Bans on Deep Sea Energy Development Must be Lifted (Pa. GOP Rep. John Peterson)

Posted By Pa. GOP Rep. John Peterson on 5th June 2007 @ 13:08 in Politics, Energy/Environment | No Comments

As a nation, we face a very grave energy dilemma. We’ve had the highest natural gas prices in the world for the last five years.  Rising prices, coupled with our increased dependence on natural gas from politically unfriendly countries, has the potential to make us a second-rate county. In my view the price and availability of natural gas is a greater concern to America’s economic future than global warming or terror or the two combined.

Currently there are two separate, but largely overlapping moratoria preventing energy exploration along more than 85 percent of the federal OCS. One is congressional - the result of a provision in an annual appropriations bill precluding the Department of the Interior from leasing offshore tracts for exploration. The other is presidential, first adopted in 1990 by President George H.W. Bush and later extended by Presidents Clinton and George W. Bush. The current presidential ban, which President Bush could withdraw tomorrow, expires in 2012; the congressional ban, which I seek to lift, is up for review each year.

My legislation, the NEED (National Environment and Energy Development) Act - which I will be introducing in the weeks to come - will lift the congressional ban of natural gas exploration and leasing. My measure will provide states the right to drill off of their coasts; it will direct royalties to producing states, various environmental restoration reserves across the country, and to renewable energy research. The measure will also include strong labor provisions.

Natural gas is the mother’s milk of manufacturing and processing and home heating and business operation in this country. It’s been the fuel we’ve depended on, and as it becomes unaffordable to all of us, we’re going to literally devastate the economic viability of many businesses, manufacturers and industries. They’ll simply move offshore where gas is much cheaper. The U.S. was once the leader of the pack. But now, in the global economy in which we compete, if the current bans on developing deep sea American energy aren’t lifted, we’ll be just another dog in the pack.

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The idea that nations with a considerable endowment in domestic natural resources would hold a keen interest in influencing the prices consuming nations pay for those resources is both nothing new, and completely understandable. It was this sort of thinking that led to the creation in September 1960 of the Organization of Petroleum Exporting Countries - an international syndicate formed to regulate the price and output of oil known more familiarly by its ubiquitous acronym: OPEC.

In concept, a cartel such as OPEC can only be effective if each of its members submit to basic requirements related to individual ouput. That way, when the price of oil across the world is low, OPEC is in a position to rollback some of its collective output, and thus, raise the price. And when the price of oil is too high - a condition that OPEC isn't as giddy about as you might think - the cartel can direct its membership to turn open the spigot so as to keep the commodity from pricing itself out of the market (and also, from their point of view, dissuade the development of alternative means of energy).

Now, to be sure, OPEC in practice has had its fair share of ups and downs over the past half-century of its existence - it hasn't been all chocolates and marmalade for the group of nations that collectively controls more than half of the world's oil supply. But the concept behind the cartel is a solid one, and, according to today's Wall Street Journal (subscription req'd), our buddies in Moscow and Tehran have started to explore the potential of entering into a trust to manage the worldwide disbursement of natural gas.

Russia and Iran -- which hold nearly half the world's natural-gas reserves -- are talking about creating an OPEC-like organization for gas, a move that has the potential to unsettle energy markets and redraw geopolitical alignments.

Gas accounts for a growing share of global energy use, but the nations that produce most of it don't work together to influence markets. That's a stark contrast to the oil market, in which members of the Organization of Petroleum Exporting Countries manage output to keep prices at levels they favor.

Here's the problem with that plan: Natural gas is not a world commodity in the way that oil so manifestly is. Unlike oil, you can't put natural gas in a barrel, throw it on a barge, and ship it across the world in its natural state. You need to freeze it down to -259 degrees Fahrenheit, load it onto a special ship the size of a large aircraft carrier, ship it around the world, re-gasify the substance in one of the five LNG plants across the country, and then - and only then - can you actually add the new gas to the pipeline and send it out to consumers across the country...that is, of course, if the natural gas is free of any impurities it might have picked up along its long and treacherous voyage.

