Aligned Interests

I know it seems counter-intuitive to suggest that the interests of big oil companies and American consumers and voters might be aligned, particularly in light of the strained mutual dependence manifested at the gas pump these days. However, there is at least one aspect of the ongoing Congressional energy debate in which we all should be rooting for the oil company lobbyists to be successful, as they were--at least temporarily--last week. The issue in question relates to the imposition of a new severance tax on domestic oil and gas production from the federal waters of the Gulf of Mexico, in order to fund alternative fuels incentives and projects. This amounts to a larger-scale recycling of California's failed Proposition 87 . You don't have to like Big Oil or be skeptical of alternative energy to see the flaws in this approach.

The logic behind the proposal seems compelling. Oil companies are making record profits, some of which accrue from Gulf Coast leases on which they were granted relief from federal royalties, when oil prices were under $20 per barrel in the late 1990s. At the same time, Congress would like to encourage the production of alternative fuels and the adoption of more efficient technology. Where better to find the money for that than from funds to which the government would have been entitled, absent royalty relief? Getting oil companies to pay for alternative energy sounds like a smart and popular notion. Unfortunately, the consequences of that simple logic turn out to be counterproductive, at least if the overall goal of the legislation is to reduce America's dependence on imported energy.

US oil production peaked in 1970 and has been in steady decline since the late 1980s. Geology had a lot to do with that, but it is not a coincidence that real-dollar oil prices had started falling in the early 1980s, a trend that only reversed in the last few years. For a free-market producer like the US, oil production is intimately related to its expected profits. Compounding this problem, US natural gas production has apparently reached a plateau. The more of both commodities we must import, the higher their domestic prices will go. The more oil and gas we can produce here, the less we will import, and the less we will compete for supplies with the rapidly growing economies of Asia.

In the meantime, we are reaching a national consensus on the importance of reducing our oil consumption by conserving, by improving vehicle efficiency, and by expanding our production of alternatives, at least those with the potential to become competitive without large, permanent subsidies. But that does not mean that it makes sense to pit alternative energy against domestic oil, particularly when in the process we stand to reduce oil and gas production by more than the net energy contribution of our current alternative fuels efforts. And that's the crux of the problem, here. By making the largest remaining accessible oil and gas resources in the US less attractive, a severance tax could actually shrink our overall energy supplies, particularly if the alternative energy and efficiency projects do not contribute as much or as quickly as the foregone oil and gas production. That would increase our oil and gas imports.

This artificial dilemma can be solved easily. If the $29 billion worth of alternative energy incentives and projects targeted by the Congress have merit, then we should fund them from a source that doesn't treat domestic energy production as a zero-sum game. For example, over the 10 years in question, a surtax of less than 2 cents per gallon of gasoline would do the trick, while providing a small incremental incentive for conservation. But wherever we find the money, it doesn't make sense to take it from companies that invested billions of dollars of their shareholders' capital to increase US oil output, at a time when that looked very risky.