This bill, like the recent “Gang of Ten” proposal, does almost nothing to increase domestic energy production. Instead, it offers more of the same government imposed mandates that promote inefficient or untested types of energy.

The following is an analysis of the most recently available proposal:

Title 1—Federal Oil and Gas Leasing

While the authors may seek to open up additional areas on the outer continental shelf (OCS) to new exploration and development, the bill permanently locks up the most oil and gas-rich areas of the OCS. For example, this would permanently ban about 97 percent of the undersea oil lying off the coast of California.

Subtitle A—Outer Continental Shelf Oil and Gas Leasing

• Permanently institutes a ban on new offshore development out to 50 miles. [Sec. 102]
  • The vast majority of undiscovered oil and gas reserves are projected to be between the coast and 50 miles offshore. Instead of allowing the production of great quantities of oil and gas, this section locks up billions of barrels of oil and trillions of cubic feet of natural gas.

• Permits leasing only between 50 and 100 miles offshore only if the adjacent state legislature ‘opts-in’ to allow leasing off its coastline. [Sec. 102]
  • Section 102 fails to provide royalty revenue sharing for the states near new offshore development. States will not have any incentive to allow oil development if there is not revenue sharing from the actual production.

• Fails to open new, energy rich areas for exploration and development in the eastern Gulf of Mexico. These areas in the Gulf could start producing oil and gas very quickly because they are close to existing infrastructure.

• Creates a new duty for the Secretary of the Interior, notwithstanding all current environmental laws, to make sure any activity “provides for the protection of the coastal environment.” [Sec. 104]
  • Offshore exploration and development is already subject to a large number of environmental laws such as the Marine Mammal Protection Act, the Coastal Zone Management Act, the Endangered Species Act, and the Magnuson-Stevens Fishery Conservation and Management Act.
  • Because this new language is not defined in the bill nor the U.S. Code, it is an invitation for environmental groups to sue so courts will determine what it means for the Secretary to “provide for the protection of the environment.” [Sec. 104] This will only slow new offshore development.

Subtitle B—Diligent Development of Federal Oil and Gas Leases

• Requires oil and natural gas leaseholders to “diligently develop” the leases they hold. [Sec. 121]
  • The bill does not explain how this would change existing law and existing requirements because existing law already requires leaseholders to develop leases or give them back to the United States.
  • This subtitle is a reference to the myth that there is 68 million acres with economical deposits that are leased by oil and gas production that oil companies are not using. More information on that myth is available here.

Subtitle F—National Petroleum Reserve in Alaska

• Accelerates leases sales on National Petroleum Reserve—Alaska (NPR-A). [Sec. 162].
  • NPR-A is estimated to contain 10.6 billion barrels of oil but those reserves are spread out over NPR-A’s 23 million acres. This bill does not open up nearby ANWR. ANWR also holds more than 10 billion barrels of oil, but ANWR’s resources can be accessed from a very small area. More information about the NPR-A and ANWR is available here.
  • The bill states that the Secretary must offer leasing in an “environmentally responsible” manner. This section does not define “environmentally responsible” potentially allowing environmental groups to sue to define what this means.

• Requires the President to facilitate construction of a natural gas pipeline from Alaska with unionized labor [Sec. 165-166]
• Bans the export of Alaskan oil. [Sec. 166]

Subtitle G—Oil Shale

There are more hydrocarbon resources in oil shale in the western United States than there are oil reserves in Saudi Arabia. The United States Geological Survey (USGS) has estimated the U.S. has 2 trillion barrels of resource of which 556 billion barrels is recoverable. A better approach would be to remove all impediments to oil shale research and development.

• Allows oil shale leasing for research, development, or production of oil shale only if states specifically pass a law permitting oil shale leasing within their borders. [Sec. 171]
  • This is only a half-measure to developing oil shale. Developing oil shale is expensive and requires experimentation to improve oil shale extraction technology. It is currently not necessary to get state approval for experimental projects, but this bill creates additional hurdles for experimental projects—the type of projects necessary to one day utilize this vast resource.

Title II—Consumer Energy Supply

• Sells 70 million barrels of light grade crude oil from the Strategic Petroleum Reserve and buys heavy grade crude. [Sec. 201]
• It is unlikely this scheme will have any effect on gasoline prices, as evidenced by this information here.

Title III—Public Transportation

From 1993 to 2003 capital expenditures for public transit grew by 100 percent, but transit ridership only grew by 13 percent. By that measure, federal subsidies for public transportation has been a bad investment, but it seems measure throws good money after bad.