So, enter Russia and Iran: two nations that control more than half of the world's natural gas reserves. In order for them to have a greater say in how much their natural gas is being sold for on the world market...they need to CREATE a world market in the first place. That means promoting LNG:

While there are several reasons why a gas cartel isn't likely to work as well as OPEC has managed the oil markets, the talk has alarmed big gas consumers, particularly in Europe, which gets a quarter of its gas from Russia. A cartel would be less menacing economically in the short-term to the U.S., which still gets most of its gas within North America.

Still, over time, the market is becoming more internationally flexible as shipments of liquefied natural gas rise. U.S. imports of LNG have more than doubled since 2002, though they still account for a small fraction of gas consumption here. Other Western countries are seeing demand for the clean-burning fuel climb even as their home-grown supply of gas declines. These shifts have turned gas in the last few years from a humdrum commodity into a prized fuel increasingly subject to geopolitical spats.

If you're a country that gets its natural gas from Russia or Iran, you should be worried. In fact, you probably already are. Luckily for the United States, we produce the vast majority of our natural gas at home - 88 percent at last count. But the more and more we seek to lock up our domestic supplies - which continues to happen in America right underneath or nose - the more and more gas we will need from foreign sources. In the case of natural gas, those sources will increasingly become Russia and Trinidad.

Indeed, every cubic foot of gas we get from overseas contributes to the future formation of a worldwide natural gas cartel controlled by Russia and Iran. And since those are two countries you can't trust farther than you can throw 'em, we should probably do everything in our power to avoid that outcome.  

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The idea that nations with a considerable endowment in domestic natural resources would hold a keen interest in influencing the prices consuming nations pay for those resources is both nothing new, and completely understandable. It was this sort of thinking that led to the creation in September 1960 of the Organization of Petroleum Exporting Countries - an international syndicate formed to regulate the price and output of oil known more familiarly by its ubiquitous acronym: OPEC.

In concept, a cartel such as OPEC can only be effective if each of its members submit to basic requirements related to individual ouput. That way, when the price of oil across the world is low, OPEC is in a position to rollback some of its collective output, and thus, raise the price. And when the price of oil is too high - a condition that OPEC isn't as giddy about as you might think - the cartel can direct its membership to turn open the spigot so as to keep the commodity from pricing itself out of the market (and also, from their point of view, dissuade the development of alternative means of energy).

Now, to be sure, OPEC in practice has had its fair share of ups and downs over the past half-century of its existence - it hasn't been all chocolates and marmalade for the group of nations that collectively controls more than half of the world's oil supply. But the concept behind the cartel is a solid one, and, according to today's Wall Street Journal (subscription req'd), our buddies in Moscow and Tehran have started to explore the potential of entering into a trust to manage the worldwide disbursement of natural gas.

Russia and Iran -- which hold nearly half the world's natural-gas reserves -- are talking about creating an OPEC-like organization for gas, a move that has the potential to unsettle energy markets and redraw geopolitical alignments.

Gas accounts for a growing share of global energy use, but the nations that produce most of it don't work together to influence markets. That's a stark contrast to the oil market, in which members of the Organization of Petroleum Exporting Countries manage output to keep prices at levels they favor.

Here's the problem with that plan: Natural gas is not a world commodity in the way that oil so manifestly is. Unlike oil, you can't put natural gas in a barrel, throw it on a barge, and ship it across the world in its natural state. You need to freeze it down to -259 degrees Fahrenheit, load it onto a special ship the size of a large aircraft carrier, ship it around the world, re-gasify the substance in one of the five LNG plants across the country, and then - and only then - can you actually add the new gas to the pipeline and send it out to consumers across the country...that is, of course, if the natural gas is free of any impurities it might have picked up along its long and treacherous voyage.

So, enter Russia and Iran: two nations that control more than half of the world's natural gas reserves. In order for them to have a greater say in how much their natural gas is being sold for on the world market...they need to CREATE a world market in the first place. That means promoting LNG:

While there are several reasons why a gas cartel isn't likely to work as well as OPEC has managed the oil markets, the talk has alarmed big gas consumers, particularly in Europe, which gets a quarter of its gas from Russia. A cartel would be less menacing economically in the short-term to the U.S., which still gets most of its gas within North America.

