House Democrats have finally released the details of their "Energy Security Bill," which will be voted on this week, and they must be cursing their rotten luck. Just when they want to stick it to Big Oil for alleged price gouging, oil and home heating costs are plunging. Never mind; this was a campaign theme amid $3 gasoline, and a detail like $2 gas isn't about to stop Democrats now.
This 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.
The bill also includes a "Strategic Energy Efficiency and Renewables Reserve" fund for alternative fuels. That sounds a lot like the Carter-era Synthetic Fuels Corporation -- one of the more notorious Washington boondoggles of all time, having spent $2.1 billion of tax dollars on alternative fuels before declaring bankruptcy. Today there is no under-investment by the private sector in alternative energy. The research firm New Energy Finance has found that between 2004 and 2006 investment in alternative energy doubled to $63 billion. Venture capital funding of green-energy technologies has quadrupled since 1998.
The Democrats also insist that the big five oil companies have received sweetheart deals from the government that have ripped off taxpayers. So let's take a closer look. The most controversial issue involves $6 billion in royalty payments that oil companies are said to owe the government for oil pumped from federal waters. The facts suggest otherwise.
These were leases for drilling rights in the Gulf of Mexico signed between oil companies and the Clinton Administration's Interior Department in 1998-99. At that time the world oil price had fallen to as low as $10 a barrel and the contracts were signed without a requirement of royalty payments if the price of oil rose above $35 a barrel.
Interior's Inspector General investigated and found that this standard royalty clause was omitted not because of any conspiracy by big oil, but rather because of bureaucratic bungling in the Clinton Administration. The same report found that a year after these contracts were signed Chevron and other oil companies alerted Interior to the absence of royalty fees, and that Interior replied that the contracts should go forward nonetheless.
The companies have since invested billions of dollars in the Gulf on the basis of those lease agreements, and only when the price of oil surged to $70 a barrel did anyone start expressing outrage that Big Oil was "cheating" taxpayers out of royalties. Some oil companies have voluntarily offered to renegotiate these contracts. The Democrats are now demanding that all these firms do so -- even though the government signed binding contracts.
The Democratic bill strong-arms oil companies into renegotiating the contracts or pay a $9 per barrel royalty fee from these leases. If the companies refuse, they lose their rights to bid for any future leases on federal property. So at the same time that the U.S. is trying to persuade Venezuela and other nations to honor property rights, Congress does its own Hugo Chávez imitation.
Are American taxpayers worse off because of these leasing agreements? Hardly. It's fortunate these contracts were issued when oil prices were so low, because the oil discovered from those leases will do precisely what the Democratic energy bill will not: reduce U.S. dependence on foreign oil. One of the largest oil deposits in the Gulf was recently discovered as a result of these leases.
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% from 35% 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.
The House energy bill is nearly a carbon copy (if we can still use the word "carbon" in polite company) of California's Proposition 87. That 2006 ballot initiative would have taxed California's home-produced oil in order to subsidize "green technology" alternatives. California is a fairly liberal state, but even those voters understood that Prop 87 would have damaged the state's home oil and gas industry, increased foreign oil consumption, and raised the energy bills of state residents. It was clobbered at the polls. The House will plow ahead anyway, but let's hope the Senate has more wisdom.
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