As the price of gasoline and the myriad products that utilize petroleum in their manufacture rises, Americans are going to ask why the Congress has resisted accessing the billions of barrels’ worth of oil and natural gas in our offshore continental shelf.
As the realization of how dependent we are on the importation of Middle Eastern oil, plus the fact that U.S. dollars fund avowed enemies such as Iran and, in South America, Venezuela, Americans are going to ask why we do not tap our own Alaskan and offshore resources.
As a matter of national security and as a significant boost to the American economy, it makes no sense to not assure and achieve a higher level of energy independence.
So why, in mid-May, did the House of Representatives reject an end to the quarter-century ban on oil and natural gas drilling in 85 percent of America’s coastal waters?
At the time, House Democratic Leader Nancy Pelosi, issued a statement that both defied logic and flatout lied, saying the vote against offshore drilling was great victory for consumers who have seen prices rise prodigiously. “In the meantime, working families are turning their wallets inside out to fill their gas tanks. It is outrageous to ask families to dig even deeper to subsidize oil drilling on undersea lands that belong to the American people.”
Americans are paying more because the global price of a barrel of oil has been increased by fears of military conflict in the Middle East, probably initiated by Iran.
Americans are paying more because, in 2005, Hurricane Katrina and other hurricanes destroyed 115 oil platforms and damaged another 50, along with 183 pipelines in the Gulf of Mexico and refineries in Louisiana. Despite this, the U.S. Mineral Management Service (MMS) reported that there were no significant oil spills from offshore platforms and no oil reached the coastline.
And, no, Americans do not “subsidize” oil drilling. Pelosi’s boogeyman of “Big Oil.” Indeed, as a report from the U.S. Energy Information Administration noted in 2005, the MMS “collects and disperses billions of dollars in revenue from the sale of mineral leases. Offshore leases brought in revenues of $5.2 billion in 2000. This represents 73.1 percent of the $7.1 billion in revenues collected from all Federal and American Indian mineral leases that year.”
As for those big profits enjoyed by “Big Oil”, it’s worth noting that a single offshore drilling platform costs about $100 million dollars to build and that comes after the equally enormous costs of exploring for oil and natural gas resources. And “Big Oil” not only pays big taxes on its profits, but also employs thousands of Americans in the process.
According to the Consumer Alliance for Energy Security, the Offshore Continental Shelf (OCS)–85 percent of which is off-limits to exploration–is estimated to have enough natural gas to heat 100 million homes for the next 60 years and enough oil to drive 85 million cars for 35 years. Thanks to the vote in the House, it remains off-limits.
When the House of Representatives voted to open the Arctic Refuge to oil drilling in late May, Rep. Pelosi again issued a statement decrying “the same, tired ideas on energy such as opening the pristine Arctic National Wildlife Refuge to oil drilling. We should not sacrifice the Arctic coastal plain, one of America’s last truly wild places, for the sake of a small amount of oil.”
Small? Well, if anyone considers an estimated 10.4 billion barrels to the nation’s oil supply “small”, then one wonders what they consider large? The vote was 225 to 201. In truth, only 2,000 of the nearly 20 million acres of ANWR would be needed for oil and gas production, contributing billions in tax revenue, and creating or sustaining thousands of American jobs.
Opening ANWR and the Offshore Continental Shelf would bring many benefits. Put simply, more oil and natural gas means lower prices. With it come greater national security and more independence from the vagaries of Middle Eastern politics.
Speaking for the Democrats and echoing the cries of environmental organizations opposed to energy independence, Rep. Pelosi called for “home-grown renewable energy, innovative technologies, and efficient use of energy in our homes, vehicles, workplaces, and factories.” Blah, blah, blah!
This is the kind of empty environmental rhetoric that has left Americans paying higher prices for oil and natural gas than ever before. It posits the use of wind and solar energy on a scale that is neither viable, nor realistic because neither will ever produce enough energy to replace conventional sources.
Rep. Pelosi said that, “America’s farmers will fuel our energy independence”, apparently by “rapidly expand[ing] the production and distribution of biofuels, encourage[ing] the deployment of new engine technologies for flex fuel, hybrid and biodiesel vehicles; and encourage[ing] cutting-edge research to develop the next revolution in renewable energy.”
