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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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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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