• Spends $100 million in new federal spending for public transportation. [Sec. 303]
• Establishes a new pilot program for contracting vanpools. [Sec. 306]
• Authorizes $1 million in spending for public transportation advertising. [Sec. 307]

Title IV—Greater Energy Efficiency in Building Codes

This title usurps the authority to set building codes from state and local governments and institutes new national building codes standards in the name of energy efficiency. The likely outcome of this title will be an increase in the cost of new construction and renovation of buildings in the United States.

• Requires states to revise their building codes to comply with certain energy efficiency standards. [Sec. 401]
• Increases energy efficiency standards for building renovations.

Title V—Federal Renewable Portfolio Standard

This title requires electricity providers (except for state or local governments) to provide 15 percent of their electricity from renewable sources, excluding hydropower, by 2020. Currently, less than 5 percent of our electricity is generated by renewable sources according to the definition in this title. Renewable electricity mandates increase the price of electricity to consumers by forcing them to use more expensive and less efficient sources of electricity.

Title VI—Green Resources for Energy Efficient Neighborhoods

This title contains and myriad of subsidies and directives that interferes with housing markets in the name of “energy efficiency.”

• Creates new subsidies for people who participate in HUD programs to implement energy efficiency programs. [Sec. 603]
• Authorizes $50 million in pilot programs for more energy efficient multi-family dwellings. [Sec. 605]
• Encourages Fannie Mae and Freddie Mac to favor energy efficient mortgages. [Sec. 606]
• Establishes a “duty to serve underserved markets” regarding energy- and location-efficient mortgages for “very low-, low-, and moderate-income families.” [Sec. 607].
• Authorizes $5 million for advertisements about energy efficient mortgages. [Sec. 609]
• Authorizes $10 million for “increasing sustainable low-income community development capacity.” [Sec. 617]
• Creates new requirements for state certified appraisers to consider the value of energy-efficiency features. [Sec. 620]
• Authorizes a $5 million fund for loans to states and tribes to carry out renewable energy sources activities. [Sec. 623]

Title VII—Miscellaneous Provisions

• Mandates each automotive fueling station owned by a major integrated oil company to have at least 1 alternative fuel pump. This section assesses a $100,000 fine for each gas station not in compliance. [Sec. 701]
• While section 701 appears to greatly increase the amount of alternative fuel pumps, this is not true. Only 3 percent of gas stations are owned by major oil companies.
• Authorizes $25 million in funding per year for a “National Energy Center for Excellence” at two universities. [Sec. 702]

Title VIII—Energy Tax Incentives

This final title is a hodge-podge of additional subsidies for politically-preferred and economically expensive energy projects, partially paid for by a major tax increase on oil companies. A recent IER analysis found that this could cost America over half a million jobs and tens of billions in lost household income and almost $200 billion in total economic output.

• Extends renewable energy tax credits. [Sec. 801]
• Creates new tax credits for “marine renewables.” [Sec. 802]
• Adds credits for pet energy projects. [Sec. 803]
• Extends credits for residential renewable energy projects. [Sec. 804]
• Authorizes $2.25 billion in tax credits integrated gas and combined cycle projects and advanced coal-based generation. [Sec. 811]
• Increases tax credits for coal gasification projects by $150 million. [Sec. 812]
• Increases the coal excise tax. [Sec. 813]
• Commissions the National Academy of Science to devise a taxation scheme to tax greenhouse gases [Sec. 815]
• Increasing subsidies for biodiesel and renewable diesel [Sec. 822]
• Creates new subsidies for plug-in automobiles [Sec. 824]
• Implements tax breaks for heavy duty trucks with idling reduction devices and thick insulation [Sec. 825]
• Implements special payroll tax breaks for governments around New York City [Sec. 826]
• Institutes special benefits for bicycle commuters [Sec. 827]
• Increases tax credits for alternative fuel vehicles [Sec. 828]
• Subsidizes loans for natural gas refueling at gasoline stations [Sec. 829]
• Subsidizes bonds for local governments to implement pet “green” projects [Sec. 841]
• Extends credits for biomass heating [Sec. 842]
• Extends credits for energy efficient commercial buildings [Sec. 843]
• Subsidizes for energy efficient appliances [Sec. 844]
• Institutes tax breaks for smart meters and smart grid systems [Sec. 845]
• Extends tax breaks for green buildings [Sec. 846]
• Retains the Gang of Ten’s tax increases on oil companies by ending section 199 credits for oil companies [Sec. 851]