The notion that America or any of the other industrialized nations of the world will be able to depend on energy sources from corn and other agricultural products in the near future is absurd. Moreover, it ignores the vast reserves of known and yet to be discovered of oil and natural gas that exist.
The problem, of course, is getting Congress to permit America to actually access its own resources! The effort to open a relatively small portion of ANWR has been stalled for three decades. The Outer Continental Shelf Lands Act was passed in 1953! It authorized the Department of the Interior to lease defined areas for development. According to the Energy Information Administration, “The offshore has accounted for about one-quarter of total U.S. natural gas production over the past two decades and almost 30 percent of total U.S. oil production in recent years.”
“In 2003, MMS estimated that there was 406.1 trillion cubic feet of remaining undiscovered technically recoverable natural gas and 76 billion barrels of oil in U.S. offshore regions.”
So why, in 1990, did former President George Walker Bush enact a blanket moratorium on all unleased areas offshore of North and Central California, Southern California except for 87 tracts, Washington, Oregon, the North Atlantic coast, and the Eastern Gulf of Mexico coast? The moratorium was extended in 1998 by former President Clinton through 2012.
Why has the Congress of the United States refused to permit the exploration and extraction of our nation’s own natural gas and oil resources? Why does a coalition of 27 of the nation’s leading environmental organizations continue to campaign against access? And why do ordinary Americans have to remain at the mercy of Middle Eastern nations and major suppliers like Venezuela?
There are literally trillions of cubic feet of natural gas and billions of oil barrels extant in the offshore continental coast of the United States. Every day on 4,000 offshore platforms natural gas and oil is extracted from Federal waters in an “environmentally sensitive” manner.
There is an extremely dangerous game being played by the White House, Congress, and environmental organizations that is placing the economy and the security of America at great risk. If energy independence is what this nation needs–and it does–it is ours for the taking.
Since May 2003, the United States, joined by Canada and Argentina, has pursued a World Trade Organization (WTO) dispute settlement process against the European Union (EU) regarding its de facto moratorium banning biogenetically altered food crops.
The main opponents of such crops include the usual “environmental” organizations for whom any progress toward eliminating famine and disease is regarded as an increase in the Earth’s human population. If you’re a member of the Earth Liberation Front, Friends of the Earth, Greenpeace, the Center for Food Safety, and the Organic Consumers Association, among others, the scientific advances of biotechnology are bad news.
If you are a member of the human race, however, genetically-modified foods (GMOs) means (1) an increase in agricultural productivity wherever such crops are grown; (2) crops that can resist the effects of drought, a common cause of crop failures; (3) the bioengineered increase of nutrients and a decrease of saturated fats in various food crops; and (4) the reduction of the use of insecticides and herbicides. Farmers will tell you GMOs, in addition to reducing the amount of water needed to grow certain crops, contribute to the reduction of soil erosion caused by agriculture.
So why is the European Union refusing to permit the importation and use of GMOs? Alex Avery of the Hudson Institute probably said it best when he described it as “technological apartheid.” While the Europeans are well fed, the fate of people in Africa and other Third World nations are of little importance to them for purely economic reasons. Avery points out that, “More than half of the EU’s collective budget is gobbled up by farm subsidy costs, so Europe has done all that it can to avoid productivity-enhancing technologies for cost savings.”
In the interest of keeping GMO crops from America and other nations out of Europe, the EU has declared that such crops may pose a health risk. They say that genetically modified crops, if grown in Europe, might “contaminate” organic crops. Baloney! For all the reasons stated above, GMO crops not only do not pose a threat to organic crops, except in terms of greater yields, they hold the potential for the virtual elimination of famines that cause the deaths of millions worldwide every year.
The EU represents the fourth largest market for U.S. agricultural exports. The earnings were projected by the U.S. Department of Agriculture at $7 billion for 2005, nearly 12% of all the U.S. agricultural exports. The main export products are soybeans, tobacco, and animal feed, including corn gluten.
To date, the EU has not offered a scintilla of scientific evidence to justify the market bans imposed by some member states. The whole point of the World Trade Organization is to end frivolous bans in order to facilitate, well, world trade! The WTO even has an Agreement on the Application of Sanitary and Phytosanitary Measures that requires “sufficient scientific evidence” to support trade-restrictive regulations on crops and food products.”
