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Fort Worth Star-Telegram, Texas, Mitchell Schnurman Column: Congress Prepares to 'Fix' Oil Problem

Posted on: Wednesday, 3 May 2006, 15:00 CDT

By Mitchell Schnurman, Fort Worth Star-Telegram, Texas

May 3--If $3-a-gallon gasoline seems like a problem, wait until Congress does something about it.

Lawmakers in Washington are considering a series of moves to address rising energy prices, and sweeping changes may lie ahead. Proposals have included $100 rebates for consumers, opening wildlife areas to drilling, and whacking oil companies with new taxes.

We've been through this cycle before: Oil prices spike, the public cries foul, and government feels compelled to act -- only to get mixed results, at best.

Recall the windfall-profits tax on oil in 1980. A congressional panel concluded that oil producers were making more money than expected, thanks to price increases by the Organization of Petroleum Exporting Countries, and lawmakers decided to tax the profits and help low-income families.

The law had other goals, too, aiming to increase domestic production, so the U.S. could be energy independent. The government created three "tiers" of oil, with each getting a different tax treatment.

Things didn't work out as planned.

Before the tax was killed in 1988, it raised just one fifth of the projected amount -- $80 billion, instead of $393 billion, according to the Congressional Research Service.

Even worse, it actually increased our dependence on foreign oil, because the tax eventually discouraged domestic production. But not until investors and companies had already lost billions by drilling dry holes.

"We flushed about $50 billion down the drain, looking for oil in a place that was depleted," says Robert Kaufmann, a Boston University professor who has researched world oil markets. "People drilled more and more wells, but our domestic production still went down."

The government also pushed the development of synthetic fuels, encouraging companies to turn coal into a form of liquid energy. Instead of making real progress, producers simply figured out a way to play the tax break.

About $4 billion was awarded in tax credits, according to a 2003 report in Time magazine. And the credits often went to companies that did little more than spray coal with diesel fuel.

Not all energy initiatives have been failures. Many people point to higher mileage requirements for automobiles, which mandated better efficiency.

But those standards have not been raised since 1990, and the rules have a huge loophole for light trucks, a category that also includes sport utility vehicles and minivans.

Car buyers -- and automakers -- wanted bigger, more powerful vehicles, rather than high-mileage cars, so the efficiency of today's vehicle fleet is lower than 20 years ago.

We have the technology to produce much better numbers, and a new energy policy is likely to require this. How that will affect SUV sales and U.S. automakers is unclear.

Analysts point to several government programs that have been a success, including incentives for developing wind power and deep-water oil exploration.

Wind power now accounts for about 1 percent of energy, which doesn't sound like much but is helpful on the margins. And deep-water production is now an accepted method in the Gulf of Mexico.

"If tax credits hadn't existed for wind power, it wouldn't be in the marketplace at all," says Neal Elliott, industrial program director for the American Council for an Energy-Efficient Economy in Washington. "Now companies are putting in wind facilities as fast as they can."

Kaufmann also points to the creation of a sulfur market as a way to reduce pollution. Companies buy and sell rights to sulfur permits, and he says that's led to lower sulfur emissions.

European countries are experimenting with a similar market for carbon dioxide credits.

In Washington, congressional leaders are discussing a range of options on energy, but none is expected to do much in the short term. (The $100 rebate has been nearly ridiculed out of contention already.)

Opening the Arctic National Wildlife Refuge to drilling wouldn't yield much additional oil for up to a decade, analysts say. Increasing the mileage requirements on SUVs wouldn't dent gas demand for maybe five years.

Taxing the profits of oil companies might have an undesirable side effect -- discouraging their investment in new drilling and refining. There's a proposal to change their accounting methods and effectively capture billions more from Big Oil, but that could reverberate to other companies in other industries.

The quickest gains would come from pushing conservation and energy efficiency. Urging people to tune up air conditioners, turn off the lights and buy efficient appliances can make a difference -- not just with gasoline usage but with all energy sources.

Elliott says that $90 million was authorized for a public awareness campaign in last year's energy bill, but the Bush administration hasn't requested the money yet.

More funding is headed to boost ethanol and biodiesel, popular ideas that could make a difference in the domestic fuel supply -- or end up being insignificant.

"We ought to just let the economy determine the cheapest source of alternative fuels," says Harry Parker, emeritus professor of chemical engineering at Texas Tech.

He says that Shell has been developing a diesel fuel in Malaysia that uses natural gas -- and is doing the work on its own.

Parker is skeptical of the agriculture lobby, pushing for farm-based products that won't be economical over the long run.

When Congress feels the pressure to do something, he says, lawmakers often make things worse. That's not their intent, but it's the outcome.

In 1993, amid an outcry over the high salaries for chief executives, the government changed the tax policy on executive compensation. When a salary topped $1 million, the additional amount would not be tax-deductible for the corporation unless it was "performance-based pay."

The tax shift led to a surge in stock options, restricted shares and bonus payments. And rather than narrow the gap between regular workers and bosses, the new standard made $100 million paydays almost commonplace.

That probably would have happened without government help. But Uncle Sam sped it along.

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Copyright (c) 2006, Fort Worth Star-Telegram, Texas

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Source: Fort Worth Star-Telegram (Fort Worth, Texas)

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