Still, over time, the market is becoming more internationally flexible as shipments of liquefied natural gas rise. U.S. imports of LNG have more than doubled since 2002, though they still account for a small fraction of gas consumption here. Other Western countries are seeing demand for the clean-burning fuel climb even as their home-grown supply of gas declines. These shifts have turned gas in the last few years from a humdrum commodity into a prized fuel increasingly subject to geopolitical spats.

If you're a country that gets its natural gas from Russia or Iran, you should be worried. In fact, you probably already are. Luckily for the United States, we produce the vast majority of our natural gas at home - 88 percent at last count. But the more and more we seek to lock up our domestic supplies - which continues to happen in America right underneath or nose - the more and more gas we will need from foreign sources. In the case of natural gas, those sources will increasingly become Russia and Trinidad.

Indeed, every cubic foot of gas we get from overseas contributes to the future formation of a worldwide natural gas cartel controlled by Russia and Iran. And since those are two countries you can't trust farther than you can throw 'em, we should probably do everything in our power to avoid that outcome.  

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The law of unintended consequences - coldly referred to as "externalities" by the economist - claimed another high-profile victim this past week, with the price of corn experiencing a two-fold increase as the Bush administration announced plans to increase the share of ethanol in our nation's transportation fuel stock. 

The interconnected relationship shared by corn price and ethanol usage is, to me, a great first-day lesson in a freshman economics class: How do markets work? Well, as supply of corn remains constant and demand for corn rises - owing to a growing market, artificial and otherwise, for ethanol - the price is bound to rise too...in a near-corresponding manner . But is that such a bad thing?

Yes and no says the Quad City Times of Davenport, Iowa. You see, plenty of nice folks in Iowa stand to benefit from a spike in corn prices - farmers, especially. But what of the people whose livelihoods are tied, not to cultivating corn, but to using it to feed their livestock?  

Like all farmers, [Clayton Casteel] has seen the biggest shift come in the price of corn. The price per bushel has doubled since this time last year, to about $3.94.

Mr. Casteel, who usually has 800 acres of corn, see good and bad with corn prices increasing. It means higher prices for his crop, but also means he pays more as a livestock producer for his feed.

Experts attribute much of the increase in crop prices to the demand for ethanol. One ethanol plant is currently under construction in Annawan, while a second plant in Galva is in the process of acquiring the necessary permits.

But it turns out, corn isn't the only component that's needed to create ethanol. You need an energy source as well. And, by the way, you need an affordable feedstock to grow the corn in the first place.

Anytime you can get a better price for commodities, it helps," Casteel said. "There will be some farmers that will switch to more corn acres. But, the cost to plant an acre of corn in the last two or three years has gone up so much that a lot of farmers can't afford to plant that much more. The input costs have gotten so out of control with the fertilizer, the nitrogen, the seed corn.  

90 percent of the cost of fertilizer can be tied directly back to the cost of natural gas. And it just so happens the United States pays more for theirs than any other country in the world. The president, in addition to talking about ethanol, could have - and probably should have - devoted some time toward sharing with America his plan to free up additional domestic supply of it. Instead, according to Congressman Peterson:

[H]e offered a vague plan to boost fuel efficiency standards and increase – by nearly a factor of five – the number of gallons of renewable fuel required to be blended into our nation’s gasoline stock.

As it turned out, that ended up being an unfortunate, and perhaps very costly, omission.

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The law of unintended consequences - coldly referred to as "externalities" by the economist - claimed another high-profile victim this past week, with the price of corn experiencing a two-fold increase as the Bush administration announced plans to increase the share of ethanol in our nation's transportation fuel stock. 

The interconnected relationship shared by corn price and ethanol usage is, to me, a great first-day lesson in a freshman economics class: How do markets work? Well, as supply of corn remains constant and demand for corn rises - owing to a growing market, artificial and otherwise, for ethanol - the price is bound to rise too...in a near-corresponding manner . But is that such a bad thing?

Yes and no says the Quad City Times of Davenport, Iowa. You see, plenty of nice folks in Iowa stand to benefit from a spike in corn prices - farmers, especially. But what of the people whose livelihoods are tied, not to cultivating corn, but to using it to feed their livestock?  

Like all farmers, [Clayton Casteel] has seen the biggest shift come in the price of corn. The price per bushel has doubled since this time last year, to about $3.94.