Speaking in May 2003, President Bush said, “Our partners in Europe
If you own stock in Wal-Mart Stores, be afraid — be very afraid. Yes, it wasn’t all that long ago that I was recommending buying shares of the giant retailer. But things have changed.
Right after I recommended Wal-Mart last October it rallied by as much as 15%. But now it’s given most of that back, even as the Dow Jones Industrial Average — of which Wal-Mart is a part — has climbed to within shooting distance of all-time highs. And it’s not because the Christmas selling season turned out to be good rather than great. It’s because of politics.
On Thursday, the Maryland legislature decided to play Robin Hood with shareholders’ money. After they targeted Wal-Mart for a massive new tax, the stock’s market value dropped by $1.5 billion in a span of 90 minutes. But our wannabe Robin Hoods blew it. That money robbed from the rich isn’t going to the poor.
Here’s what happened Thursday. The Maryland General Assembly voted to tax Wal-Mart by the amount which the company’s expenditures on employee health care falls below 8% of payroll costs. That’s about twice as much as Wal-Mart now spends on health benefits for its 15,000 Maryland workers, so the tax is going to be hefty, indeed.
Similar taxes are now being contemplated by the legislatures of 30 other states. This could get very, very ugly for Wal-Mart.
You’re probably wondering how a state could single out just one company for such a tax. Indeed, Article I, Section 9 of the US Constitution forbids “bills of attainder” — laws aimed at single individuals. But Maryland has a trick to get around that. The tax is on any firm that has more than 10,000 employees. It’s just sheer coincidence, you see, that Wal-Mart is the only company in Maryland with more employees that doesn’t already spend 8% on employee health care.
The idea is to force Wal-Mart to spend more on health benefits. But until and unless it does, the tax dollars will go to the government of Maryland, not Wal-Mart’s workers. And even if Wal-Mart ends up doubling its health expenditures, chances are that will just end up causing Wal-Mart to pay lower wages in the future than it would have otherwise.
Think about it. A company pays its employees a compensation package that consists of cash plus benefits, and in total is an amount that’s fair for the work that’s being done. If a law comes along that forces the company to pay out more for benefits, that doesn’t change the total value of the package if wages subsequently go down.
Wait, haven’t I contradicted myself? If total compensation isn’t going to change, then how is Wal-Mart going to get hurt by this new tax? How would the company be hurt even if 30 more states adopted it?
The answer to that is simple — and sad. Wal-Mart would be hurt because its employees would be hurt. Right now 1.3 million Americans have chosen voluntarily to work for Wal-Mart because, overall, they like the package of wages and benefits that they get. If laws are passed that force Wal-Mart to offer benefits instead of cash, it will be harder for Wal-Mart to attract and retain workers.
For example, consider the fact that Wal-Mart employs a disproportionate number of older Americans — people in retirement from their lifetime work, looking to pick up a little extra money or just something to do. Those people are already on Medicare, so why should they give up a penny of wages for Wal-Mart health benefits that they don’t even need?
If Wal-Mart finds it more difficult to attract and retain workers, then it could always simply pay more. But that’s easier said than done. Wal-Mart is a low-margin player in a ruthlessly competitive field. As things stand now, the company only earns profits of about $6,000 per employee (which means, by the way, that employees make much more money on Wal-Mart than Wal-Mart makes on Wal-Mart). If wage costs go up even a little bit, margins that are razor thin already start to vanish altogether.
If that happens, then Wal-Mart stops growing. Instead of adding more than 100,000 new jobs every year as it currently does, it will someday add none. Those lucky enough to get a job at Wal-Mart will make a few extra bucks. But the company that now does more than just about any other to provide entry-level jobs for young, unskilled Americans getting started in their working lives will become a closed door.
The other reason why Maryland’s tax is so dangerous for Wal-Mart is that it’s not really about health benefits at all; rather, it’s about unions. Wal-Mart has successfully resisted unionization, and it’s been able to do so by keeping its nonunion employees so happy that they don’t feel the need for collective bargaining. So the unions are doing everything they can to make things hot for Wal-Mart, including lobbying state legislators to punish the company with new taxes under the guise of improving employee health care.
