, it will still take time for energy companies to explore and start producing oil (unless the lease sales are offered offshore of California where we already know where some resources are).

Here is some of the typical activities that need to occur for an energy company to produce energy:

• Gather seismic data and evaluate

• Conduct shallow hazards survey

• Partner with new companies; spread risk

• File for approval of exploration plan—NEPA review

• Drill well (60–180 days)

• Assess prospect

• Gather seismic data and evaluate

• Drill additional wells

• Decide to proceed with development; obtain partner commitment

• File development plan/pipeline approval—NEPA review

• Structural engineering review by MMS

(with a major project–2 year period to construct/fabricate production facility/ transport from overseas)

• Structural engineering review by MMS

• Pre-production inspection by MMS (and Coast Guard)

• Transport to site and hook-up (2–6 months)

• Production approval by MMS

• First production

It is great news that Congress has decided to lift the OCS moratorium. Now we can start moving forward with all of the steps necessary to start producing more domestic energy. There are a lot of steps, but we haven’t been able to take any of them until now.

One last caveat, this is an important victory, but Congress and future Administrations can reverse course and lock up America’s energy resources. We need to be vigilant to safeguard our domestic energy production.

[2] Mineral Management Service, Leasing Oil and Natural Gas Resources: Outer Continental Shelf, p. 16. http://www.mms.gov/ld/PDFs/GreenBook-LeasingDocument.pdf.