National Association of Convenience and Petroleum Retailing, Who Sells Gasoline in the United States?, http://64.233.169.104/search?q=cache:3SO5I9pKI18J:cstorecentral.com/NR/rdonlyres/e4byydgy5rac32l3xw2ajs53o2jolqw73vsi6roq5dag2vh2hzrx4flprwtlvzgwcjukq434wwsesxqwzspln4ynzxh/Who%2BSells%2BGasoline%2Bin%2Bthe%2BUnited%2BStates.pdf+what+percentage+of+gas+stations+are+owned+by+major+integreated+oil+companies%3F&hl=en&ct=clnk&cd=2&gl=us&client=firefox-a

According to the summary released by the Speaker of the House, the new “compromise” would:

• Institute a permanent ban out of 50 miles.
• Permit leasing between 50 and 100 miles offshore if a State ‘opts-in’ to allow leasing off its coastline by enacting state law.
• Continue the ban on energy production in the Eastern Gulf of Mexico.
• Lift the ban on energy production beyond 100 miles.

To the casual observer, this certainly seems like a reasonable compromise.  Unfortunately, it’s not.  It’s a bait and switch.  Here’s why:

• A permanent ban out to 50 miles locks-up the largest known offshore energy reserves, including those off the coast of California, that are close to existing infrastructure and be produced the fastest.
• The plan permanently bans access to 97 percent of the 10.527 billion barrels off the coast of California.  It allows the State to decide whether to produce just 3 percent, or 287 million barrels, which is highly unlikely anyway.  The remainder…10.24 billion barrels…is off limits.
• Keeping the Eastern Gulf of Mexico off limits also denies access to large reserves located close to existing pipeline infrastructure.  The plan keeps an estimated 3.65 barrels of oil and 22 trillion cubic feet of natural gas off limits
• The offshore areas surrounding the State of Alaska are not currently subject to any bans.  This plan appears to institute a 50-mile ban around energy-rich Alaskan shore for the first time ever.  Energy exploration there is just beginning.
• While the plan enables the states to “opt in” and produce energy between 50 and 100 miles, it lacks a revenue sharing mechanism, thereby making it highly unlikely that state would chose to do so.  In the case of energy production on federal lands – both onshore, and offshore in the Gulf of Mexico, states split production revenues with the federal government.  Denying the states this incentive effectively prevents new production.

Of the 18 billion barrels of oil locked-up by current bans, the new plan allows access to less than four, and perhaps as little as 2 billion barrels.  And without revenue sharing, even the four states most lilely to allow production – Virginia, North Carolina, South Carolina, and Georgia – would not do so.

For Comparison: The new plan may make available 2 billion barrels of oil available, beyond 100 miles of the shores on the East Coast.  Opening 2000 acres of ANWR’s northern coastal plain – onshore, 70 miles from an existing pipeline – would yield the United States at least an additional 10.4 billion barrels oil.

The Bottom Line: It appears as though the new plan would take the America from banning access to 85 percent of the OCS acreage surrounding the lower 48 states to banning access to roughly 90 percent of its most-promising and easy-to-produce offshore energy reserves.  By opening only the farthest reaches of the OCS where no infrastructure exists, denying the states a share in the revenues, and locking up the reserves that are closest (and largest), this proposal ensures that (1) new production would be sparse, at best, and (2) new supplies would not come online for a long, long time.  Combine these facts with the plan’s new taxes and government handouts, and the American consumer gets little more than an expensive energy bridge to nowhere.

Click here for charts which illustrate the points above.

September 9, 2008

The Honorable Harry Reid
Majority Leader
United States Senate
S-221, The Capitol
Washington, DC 20510

The Honorable Mitch McConnell
Minority Leader
United States Senate
S-230, The Capitol
Washington, DC 20510

Dear Leaders Reid and McConnell:

I write today in my capacity as president of the Institute for Energy Research (IER), a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets, to express my concerns about the so-called Gang of Sixteen’s New Energy Reform Act (New Era) of 2008, led by Senators Kent Conrad (D-ND) and Saxby Chambliss (R-GA).

While we applaud efforts to reach political “compromise” on the energy issues facing our country, this plan will only create a false sense of energy security.  The American public has been loud and clear in their support for more drilling and more domestic energy production.  And when they discover that this initiative does virtually nothing to decrease our reliance on imports from unstable nations like Venezuela and Nigeria, they will want answers.  This hollow plan is a tremendous missed opportunity that actually puts more of our oil off limits, while raising taxes and increasing government subsidies.  The American people will come to realize that this pass-the-buck plan does not guarantee that any new oil is produced, or that any new exploration can even be conducted for that matter.

