Editorial - OPEC and the energy bill

Feb. 16, 2004
In an election year, someone inevitably will argue that the Feb. 10 decision by the Organization of Petroleum Exporting Countries to lower production targets demonstrates urgency of the US need for comprehensive energy legislation.

In an election year, someone inevitably will argue that the Feb. 10 decision by the Organization of Petroleum Exporting Countries to lower production targets demonstrates urgency of the US need for comprehensive energy legislation. The claim will be wrong. Beneficial energy legislation would be welcome no matter what OPEC does. But beneficial energy legislation isn't in prospect.

Desperate to rescue an energy bill dying of obesity, lawmakers are trimming away everything but the fat. In order to pass something—anything—Sen. Pete Domenici last week made good on a Feb. 3 promise to remove limited litigation protection for the gasoline additives methyl tertiary butyl ether and ethanol. He thus obliterated a compromise that induced parts of the oil industry to support a hefty mandate for ethanol in gasoline. If the bill passes now, therefore, it will contain an ethanol mandate but no relief for refiners under legal siege because they produced fuel additives needed to meet product specifications set by Congress. Some compromise.

Tax incentives

If passed in its form at this writing, the legislation also wouldn't contain immediate tax relief for marginal oil and gas wells in times of price distress. Other tax incentives important to small producers and to preserving the tax base also were in jeopardy as lawmakers scrambled for budget-scoring savings. Long missing from the legislation is any movement toward oil and gas leasing of federal waters off the East and West Coasts and in the eastern Gulf of Mexico. And the Senate won't approve leasing of the Arctic National Wildlife Refuge coastal plain. Without those provisions, baby steps in the legislation toward improved access to federal land in the US West—in relation to genuine and in some cases urgent US energy needs—would be meaningless.

The bill, therefore, would do too little for domestic energy supply. Lawmakers trumpet incentives for exotic energy sources favored because they're not oil and gas. But they're just throwing money at fuels that can never represent more than small fractions of the market. They can't continue to stifle development of oil and gas—which together meet 60% of US energy needs—and legitimately claim to have acted positively on energy supply.

In addition to failing on supply, the bill would raise prices of energy.

The ethanol mandate would fleece fuel consumers directly by raising gasoline costs and indirectly by lowering government tax receipts. Those effects alone should keep the oil industry from supporting ethanol incentives.

Further raising fuel costs would be the failure to limit product-defect liability for MTBE. Inaction exposes refiners and MTBE manufacturers to scores of lawsuits filed by municipalities and utilities alleging MTBE contamination of drinking water. The protection sought by industry wouldn't block lawsuits claiming negligence or other such misbehavior; it would preclude only product-defect claims on the logical basis that MTBE isn't defective. It thus would have denied plaintiff's attorneys a complaint much easier to litigate than negligence and thereby would have reduced an ominous caseload.

If that mass of lawsuits advances and courts find MTBE "defective" wherever harmless traces of it have appeared in water supplies, the refining industry will suffer a serious and unjust financial blow. Ultimately, gasoline consumers will pay the price.

Overwhelming disadvantages

Energy legislation certain to squeeze consumers in these and other ways shouldn't pass and doesn't deserve the support of oil and gas companies. Yes, the legislation contains scattered advantages for various segments of the industry. But they're disappearing. And the bill's disadvantages are overwhelming. Nothing in the current energy bill is worth the scorn the industry would face from consumers—who also are taxpayers and voters—angered by rising energy prices and failure to address supply to the full extent of US potential.

Legislators who have worked on the bill for years naturally want to pass something. To them, every burble in the energy market signals dire need for a new gaggle of energy law. OPEC's decision to trim 1 million b/d from the group quota on Apr. 1 will join that arsenal. Yet OPEC can point to supply-demand balances foreshadowing oversupply in the year's second quarter as a reason for its action. For what Congress seems determined to do to energy consumers, there is no good reason and no excuse.