Mr. Casteel, who usually has 800 acres of corn, see good and bad with corn prices increasing. It means higher prices for his crop, but also means he pays more as a livestock producer for his feed.

Experts attribute much of the increase in crop prices to the demand for ethanol. One ethanol plant is currently under construction in Annawan, while a second plant in Galva is in the process of acquiring the necessary permits.

But it turns out, corn isn't the only component that's needed to create ethanol. You need an energy source as well. And, by the way, you need an affordable feedstock to grow the corn in the first place.

Anytime you can get a better price for commodities, it helps," Casteel said. "There will be some farmers that will switch to more corn acres. But, the cost to plant an acre of corn in the last two or three years has gone up so much that a lot of farmers can't afford to plant that much more. The input costs have gotten so out of control with the fertilizer, the nitrogen, the seed corn.  

90 percent of the cost of fertilizer can be tied directly back to the cost of natural gas. And it just so happens the United States pays more for theirs than any other country in the world. The president, in addition to talking about ethanol, could have - and probably should have - devoted some time toward sharing with America his plan to free up additional domestic supply of it. Instead, according to Congressman Peterson:

[H]e offered a vague plan to boost fuel efficiency standards and increase – by nearly a factor of five – the number of gallons of renewable fuel required to be blended into our nation’s gasoline stock.

As it turned out, that ended up being an unfortunate, and perhaps very costly, omission.

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The hits just keep on coming against the Democrats' tax-and-spend energy bill, which is being considered this afternoon on the House floor. Yesterday, the Washington Post editorial board - not exactly a denizen of the right - weighed in by filing this stinging editorial. Among its points:

THE HOUSE Democrats plan to pass an energy bill Thursday that combines the good, the bad and a large dose of missed opportunity. Thankfully, it faces an uncertain future in the Senate. Energy policy deserves more serious treatment. ... The main problem with the House bill is that hitting up oil companies is a poor substitute for a real energy policy.

The premise from which we start is simple: We need access to affordable energy, and it’s better to produce that energy here and create wealth stateside than it is to buy it from foreign suppliers and add to our already staggering dependence.

The majority starts from a different premise: We don’t really need energy – at least not right now, so let’s choke off supply, raise up the price, and eventually create conditions in which wind and solar can compete with hydrocarbons.

What’s missing from their analysis, though, is an answer to how American industries are supposed to compete for the next 20 years while Democrats find places to stick windmills and develop processes to allow for more efficient conversion of energy from the sun.

The difference is this: We’re not willing to say good-bye to several million jobs today in the hope that their energy vision of tomorrow will eventually yield a better outcome. That’s a luxury they have, and we don’t.

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The hits just keep on coming against the Democrats' tax-and-spend energy bill, which is being considered this afternoon on the House floor. Yesterday, the Washington Post editorial board - not exactly a denizen of the right - weighed in by filing this stinging editorial. Among its points:

THE HOUSE Democrats plan to pass an energy bill Thursday that combines the good, the bad and a large dose of missed opportunity. Thankfully, it faces an uncertain future in the Senate. Energy policy deserves more serious treatment. ... The main problem with the House bill is that hitting up oil companies is a poor substitute for a real energy policy.

The premise from which we start is simple: We need access to affordable energy, and it’s better to produce that energy here and create wealth stateside than it is to buy it from foreign suppliers and add to our already staggering dependence.

The majority starts from a different premise: We don’t really need energy – at least not right now, so let’s choke off supply, raise up the price, and eventually create conditions in which wind and solar can compete with hydrocarbons.

What’s missing from their analysis, though, is an answer to how American industries are supposed to compete for the next 20 years while Democrats find places to stick windmills and develop processes to allow for more efficient conversion of energy from the sun.

The difference is this: We’re not willing to say good-bye to several million jobs today in the hope that their energy vision of tomorrow will eventually yield a better outcome. That’s a luxury they have, and we don’t.

