When it comes to energy, a critical question always seems to be whether public policy will be guided by sound economics, or irrational, pandering politics. That question looms particularly large right now.
There is the usual issue of prices. Early this month, the price of a barrel of crude oil was up by 34 percent compared to a year earlier. Similarly, the price at the pump for a gallon of regular gas had increased by nearly 40 percent compared to same time in 2009. But at least neither oil nor gasoline have come close to the highs hit in July 2008.
Lurking on Capitol Hill has been climate change legislation that would mandate reductions in carbon-dioxide emissions.
In June of last year, the House of Representatives narrowly passed legislation featuring a cap-and-trade regulatory scheme, along with renewable energy portfolio mandates on electricity producers. This would raise the price of fossil-fuel-based energy, and force a shift to far more costly energy sources. In effect, it’s a massive energy tax hike that would slow economic growth, reduce job creation, and damage U.S. competitiveness.
The Senate has been working on its own version of this legislation, while the Obama Environmental Protection Agency threatens to act without any action being taken by Congress.
As if this were not bad enough, add into the volatile energy policy mix the accidental explosion, fire and sinking of BP’s Deepwater Horizon drill rig in the Gulf of Mexico in April. The loss of life obviously was the most tragic aspect of this accident, as we all should mourn the 11 oil workers who died and pray for their families. And then there have been the important efforts to limit the damage to the environment, wildlife, and local businesses and economies.
But what about the impact on U.S. energy exploration and development?
First, it is critical to understand that, contrary to the dream-like desires of some, fossil fuels are crucial to the current economy, and will be far into the future. While alternatives, such as solar and wind, might capture the imaginations of the green movement and various politicians, they are simply not economically viable now or, barring some unexpected technological breakthrough, for the foreseeable future. The Energy Information Administration, for example, projects very little change in U.S. energy sources between now and 2035.
Second, given increasing global energy demands, the U.S. needs to be open to all kinds of domestic energy exploration and development. When it comes to offshore resources, a February 2009 study by Joseph Mason from the American Energy Alliance noted that the Outer Continental Shelf (OCS) “contains significant energy resources — approximately 86 billion barrels of recoverable oil and 420 trillion cubic feet of recoverable natural gas, according to government reports. However, federal researchers noted that these estimates are conservative.”
Indeed, as technology improves, recoverable energy resources wind up far outrunning original estimates, while new resources are discovered.
A decades-long moratorium on energy exploration covering most offshore areas was allowed to expire by President George W. Bush and Congress in 2008. In March of this year, President Barack Obama sent mixed signals by promising to open certain waters to development, but placing other areas off limits. In the wake of the Gulf accident, the President put a hold on any new offshore oil drilling leases until additional safeguards could be examined.
Third, understanding that no one can, by definition, guarantee accidents will not happen, the industry’s safety and environmental record offshore has been exceptional. Citing the latest study from the U.S. Interior Department, The Wall Street Journal recently reported that the spill rate for 4,000 oil and gas facilities, 80,000 workers, and 33,000 miles of pipeline in offshore energy activities from1985 and 2001 was 0.001 percent.
Nonetheless, the unprecedented Gulf accident has allowed the hard Left to crank up the pressure to shutdown offshore energy production. Moveon.org, for example, has an online ad up calling for the President to reinstate the ban on new offshore drilling. Indeed, for some, all fossil fuels must go. On its blog, Greenpeace declares: “President Obama needs to reinstate the moratorium on offshore drilling immediately and take decisive action to replace dangerous and dirty fossil fuels with safe and clean renewable energy.”
On April 30, the President declared: “So, let me be clear. I continue to believe that domestic oil production is an important part of our overall strategy for energy security, but I’ve always said it must be done responsibly, for the safety of our workers and our environment.”
Let’s hope this is not mere rhetoric, and that the he actually understands the economic realities. Unfortunately, given the President’s track record, including his push for costly climate change legislation, confidence does not run high that sound economics will win out in the end.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He can be reached at email@example.com.