Geotimes Logo POLITICAL SCENE  March 1999 

Senators Debate Response to Oil Crisis

by David Applegate

At a hearing on the state of the domestic oil and gas industry, it all came down to this: A half pint of bottled water costs more than a gallon of gas at the filling station. In constant dollars, crude oil prices are at their lowest point since World War II. Prices as low as $6 per barrel have been reported for heavy crude in several states. Last year, the oil and gas industry lost 30,000 jobs in the United States, with many more layoffs already announced in 1999. Prices are not expected to rise until the end of this year at the earliest.

Senate Energy and Natural Resources Committee Chairman Frank Murkowski (R-Alaska) called the hearing on Jan. 28 to answer the question: What is the appropriate role for Congress and the administration to address the problem? Not surprisingly, witnesses representing the major integrated oil and gas companies, small independent petroleum producers, drilling companies, oil-state governors, and industry analysts had many different ideas of what government should do.

Bob Palmer, chairman of Rowan Industries, a major drilling company, said that he was not looking for handouts and only wanted a consistent federal policy for the Outer Continental Shelf. Industry analyst John Licthblau urged Congress to buy oil for the Strategic Petroleum Reserve to bring it up to full capacity, a move he termed a “short-term remedy [for low prices] and long-term insurance” for national security. He also encouraged policies that fostered greater diversification of global energy sources, especially development of the Caspian Sea region, as a hedge against a Middle East supply disruption.

Testifying for the Independent Petroleum Association of America (IPAA), Equinox Oil Company President Steve Layton called for enactment of a number of tax incentives, including a marginal wells tax credit, “expensing” geological and geophysical costs, and expanding the definition of enhanced oil recovery and inactive well recovery. He also called for immediate purchase of oil for the Strategic Petroleum Reserve.

The need for federal measures to protect marginal well production was echoed by North Dakota Governor Ed Schafer (R), representing the Interstate Oil and Gas Compact Commission. However, Schafer’s suggestion to establish import fees to protect domestic production, as has been done in other industries, was strongly opposed by the other witnesses.

Legislating Relief
The senators also expressed a range of views. Sen. Kay Bailey Hutchison (R-Texas) announced her introduction of S. 325, the U.S. Energy Economic Growth Act, to encourage domestic oil and gas production. The bipartisan bill has 18 original co-sponsors, including all of the senators at the Jan. 28 hearing. The legislation provides tax credits for marginal wells — those that produce less than 15 barrels a day and hence are most vulnerable to being shut down. Although averaging only two barrels a day, 500,000 marginal wells in the United States collectively produce 20 percent of the nation’s oil, as much as we import from Saudi Arabia. The tax credits would be phased out as prices increased. The legislation also would provide a tax exemption for the costs of restarting inactive wells, based on the success of a similar state program in Texas. The bill would provide many of the tax incentives proposed by IPAA, including the expensing of domestic geological and geophysical costs. A marginal well tax-credit bill (H.R. 53) has been introduced in the House by Rep. Wes Watkins (R-Okla.).

Both Murkowski and ranking Democrat Jeff Bingaman (D-N.M.) favor purchasing oil for the Strategic Petroleum Reserve, which was established in 1975 to soften the impact of a sudden oil shortage. The reserve currently contains 563 million barrels, well below its 680 million barrel capacity. The last purchase took place in 1993, and several sales have taken place since then. Supporters of the plan pointed out that even a small purchase would help reduce the current oversupply and could impact prices. Others, however, were more cautious. In particular, Sen. Don Nickles (R-Okla.) lent his support only if the goal was to bring the reserve up to full capacity for national security purposes, not simply as a tool to enhance prices.

Republican senators criticized the administration both for inaction and for actions that they saw as deleterious to the struggling industry. Nickles cited the administration for seeking to raise offshore royalty rates, to include oil field waste in the Toxic Waste Inventory, to cut Department of Energy funding for fossil energy research and development, and to limit access to public lands.

By contrast, Democratic senators focused on the long-term economic effects of lost production. Bingaman described the impact of lost tax and royalty revenue on New Mexico communities and school districts due to low oil and gas prices.

During the course of the hearing, both Republicans and Democrats raised the issue of oil imports as a threat to national security. Several witnesses criticized the administration for inaction in the face of a 1995 report by the U.S. Department of Commerce that stated oil imports — currently at 56 percent of total U.S. consumption — posed a national security threat. They also noted that the 1973–74 Arab oil embargo, and the gas rationing that resulted, took place when the United States was only 37 percent dependent on foreign oil. Others, however, pointed out that our foreign sources of oil are much more diversified today and that the strength of cartels such as OPEC had been diluted.

Next Steps
Despite the shared sentiment that something must be done, the senators at the hearing were clearly aware that their efforts would be uphill. Cheap gasoline prices are a boon to many consumers, credited by Energy Information Administration Chief Jay Hakes with reducing inflation in 1998 from 2.3 percent to 1.6 percent. Moreover, the senators were well aware of the wary eye that the Senate Finance Committee — with primary jurisdiction over any tax-related measure — would cast on Hutchison’s bill. Efforts in the last Congress to provide tax incentives or buy oil for the strategic reserve did not succeed. But oil-patch senators hope that the lengthening crisis and ensuing job loss will motivate action this year, before the oil industry slowdown impacts the health of the economy as a whole.

David Applegate
AGI Director of Government Affairs

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