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Gas Price Perfidy

The president wanted higher gas prices, not a boom in domestic production.

2:05 PM, Mar 3, 2012 • By MARIO LOYOLA
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Speaking at the University of Miami on February 23, Obama again revealed his remarkable gift for oratory. He denied any responsibility for the rising gas prices and instead took the credit for dramatically increased domestic oil production. This took real artifice. Even as a candidate Obama promised that his energy policies would reduce fossil fuels and “cost money.” Secretary of Energy David Chu famously explained, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”

Gas prices

Gasoline in Europe is consistently above $8 a gallon, so the administration still has a ways to go, but it is making a lot of progress. One need only compare the boom in domestic production on private and state-owned land to the vertiginous drop in oil production from federally-controlled sources.

The federal government controls about a third of the nation’s oil production, through federal onshore leases (mostly in the West, where it owns half the land) and leases to drill in outer continental shelf (OCS) starting 10 miles off the coast. The rest of America’s oil production is on state-owned land (including coastal areas) and on private lands subject to state regulation.

As a direct result of the president’s severe constriction of oil production under federal leases, domestic U.S. oil production will be nearly one million barrels per day lower this year than it would have been otherwise.

Meanwhile, production from newly available shale oil and oil sands on private and state-owned land has been booming—more than enough to make up for the steep decline in production under federal leases. That boom, combined with slackened demand since the start of the recession, has reduced America’s dependence on foreign oil to about half its daily consumption of 20 million barrels per day, down from 60 percent in 2005.

The two most important factors in the cost of gasoline are world oil prices (about 71 percent of the price of a gallon of gasoline) and taxes (about 48.8 cents per gallon). Many factors in turn affect the price of oil. Most prominent this year are turmoil in the Middle East, and rising Asian demand picking up the slack of anemic demand in North America. The National Petroleum Council lists several more: weather, inventories, exchange rates, spare production capacity, and problems with “access” to supply in North America.

Expectations of future supply are always a critical factor, and that is where administration policies are contributing most to higher prices. According to the Department of Energy, oil production under federal leases declined 11 percent in 2011, and will decline almost as much again this year. As recoverable reserves soar due to new technologies and rising demand, the volume of production deferred by current policies on federal leases will soon reach several million barrels per day.

Contrary to what it would now have you believe, choking off production under federal leases was quite clearly a priority of this administration from the start. When gas prices reached $4 per gallon in the summer of 2008, the Bush administration reached a bipartisan agreement to open virtually all of the OCS to oil production, ending a thirty-year moratorium. In its first weeks, the Obama administration shelved the plan. Last year, Obama announced a new five-year plan effectively closing all of America’s OCS until 2017, leaving only northern Alaska and the central and western Gulf of Mexico open to drilling.

Now the Obama administration claims that it has actually opened more of the OCS to exploration than before. But that is true only in the sense that he first closed off all of what he could close, then opened up a small fraction of that. But the net effect has been to close nearly all of the OCS that was open when he assumed office.

Even in the few areas of the OCS that remain open, the administration is seeking to strangle production. As a result of the various deep-water drilling moratoriums, a third of the Gulf’s deep-water drilling rigs have left for other shores, dissuaded by the regulatory uncertainty. As a result of the shallow-water “permitorium” even shallow-water drilling has slowed to a crawl. According to the Department of Energy, oil production from the Gulf of Mexico will drop by 700,000 barrels per day by the end of 2012, which further decreases in ensuing years. And as for America’s working families, the combination of moratoriums and “permitorium” are estimated to have cost 60,000 thousand jobs in 2010 alone.

On federal lands the story has been the same. Just as technological breakthroughs have paved the way for tapping into the vast oil reserves of the Rocky Mountain states, the administration cut the number of new leases by 50 percent in 2010 alone.

Impelled by new technology and rising oil prices, oil production on land outside federal control has been booming. North Dakota alone will produce an estimated 16 million barrels of oil this year, up from 2 million barrels just a decade ago. The Keystone XL pipeline extension could bring more than 700,000 barrels of additional North American oil production the nation’s major refineries in Texas, refineries that now cater to Venezuela’s Hugo Chávez.

If Obama reversed policy on federal leases and the Keystone XL pipeline, we could virtually double North American oil production in a decade. Canada could be exporting millions of barrels more per day to the U.S. by 2020; the OCS along the Atlantic and Pacific Coasts, and off Alaska, could soon add several million more; and the Rocky Mountain states, another million or two. Changes of this scale in the economics of world oil production would have a historic impact not just on gasoline prices, but on America’s overall current account balance, and would dramatically improve our long-term economic outlook.

And the corresponding changes in policy today would have immediate effects because expectations of future supply and demand affect prices today. Consider this. In 2007, before the recession, world oil demand peaked at 86 million barrels per day. By 2009, demand had fallen to 85 million barrels per day—but in the same period the price of gasoline fell by half. Meanwhile, surplus capacity has averaged just 2.6 million barrels per day, which means that any significant shift in marginal supply or demand can trigger panic in the oil markets—and demand is projected to soar in the years ahead.

President Obama’s assault on the supposed tax “subsidies” that we give oil companies perfectly illustrates his real agenda. Oil companies pay the highest effective tax rates of any major sector of industry. Gasoline is one of the few commodities subject to special federal and sales taxes. Obama nonetheless wants to eliminate—for oil and gas companies—the long-standing tax structure meant to encourage the industry to expand capacity. This would not be eliminating special subsidies, it would be singling oil companies out for punitive tax treatment. The effect would be to reduce projected by oil production by yet another non-trivial fraction.

Meanwhile, lurking in the wings is the Environmental Protection Agency, which is finalizing a rule that would require oil rigs to capture natural gas emissions rather than flaring excess natural gas as has always been done. This would be the first time that EPA has sought to regulate oil production on private and state-owned land under the potentially crushing shackles of the Clean Air Act. As usual, the administration claims that the “capture” rule would pay for itself, in this case because the captured natural gas could be sold off. But industry objects that the rule would be far more expensive, and lead to far less marketable natural gas than the EPA estimates.

Nor is that all. Next month, the EPA plans to propose its “Tier 3” rule to cut fuel and automobile emissions. This new rule would increase the cost of gasoline by as much as 25 cents per gallon, would raise the price of cars, and could force as many as seven refineries to shut down, reducing the supply of gasoline from domestic refineries by perhaps 15 percent. Other EPA regulations will further penalize oil companies, and reduce domestic supplies of gasoline.

But this objection is beside the point given Obama’s real agenda. In the worldview of Obama and his environmentalist base, any penalty imposed on oil companies is ipso facto a laudable goal. The speech at the University of Miami was meant to rouse the environmental rabble against oil companies, even as they struggle to expand production and thereby lower prices.

Obama says that there is nothing the government can do to solve the fact that gasoline is expensive and will only get more so. But he doesn’t want cheaper gasoline. And the policies his administration has put in place—from the constriction of supply under federal leases, to the Keystone XL pipeline decision, to the looming assault on private and state-owned sources—have already contributed significantly to the higher gasoline prices we will see in the months and years ahead.

With any luck, the ingenuity and dynamism of Americans will continue to stay one step ahead. But if so, it will be no thanks to this administration.

Mr. Loyola is senior analyst at the Armstrong Center for Energy and Environment, and director of the Center for Tenth Amendment Studies, at the Texas Public Policy Foundation.

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