The political logjam over solving America’s energy woes comes down to two competing views: some policymakers want to remove federal restrictions that prevent onshore and offshore energy production, while others believe large tax expenditures and R&D subsidies are necessary to encourage the nation’s transition away from fossil fuels altogether.  The charm of the New Era plan is its apparent compromise:  it relaxes some restrictions on offshore drilling but supplements this concession with new and generous expenditures for alternative fuels and alternatively-fueled vehicles.  Unfortunately, this act of political theater does nothing to reach the full potential of America’s energy resources.

The appearance of a compromise in the ‘New Era’ plan is very misleading, as it would deliver for consumers and the economy much more in terms of new tax burdens than it would new energy supplies.  The New Era plan offers only tepid and potential increases in offshore production in exchange for a $30 billion tax hike on producers, which will surely be passed on to consumers.  The net effect will very likely result in an overall reduction in U.S. oil production and even higher energy prices.  Furthermore, the New Era Plan contains $84 billion in spending measures designed to “encourage” the development of potential energy sources and technologies that are both uneconomical and impractical today.  If these sources were commercially viable, they wouldn’t need billions of dollars in new or additional government subsidies in the first place.

The New Era plan also falls short with respect to expanding access to the energy-rich outer continental shelf (OCS).  Energy exploration and production is currently outlawed on 85 percent of the OCS surrounding the lower 48 states.  And while the New Era plan does extend access to a limited area in the Gulf of Mexico, it enables only four coastal states the right to explore and produce if and only if their state legislatures agree to do so.  Even then, these four states – Virginia, North Carolina, South Carolina, and Georgia – would still be prevented from exploring within a 50 mile buffer zone off their coasts.  Some of the most lucrative known deposits are located within this zone, such as the Gulf of Mexico’s Destin Dome.  What is most troubling about the New Era position on drilling, however, is that it appears to replace the current moratorium – which must be annually renewed by Congress – with a permanent ban.

In total, if the ‘New Era’ plan were to become law, energy exploration and production would still be banned, permanently, on roughly 78 percent of the entire OCS surrounding the lower 48 states.  Taxpayers own the OCS lands and the energy resources that lie beneath them, and we at IER believe their government owes them more than a 7 percent solution to skyrocketing energy prices.

Moreover, the bill painfully misses the mark on the principal reason behind our current energy supply shortage.  The federal government owns roughly 2.4 billion acres of lands – an area larger than the land mass of the United States and larger than all other nations on earth, except for Russia and Canada.  Of these lands, which belong to the American public, only about 4% have been leased for energy production.  This circumstance is mainly due to 40 years of land use management laws that have de facto or de jure limited access to our own resources.  That’s why those who repeat ad infinitum that “the U.S. only has 3% of the world’s proven oil reserves” are not telling the whole story.  America’s current reserves stand (artificially) at a mere 3 percent of the world’s total only because government policies have effectively prevented and/or hamstrung energy exploration on roughly 96 percent of the taxpayer-owned lands here at home.

In short, the federal government has placed an embargo on our national energy supplies and consumers are paying unnecessarily high energy prices as a result.  The New Era plan does little to rectify this, and depending on the final language of the bill, may even make it worse.

Because energy production on federal lands nets the U.S. Treasury tens of billions of dollars in the form of corporate income taxes, bonus bids, royalties and land rents, IER also believes that consumers should not have to bear the costs associated with this or any other legislative solution.  The New Era Plan quite simply takes taxpayer money in order to achieve inefficient outcomes.  Consider the $20 billion earmarked for converting 85 percent of the nation’s cars to run on non-petroleum fuels within 20 years.  With 250 million vehicles on the road, a conversion rate of less than $100 per vehicle makes this particular proposal little more than a symbolic gesture.

The economy is teetering on the brink of recession and energy prices are still at near record high levels.  In this difficult time for American families, the last thing the country needs is $84 billion in new taxes and spending that will be dispersed to inefficient, but politically popular, sources of energy production.  By penalizing consumers with higher prices and more imported energy, and subsidizing alternative technologies that currently cannot survive in the open market, the New Era plan will harm consumers while squandering scarce funds in exchange for very little new energy.

In contrast, a much more economically sensible plan – simply letting the current OCS ban expire at the end of this fiscal year – would provide far greater access to both onshore and offshore energy resources, lower energy prices and bring in billions of dollars in extra revenue for the U.S. Treasury.  That’s a win-win-win scenario for America.

The Gang of Sixteen’s New Era plan is yet another act of political expedience at a time when the American public is demanding real energy solutions.

Sincerely,

Thomas Pyle
President
Institute for Energy Research