The US oil and gas industry can find little consolation in last week’s passage of energy legislation that could have been worse. The Energy Independence and Security Act, passed by the Senate Dec. 13 and the House 5 days later, doesn’t punish the industry with taxation as originally proposed. As energy policy, though, it still fails.
The worst recent proposal of a hostile Congress fell victim to a veto threat. The bill doesn’t raise taxes on oil and gas to pay for costlier substitutes. It does, however, sustain the economic poison of fuel choice by the government. And it promises more energy supply than it will deliver.
CAFE standards
The bill’s centerpiece is a toughening of standards for vehicle fuel efficiency. In 2020, new cars and light trucks will have to meet a corporate average fuel economy (CAFE) standard of 35 mpg, up from 27.5 mpg for cars and 22.5 mpg for light trucks. It’s the first change to CAFE standards since 1985 and the feature to which politicians will point when they boast about having acted on energy.
The bill also raises the standard for vehicle fuels from renewable sources, mainly ethanol in gasoline. The mandate, now rising annually to 7.5 billion gal/year in 2012, will jump to twice that level in 2015. By 2022, 36 billion gal/year of vehicle fuel sold in the US will have to come from renewable sources, of which more than half must be “advanced,” such as cellulosic ethanol.
And instead of outlawing “price-gouging,” the bill makes it “unlawful for any person, directly or indirectly, to use or employ, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Federal Trade Commission may prescribe as necessary or appropriate in the public interest or for the protection of United States citizens.” Whatever this means, the infraction is subject to a civil penalty of as much as $1 million/day of violation. The same penalty applies to the new crime of reporting false information to a federal agency on the wholesale prices of crude and products.
The bill won’t cut oil use or lift supply by anywhere near the amounts claimed by its supporters.
The extent to which toughened CAFE standards can lower fuel consumption is a matter of dispute. According to some economists, lowering fuel mileage just encourages driving. And market controls always produce surprises. The first round of CAFE standards, for example, spawned the sport utility vehicle. But how much worry about consequence can anyone expect from a Congress that stiffens CAFE requirements in a bill that also extends tax incentives for vehicles able to burn low-mileage, 85% ethanol blends?
Extension of the renewable-fuel standard is an attempt to paint over a huge mistake while bailing a coddled industry out of its greedy misery. Because extravagant ethanol incentives have raised the price of corn and encouraged construction of too much distillation capacity, ethanol manufacturers are caught in a margin squeeze. By elevating the mandate, Congress hopes to sop up the surplus while perpetuating the myth that ethanol meaningfully extends energy supply at reasonable cost. In fact, the original ethanol mandate placed a huge, unfair burden on taxpayers and consumers of food and fuel while raising the amount of energy needed for the production and transportation of ethanol. Expanding it even as the costs become obvious is scandalous.
Prohibiting what?
And what can be the point of the section on unlawful market activity other than a subtitle, “Prohibitions on Market Manipulation and False Information,” that enables politicians to claim to have prohibited market manipulation? Subjecting wretchedly ambiguous offenses to criminal prosecution and huge civil penalties might in fact crimp the information flows on which free markets depend.
In the name of energy policy, Congress again has indulged base political impulses at the expense of taxpayers and consumers. When lawmakers crow about having acted on energy, Americans should note what they’re paying for food.