The ultimate downside for Wal-Mart isn’t just a new tax — it’s the potential unionization of its workers. Set aside whatever noble principles you may have about the virtues of unions. The reality is that Wal-Mart has become the colossus that it is because of its genius for streamlining and efficiency, computerizing and modernizing every single element of the “value chain” that comprises today’s retailing. The inflexibility of union labor is, simply, anathema to Wal-Mart’s whole business model, and would in the end destroy it.
So here we are, seriously talking about threats that could destroy America’s largest employer, and decimate billions of dollars of shareholder wealth. And the ultimate irony is that theses risks are all being set in motion under the banner of improving health benefits that are already excellent.
Yes, it’s true: Wal-Mart already pays about as much, per worker, for health benefits as the average retail company. And more than 80% of Wal-Mart’s employees are eligible for those benefits, compared to about 60% for the average retailer.
Do you really think American innovation has improved since federal and state governments went after Microsoft on antitrust grounds? If you ask me, the technology economy was a heck of a lot more vibrant back in 1999 when Microsoft was still, supposedly, a monopoly. Its stock price sure was.
This is no different. The retail economy won’t be any better when government is done destroying Wal-Mart. Shareholders better watch out!
The above is an “Ahead of the Curve” column published January 13, 2006 on SmartMoney.com, where Luskin is a Contributing Editor.
Of all the politicians complaining about the profits and practices of America‘s wicked oil companies, few can top Sen. Maria Cantwell (D-Wash.).
Among her latest ventures is a demand that the oil company executives who testified Nov. 9 be brought back to the Senate, this time under oath. In a letter to the chairmen of the two committees that held the hearings, she claimed that the CEOs “failed to answer the simple questions asked of them. This is unacceptable. If we’re going to get to the bottom of high gas prices, we need complete answers that Americans can trust.”
Of course, “getting to the bottom” of price rises isn’t difficult. Energy exists in a global commodity market. Demand is rising from China and India, as economic growth brings a better life to more than two billion people, and supply has been constrained by OPEC, Hurricanes Katrina and Rita and absurd policies that restrict domestic drilling and the construction and expansion of pipelines and other energy infrastructure.
Cantwell has opposed such supply-boosting policies in the United States, lately blocking measures that would have benefited her own state while increasing tanker traffic in Puget Sound.
Another sure way to reduce supply is to pass laws to stop “price-gouging” in fuel costs — legislation such as Cantwell herself has introduced — or to exact special “windfall” taxes on a few large energy companies. Windfall taxes have been tried before, in the early 1980s, and, according to a Congressional Research Service study, they had a predictable effect. The taxes cut production by U.S. energy companies and increased our reliance on foreign oil. So much for “Energy Independence 2020,” the Democrats’ organization that Cantwell chairs.
Cantwell voted “yes” on Nov. 17 to an amendment (No. 2626) that would have imposed “a temporary windfall profits tax on crude oil.” The amendment failed, but the irony lingers because, as it turns out, Maria Cantwell’s life story has revolved around her own windfall profits.
Back in 1992, when I was editor of the congressional newspaper Roll Call, a young woman from Indianapolis named Maria Cantwell, who had spent her life working on campaigns (at age 24 she was out helping Jerry Springer run for governor of Ohio) and serving in government, won a U.S. House seat from a Seattle district.
At the time, according to the Associated Press, Cantwell earned $33,789 in the year before she came to Congress, and she had a net worth under $15,000.
The House provided her with a $10,000 raise, but, alas, she was washed away in the Republican tsunami of 1994. She emerged from Congress practically broke, but, luckily, with some nice friends.
One of them, Rob Glaser, a former Microsoft employee, “recruited the out-of-work politician for his new company, Real Networks,” according to The Industry Standard.
These were the lovely days when many high-tech firms were handing out stock options like crazy, and Glaser showered them on Maria Cantwell. A few years later, her Real Networks shares were worth, according to a definitive 2001 article in the Seattle Weekly, “roughly $80 million.”
She was rich — so rich that she could run for Senate, in a great Democratic tradition followed that same year by Sens. Mark Dayton (D-Minn.), the department store heir, and Jon Corzine (D-N.J.), former CEO of Goldman Sachs.
She used $9.2 million of her own money in the campaign, according to the Seattle Post-Intelligencer. About $6 million came from stock sales and the rest from loans using her stock as collateral.
