Wednesday, September 17, 2008

What Compromise?

I can't think of a single occasion on which I've reviewed the details of a piece of pending Congressional legislation when I haven't regretted the unintended civics lesson the experience provided. Poring over the text of the House Leadership's proposed "energy compromise" bill, HR.6899, the "Comprehensive American Energy Security and Consumer Protection Act" was no exception. Although the bill contains a version of the expected headline deal relating to offshore drilling and renewable energy credits, it also includes a hodgepodge of leftovers from the negotiations for last year's Energy Bill, along with some poison-pill measures such as the coerced, retro-active renegotiation of royalty relief on those late-1990s deepwater leases, plus an utterly half-baked idea to sell light crude oil out of the Strategic Petroleum Reserve and buy back heavier oil. Falling short of any dictionary definition of "compromise", this bill epitomizes my concerns about mixing energy policy with election-year politics.

Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.

Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.

That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.

In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.

My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.

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