Energy veto bait

July 2, 2007
The US Congress has acted out many of its demagogic whims on energy. A few more are in prospect.

The US Congress has acted out many of its demagogic whims on energy. A few more are in prospect. Veto season looms.

With energy bills already passed, the House and Senate clearly want more to punish an unpopular industry than to act constructively on energy. To oil and gas companies, the proposals would be damaging if enacted but not ruinous. To the consumers and taxpayers who would pay for the blunders, harm would be far worse.

Only in a perversely political context can this bundle of historically discredited ideas make any kind of sense. Maybe congressional Democrats intend to send President George W. Bush a bill they know he’ll veto so they can scorn him as a friend of Big Oil. What a way to govern.

Bush isn’t running for anything. Even though it’s the start of what promises to be a vitriolic presidential campaign, he should do what’s right for the country instead of what he thinks might help his political party, a large part of which is fleeing him anyway. He has nothing politically to lose. His country has much to lose if he doesn’t defend it against the worst products of antioil populism.

By approving energy legislation in present form, Congress would be ignoring lessons of the past and discouraging oil and gas investment in a country that craves new supply. Each of the following measures, passed in some form by one or both houses of Congress, represents a reason for Bush to veto whatever mess reaches the White House:

• Making “price-gouging” in supply emergencies a crime. This would be a law against behavior Congress can’t define, enforcement of which would amount to imposition of price controls. Results would be diminished investment in new supply and constrained sales in emergencies, just what consumers don’t need.

• Extending antitrust enforcement to the Organization of Petroleum Exporting Countries. Like the price-gouging initiative, this measure would restrict sales and discourage development of future supply, but the effects would appear outside the US. Inside the US, consequences would be the same: lower supply and higher price.

• Asking the government to determine how much and what kinds of energy people use. Government shapes the energy market at best by guessing and at worst by dispensing political favors. Energy consumers and economies always suffer when governments tinker with markets.

• Raising taxes on the oil and gas industry. Tax hikes reduce capital available for investment in supply. They also improve the relative allure of opportunities elsewhere. A legislature serious about its expressed concern over foreign oil would seek ways to cut taxes on domestic production and refining, however unpopular such a move would be while gasoline prices are high.

• Rescinding contracts and incentives. A political regime that erodes long-term project economics with short-term fiscal changes frightens capital. It’s understandable that lawmakers want to change deepwater leases containing royalty incentives to insert price thresholds omitted in 1998 and 1999. But the leases are contracts, and producers entered them in good faith. To hold participation in future lease sales hostage to renegotiation of the troublesome leases reflects bad faith by the government. So do efforts to eliminate production incentives enacted in the Energy Policy Act of 2005 (EPACT) after less than 2 years. Political stability is an advantage in competition for exploration and production capital. The US can’t afford to squander it.

• Increasing the ethanol mandate. That the EPACT ethanol mandate was a mistake becomes clearer with time to everyone except the grain growers and distillers getting rich from it. Expanding the mandate would aggravate problems rapidly becoming manifest in the prices of food and fuel.

On ethanol, of course, Congress is mainly following the president, who in his state-of-the-union speech urged a quintupling of the mandate and won’t see a comparable initiative as objectionable. But Congress seems determined to send Bush energy legislation with plenty of other reasons for him to exercise the veto. To the great fortune of energy consumers and taxpayers, one reason is all that’s necessary.