Cantwell’s Senate seat itself is a windfall profit. Without the lucky timing of her plunge into Real Networks, it’s unlikely she would be a member of the world’s most exclusive club today.
As fortune would have it, just as Cantwell started her Senate campaign, Real Networks was hitting a new high ($93 a share, adjusted for splits). By February 2001, after she was safely sworn in, the stock had fallen to $8, in which neighborhood it’s pretty much been ever since (Friday’s close was $8.89).
So, if Cantwell had run first in 2002 instead of 2000, she couldn’t have mustered $9 million from her Real Networks stock to put into the campaign.
Maria Cantwell is truly the Senator From Windfall, but I wouldn’t want to slap some kind of special tax on her just because she got a bit lucky — like her colleague, Sen. Judd Gregg (R-N.H.), another backer of windfall profits, who won $853,000 in the Powerball lottery in October.
But let’s contrast the windfalls of Cantwell and Gregg with the increased earnings of integrated oil and gas companies in the third quarter of 2005. Those firms use a big chunk of their profits each year to make huge long-term capital investments in the risky business of exploring for energy and producing it. (ExxonMobil’s capital expenditures over the past 10 years have roughly equaled its reported earnings.) The price of oil, like that of any other commodity, bounces around, so some months oil companies make more from their upstream operations than others.
Are such profits a windfall? Of course not. They are the result of serious investment and research and development. But Senators like Cantwell and Gregg — and others who should know better — continue to try to exact special tribute from the same companies that are trying to boost America‘s energy supply.
The latest windfall profits tax proposals come in new guises — a change in LIFO inventory rules and a limit on the foreign tax credit. But the effect would be the same as the WPT disaster of the 1980s: to cut supply and increase dependence on oil produced by non-U.S. companies, many owned by nations like Venezuela and Saudi Arabia.
That would be a windfall loss for the public.
Originally published in Tech Central Station.
The first rule in government, as in medicine, is the Hippocratic one: Do no harm. Unfortunately, Congress is about to do severe harm to the U.S. economy if it fails to act in the next few months to stop three huge automatic tax increases.
Let me shift metaphors. The increases — 133 percent for the rate on dividend income, 33 percent for the rate on capital gains and what amounts to an infinite increase in the coming rate on what you pass on to your heirs — comprise a ticking time bomb.
The dividend and capital gains rates were reduced to 15 percent in 2003. The estate (also called death or inheritance) tax got an overhaul in 2001, with gradual reductions over 10 years and complete elimination set for 2010.
But the dividend and capital gains cuts turn into pumpkins (reverting to their old top rates of 35 and 20 percent, respectively) at the end of 2008. And in 2011, the pre-2001 estate tax reappears. Since backers lacked 60 Senate votes, all three of the cuts were only temporary.
The estate-tax cut can wait a bit for an extension, but the dividend and capital gains tax cuts can’t. My guess is that, early in 2006, the prospect of the big increases will weigh on markets. Investors will start selling stocks and other assets to take advantage of the expiring 15 percent capital gains rate, driving down prices.
Academic research has found that the dividend cut, by increasing what America‘s 57 million investing families can keep after taxes, boosted stock prices considerably. A paper for the prestigious National Bureau of Economic Research by Alan Auerbach and Kevin Hassett concluded that the cuts “had a significant impact on equity markets” — a broadly positive impact. Take the cuts away, and stocks will almost certainly head in the opposite direction.
As for the estate tax: It’s hard to say if the tiny changes so far have had an effect, but the elimination of all taxes at death certainly will. Surveys show the estate tax is the most broadly despised federal tax, hated even more than the income tax. Americans of both parties think it’s unfair to tax income once on receipt and again at death.
A good compromise — one that would likely have become law if it weren’t for the post-hurricane political meltdown — would have been to exempt, say, the first $5 million of an estate from all taxes (a figure that would be indexed to inflation) and tax the remainder at 15 percent.
That’s the golden number: 15 percent. It’s low enough that — for income and investments — it doesn’t get in the way of people’s decisions about working hard, saving and investing more and generally doing the right thing economically.
There’s not the slightest doubt that the tax cuts enacted in 2001 and 2003 (including those on personal income) played a big role, along with low interest rates, in keeping the recession short and shallow and in keeping the U.S. economy the most robust in the world. Today, we’re growing at better than 3.5 percent, compared with about 1 percent for Germany and France. Our unemployment rate is about half theirs.