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The Democrats have made clear their intention this week to bring to the House floor an "energy bill" (loosely defined) designed to roll back subsides for "Big Oil," and, along the way, make it much more difficult and expensive to produce essential supplies of energy at home. According to the Wall Street Journal (subscription required):

[The Democrat "energy bill"] is said to promote America's energy independence, but the biggest winner may be OPEC. This is a lengthy, complicated bill, but the central idea is simple: Raise taxes on domestic oil producers and then spend the money to subsidize ethanol, solar energy, windmills (so long as they're not on Cape Cod), and so on. But if you increase the cost of domestic oil production by $10 billion, you are ensuring that U.S. imports of OPEC oil will rise and domestic production will fall.

Democrats also want to raise about $5 to $6 billion by snatching away alleged tax breaks for Big Oil in the Republicans' 2005 energy bill. Sorry, that isn't true either. The Congressional Research Service reports that the net impact of the 2005 energy bill was to raise taxes on the oil and gas industry by $300 million. Nor does it make sense to repeal a domestic oil company's eligibility for a 2004 tax cut that reduced the effective corporate income tax rate to 32 percent from 35 percent on U.S. manufacturers. This tax cut increases the competitiveness of U.S. manufacturers that are now penalized by a U.S. corporate tax rate that is among the highest in the industrialized world. Our objection is that every U.S. company should pay the same, lower rate.

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The Democrats have made clear their intention this week to bring to the House floor an "energy bill" (loosely defined) designed to roll back subsides for "Big Oil," and, along the way, make it much more difficult and expensive to produce essential supplies of energy at home. According to the Wall Street Journal (subscription required):

[The Democrat "energy bill"] is said to promote America's energy independence, but the biggest winner may be OPEC. This is a lengthy, complicated bill, but the central idea is simple: Raise taxes on domestic oil producers and then spend the money to subsidize ethanol, solar energy, windmills (so long as they're not on Cape Cod), and so on. But if you increase the cost of domestic oil production by $10 billion, you are ensuring that U.S. imports of OPEC oil will rise and domestic production will fall.

Democrats also want to raise about $5 to $6 billion by snatching away alleged tax breaks for Big Oil in the Republicans' 2005 energy bill. Sorry, that isn't true either. The Congressional Research Service reports that the net impact of the 2005 energy bill was to raise taxes on the oil and gas industry by $300 million. Nor does it make sense to repeal a domestic oil company's eligibility for a 2004 tax cut that reduced the effective corporate income tax rate to 32 percent from 35 percent on U.S. manufacturers. This tax cut increases the competitiveness of U.S. manufacturers that are now penalized by a U.S. corporate tax rate that is among the highest in the industrialized world. Our objection is that every U.S. company should pay the same, lower rate.

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It sounds reasonable enough: Why not allow the federal government to "negotiate" with drug companies and insurance providers in order to ensure prescription drugs offered to seniors through Medicare are available at the lowest prices possible? Who can possibly be against that?

Well, if you're one of the millions of Americans who'd prefer to operate off an expanded list of available medicines - in other words, if you're a fan of choice - the Democrats' plan to rollback price might not be for you. To wit, today's piece in the New York Times (yes, THAT New York Times):

Democrats want the government to negotiate lower drug prices for Medicare beneficiaries, but insist that the government should not decide which drugs are covered.

Many economists and health policy experts see this as a paradox. The only way to get big savings and discounts, they say, is to steer patients to certain preferred drugs.  

So exactly who are these "economists" and "health policy experts," you ask?

Dr. Alan M. Garber, director of the Center for Health Policy at Stanford University, said he did not see how Medicare officials could obtain big discounts unless they were able to establish a restrictive formulary.

“To obtain drugs at low prices, a purchaser must be able to say no to covering a particular drug,” said Dr. Garber, who is an economist and a physician. “If you cannot walk away from a deal, there’s no way you can be sure of obtaining a low price. That’s true whether you are buying a car, a house or medications.”

Here's the thing: Give them the chance, and governments won't "negotiate" prices -- they'll just go ahead and set them. And as the administration of Richard Nixon so famously taught us, price and wage controls as a broad, macroeconomic mode of policy are a recipe for disaster -- unless you're looking for sharp reductions in supply and a profound impact on access and choice.

I think it was H.L Mencken who said, "For every complex problem out there, there is an answer that is clear, simple, and wrong." I'd file the Democrats' plan to retool the Medicare prescription drug program -- a program in which beneficiaries are saving more than $1,200 annually on their drug costs -- in this particular category. 

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