Oil Slicks

Why the House threw money at the oil industry, which is struggling under record profits


Washington, D.C. policymakers really do live in a world separate and distinct from much of America. If you doubt that, consider a recent pair of newspaper stories on energy "challenges."

On July 30, The Wall Street Journal ran the front-page story, "Oil Giants Struggle to Spend Profits Amid Shortage of Exploration Sites." Current good times, you see, present a problem for the oil industry: They can't figure out what to do with some $40 billion in extra cash they've generated of late. Royal Dutch/Shell Group, for example, is turning profit at the rate of $1.5 million an hour. It's hard to spend that kind of cash quickly.

Four days later, the Washington Post sported its own front-page article on the energy industry. In legislation that was signed last week, members of the House of Representatives felt the need to include $33.5 billion in tax breaks for the power industry (the breaks will go toward costs of exploration and similar activities).

Which raises the question: If business managers are facing a scarcity of profitable uses for their shareholders' dollars, why do our political managers find a surfeit of meritorious opportunities for taxpayers' dollars?

Because political projects don't have to pay off economically. They only have to pay off politically. So when the House started debating a bill as detailed and cumbersome as the 500-plus page Securing America's Future Energy Act of 2001, it didn't take long before members agreed to triple the number of giveaway items the president originally asked for. "It's like anything you do in your personal budgeting," explains John Felmy, chief economist for the American Petroleum Institute, which formed a coalition with other producer and consumer interests to support the bill. "You add everything up you want to buy and it sums up to twice what you wanted to spend."

But why should taxpayers want to buy any of it? More precisely, why would taxpayers want to spend their money helping oil companies improve their bottom lines? There are serious issues with energy policy, but a dearth of targeted tax credits for producers and consumers aren't among them. If pols are worried about domestic production, they need to allow oil and gas exploration on some of the land the feds control. Industry also complains of regulatory burdens–such as constantly changing clean-air regulations and state requirements that force companies to produce 16 different types of gasoline–that increase its costs and cut into long-term profits.

Fine. But ultimately it's the consumer who pays those costs. Restrict exploration and production enough to affect world production, and we'll pay for it at the pump. But policy makers and voters should keep two things in mind. First, there'll almost certainly always be a crisis that can be traced back to oil. If prices are too low, consumers are happy, but producers demand that the federal government do something. When prices are high, consumers whine, truckers demand their own special bill of rights, and congressmen call for price-gouging investigations of the oil industry.

The result is an incoherent jumble of impulses to reduce the price consumers pay while increasing the price producers receive. The bill that passed the House last week, for example, includes a provision to keep small, unprofitable wells pumping. Yet if the goal is to increase supply enough to provide lower prices, wouldn't markets naturally work to shut those smaller producers down?

Of course. But then those producers are salt-of-the-earth, hardworking Americans. "This isn't big oil, it's small oil, tiny oil," says the American Petroleum Institute's Felmy. And yes, that tiny oil, like tiny renewable energy producers, like manufacturers of energy efficient appliances, like large oil companies, are well-organized. They have a way of making it politically profitable to invest in their particular projects, even if such investments would never earn a return to any shareholder.