But what about the budget deficit? It’s a non-issue. First, the deficit is small (2.6 percent of our $12 trillion-plus GDP), and it has had no effect on interest rates or the value of the dollar, which, despite Warren Buffett’s prediction (which cost his company a billion bucks), has risen strongly in 2005. Second, America‘s fiscal problem is too much spending. The problem is, emphatically, not the way that the funding for that spending is allocated, between taxes and borrowing. At these low interest rates, we should, in fact, be borrowing even more.
In a perfect world, an extension of the Big Three cuts could be part of comprehensive tax reform, along the lines recently recommended by the Mack-Breaux Commission. Let’s end tax breaks on real estate, health insurance, state taxes and other preferences and lower all rates to the 15 percent level. Then we’d see fantastic economic growth in America, just in time to engage surging China, India and Japan.
But I’d settle for a simple Hippocratic move: extend the dividend and capital gains cuts by April, then force a vote on an estate-tax compromise just before the 2006 elections. Defuse the ticking time bombs.
James Glassman: Energy prices have been rising sharply, partly because of Hurricane Katrina and Hurricane Rita. We decided to talk to probably America’s number one expert on energy to try to separate some of the hysteria and the myths from the truth.
Dan Yergin is the Chairman of Cambridge Energy Research Associates. He’s also a Pulitzer Prize winner for his book, “The Prize: The Epic Quest for Oil.” He’s also the author of “The Commanding Heights: The Battle for the World Economy,” which received wide attention for analysis and narrative and was made into a six-hour documentary by PBS. And he’s also the recipient of the United States Energy Award for lifetime achievements in energy and the promotion of international understanding. Dr. Yergin received his BA from Yale and his Ph.D. from Cambridge University.
Dan, Speaker of the House Dennis Hastert today said that he wanted to pass a law that required oil companies to reinvest their profits in increasing refinery capacity in the United States. What would the impact of increasing refinery capacity in the United States be?
Dan Yergin: There is a tendency to think that the refining problem is a U.S. problem, that we don’t have enough refining capacity. The problem is a global one and it is really more concentrated in Europe and in Asia and we are feeling the impact of it. In Europe, half the new cars sold are diesel and they don’t have enough of what is called conversion capacity in the refineries to turn out that fuel and there is also rising demand in China for that type of fuel. So that’s what really put the pressure on the refining system. In the United States we could certainly use expanded capacity to process difficult crudes, although we are kind of the world leader in that as it is.
The big problem is not a lack of cash; it is the regulatory and permitting process that makes it very difficult to do almost anything new and significant in refineries and certainly makes it almost impossible to build a new refinery.
Glassman: Speaker Hastert has called on oil companies to invest in America’s energy infrastructure but hasn’t Congress kept the hands of energy companies tied to some extent by limiting their ability to develop domestic resources?
Yergin: Yes, the capital is there to invest. It’s a question of access and opportunities. You see enormous sums, billions of dollars go into the off-shore Gulf of Mexico because you can drill there. You have seen astonishing improvements in technology. But there is no point drilling where there are no oil and gas resources, and we do also have a lot of resources that are closed off, for instance, off the east coast. I mean it is a strange situation. We can drill off the Gulf Coast but not off the East Coast and yet there may be very extensive resources as well.
Glassman: There is a great deal of concern about rising natural gas prices — something that Federal Reserve Chairman Greenspan pointed out in 2003. We have seen prices go from $3.00 a little bit before he made his speech to $13.00 or $14.00 today. Some people believe – including, I think, Chairman Greenspan — that it’s not just a question of developing U.S. resources, but being able to import foreign resources which we can’t do now with a lack of LNG terminals. Are those LNG terminals — liquefied natural gas terminals — going to get built?
Yergin: I think that we have gone from plans and proposals for just a few natural gas re-liquefaction facilities to literally dozens, and we think that at least four, six, something seven like that — maybe eight — will end up being built and that we will have the capacity to import LNG. The big question, of course, is where are they going to be built? Are they going to tend to be built on the Gulf Coast, or will they be spread out? And will at least one or two of them be on the East Coast, which is near the demand centers, near where people are heating their homes with natural gas? And that is a question not of national politics but of local politics.
Glassman: The statement that Speaker Hastert made just recently was perhaps in response to growing sentiment on the Democratic side for a windfall profit tax on oil companies. This has been tried before. Is it effective at reducing oil prices?
Yergin: What a windfall profits tax does is introduce a lot of distortions. It reduces investment, it increases a sense of political risk and it doesn’t achieve the goal that is intended, if it is to facilitate investment in new sources. It obviously responds to a political demand, but it has the opposite effect of increasing supply. It really will lead to decreased supply, not only here, but it will be something that will have an impact around the world. And this is a time when you want to increase and encourage investment, not provide disincentives to investment.
Glassman: There is a lot of the use of the term ‘energy independence’ in Congress. Is it possible for the United States to stop using foreign oil and turn to domestic resources? What does energy independence mean exactly?
Yergin: You know, that is something that I have puzzled over. It has been part of the political lexicon now since the 1970s. For a long time, during all this period when we have been talking about energy independence, our oil imports have gone up from being about a third of what we import to close to 60 percent, and will probably continue to rise as our consumption rises. And we are entering into the era of where we have built an enormous amount of new natural gas demands in terms of electric power usage — building lots of gas fired electric power plants — and we will be importing much more natural gas in the form of LNG. What we need to do is say, well, how do we manage our role in a global economy in terms of energy, make sure we have diversified sources to make sure that the development is going on around the world that we can call upon, and also trying to reduce unnecessary regulatory barriers or delays, which is so characteristic of the system of development in the U.S., so we can maintain a vibrant, domestic industry; but recognizing that we are part of this larger picture and pursuing all those other things like alternatives and renewables and certainly conservation.
Glassman: If we were less dependent on foreign sources for oil, let’s say, would the price of gasoline drop?
Yergin: Really there are two things that will determine the price of gasoline. One is how much spare production capacity there is in the world. In other words, what is the balance between the ability to produce oil and consumption? Right now it is very tight and that is the number one reason that we see these high prices. The second reason is the lack of the kind of what is called deep conversion capacity in refineries to make the type of products like diesel fuel that the world increasingly wants. So those two things are interacting. If our demand went down, if we became more energy efficient — which I think is a highly desirable goal — that we get more miles to the gallon and then if that took some pressure off the world market, you know, all other things staying constant, then we would see lower prices.
Glassman: So there is a lot of political pressure building and you have heard about a windfall profit’s tax or Senator Lieberman is trying to get energy independence from foreign oil and now we have heard about what Speaker Hastert wants to do. I mean, what would you do in response to this political pressure? Is there anything that can be done on the public policy side?
Yergin: I think that there are two things that we can do as we are heading into the winter that would be significant. The first thing is that we really ought to make sure that people really have the information and the knowledge about the minor changes in behavior that they can make that will not only save them money but in a total sense would reduce natural gas prices and take the pressure off. If all of us this winter reduced our thermostats by two degrees, homeowners, commercial establishments, we would save more natural gas than has been lost because of Hurricane Katrina.
The other thing we ought to do is not wait until a cold winter, if we do have a cold winter, and address now how to build flexibility into some of these environmental regulations so that for instance, in an area where a utility is only allowed to burn oil four days a months, perhaps in January if there is really pressure on prices they can burn oil eight days a month and reduce their consumption of natural gas. And there is no shortage of residual fuel oil, the type of oil that does get burned in utilities, so it wouldn’t add to the price pressure on oil but it would take pressure off natural gas.
Glassman: Well thank you very much Dan Yergin.
As you can see, Dan Yergin is separating the myths from the reality. The political overreaction could actually be counterproductive when it comes to trying to solve the problems of energy. In fact, it’s fairly straightforward — the best way to get energy prices down is by increasing supply, to some extent reducing demand, which happens anyway in response to higher prices. But how do we increase supply? Not by political intervention. That disrupts capital markets, makes investors think, well, maybe putting money into energy companies is not the best use if there’s going to be political repercussions to doing that. So, perhaps Speaker Hastert, Senator Lieberman, Senator Dorgan, and others who are responding in an earnest, and heartfelt way to the complaints of their constituents about higher oil and gas prices, are really doing exactly the wrong thing. We need to make markets work. That is Dan Yergin’s advice. Sounds sound to me.