Bingaman on Republican Leadership Energy Amendment

Mr. President, the pending business before the Senate is S.2284, a bill to reauthorize the Federal law governing flood insurance. Our next scheduled vote, however, does not relate to that bill. Our next scheduled vote does not relate to the subject of flood insurance at all. Our next vote will be on an amendment which the Republican leader has filed, allegedly to deal with the high price of oil and the high price of gasoline at the pump. I will oppose that amendment and I urge all Senators to do the same.

The high price of oil and the gasoline and diesel refined from that oil is creating a substantial economic burden on the American consumer and on the U.S. economy. At the close of business Friday, the price of oil stood at $126 per barrel and the average price of gasoline was around $4 per gallon. This reflects a dramatic increase over prices a year ago. The increased cost is difficult for many Americans to avoid because many commute to work or otherwise need to travel substantial distances with no ready alternative to the use of their private vehicles. To the extent that Congress and the Administration can take action to reduce the burden of this increased cost, we should do so.

Unfortunately, the Republican leader’s amendment is not a credible proposal for reducing that burden. We should be honest with the American people about this so-called “debate” on high gas prices. This is election year politics in its classic form. It is Washington finger-pointing and – unfortunately – very little else. Let’s be clear. The President set the tone for the current debate. On April 29, nearly two weeks ago, the President went to the Rose Garden to express his concern about the price of gas and to blame the Congress. While he was there, he also took the occasion to blame the Congress for the rise in food prices.

Unfortunately, there has been no effort by the President to sit with the leaders of Congress and work out a consensus on constructive actions that might actually help, either with the high price of gas or with the high price of food. The Republican leader’s amendment which will come up for a vote tomorrow continues the same old “blame the other guy” approach.

So let’s talk about the facts of why oil and gasoline prices are so high. In my view there are supply and demand issues in world oil market, that explain some of what we have seen and some of those factors are outside our control in the short term.

The simple fact is that the market for oil is a global market and the price of oil is reflected on that market. The United States is the largest purchaser of oil in that market, but China is rapidly gaining on us in that regard. We are not even close to being the largest seller of oil. In fact, we import about 60 percent of the oil we consume.

So if we want to affect the price of oil either by reducing world demand or by increasing world supply our ability to do so is limited.

By far the most significant step we can take to reduce demand in the short and medium term is to improve vehicle fuel efficiency of the cars and trucks, which we drive. Last fall, we did just that. Many of us believe the increase in required miles per gallon was too modest, but it was a substantial improvement over what had prevailed for the 3 previous decades. On the supply side our ability to affect world prices is even more limited. That is because of our limited reserves (we have about 3 percent of the world’s reserves) and because most experts believe that US production in coming years will do well to maintain its current level. We can affect that production somewhat by adopting enlightened policies, but its impact on world markets and consequences on the world price of oil will be limited.

But when we look at issues that we in the U.S. government can most directly and immediately affect, I would cite two:

1) Reduce the incentives for speculation in the oil market, and;

2) Strengthen the dollar by showing some commitment to getting our own fiscal house in order.

I want to comment on each of these issues.

The Committee on Energy and Natural Resources, which I chair, has held several hearings on oil and gasoline prices and markets this year. Other committees in the House of Representatives have also been holding hearings. Current high prices are a result of several factors, and one of them is certainly the tight global supply-demand balance. But one thing stands out from all the testimony Congress has heard – a key factor pushing up oil prices into the triple digits is a dysfunctional energy market.

Here is what a Senior Vice President of a major oil company said at one of these hearings, on the House side.

“When you look at the fundamentals of our business, Congressman, the supply/demand fundamentals, our assessment would be the price should be somewhere around ($)50, $55 a barrel. There is a disconnect. To me, there are three factors that contribute to that. One is the monetary issue, the weaker dollars we've already talked about. The other is geopolitical political risk. And the third, we believe, is speculation.”

Other key analysts in the government and the private sector have made similar statements, although their assumptions about what exact price level was supported by supply/demand fundamentals have differed. But it would be fair to say that key energy analysts are in agreement that at least $30 of the current price of a barrel of oil is the result of market pressures unrelated to supply and demand for physical barrels of oil.

This general assessment of a significant cause of high oil and gas prices is broadly shared. One noted energy economist put it this way recently to the Wall Street Journal: “Crude futures prices have decoupled from the forces controlling the underlying physical flows of the commodity.” In plain English, that means that crude oil prices are not connected to supplies. If oil prices aren’t being driven by supply and demand, what are they being driven by?

We heard some strong testimony on this in our Committee from Cambridge Energy Research Associates, the firm headed by Daniel Yergin, a leading oil expert. Here is what their analyst had to say in early April:

“Crude oil futures trading activity on the New York Mercantile Exchange—the largest in the world—is currently about 350 percent higher than in 2002. Noncommercial investors have contributed to this increase… “New fundamentals”—new cost structures and global financial dynamics—are behind the momentum that pushed oil prices to record highs around $110 a barrel.”

So, if we want to get at the real question of why oil is over $125 a barrel, and why gasoline is closing in on $4 a gallon across the country, you won’t find the answer in the Republican Leader’s amendment. We are witnessing a substantial influx of speculative money into energy markets. It is bidding up the price of oil beyond any reasonable level. Every consumer can see it at the pump. But we do not have any serious effort to regulate that speculation, or even to notice it. A Commodity Futures Trading Commission (CFTC) witness told our Committee that they saw no evidence of speculation driving up oil prices. I thought they were alone in that view. But the Republican Leader’s amendment also fails to acknowledge or deal with this significant part of the problem.

If we’re going to protect consumers, we need to have the Federal government as an effective overseer, to start policing these markets. There is a proposal that Senator Reid has introduced that will begin to address this issue. That bill requires the CFTC to start doing the job that Congress intends for it: to make sure oil trading is done with adequate transparency and to make sure that limits on speculation apply across the board. Right now, it’s entirely possible for hedge funds or traders to evade the protections put in place for trading oil in the United States. They simply trade U.S. crude oil in foreign markets that the CFTC has decided it will not regulate. The CFTC could regulate these so-called “dark markets,” but it decided not to.

Instead of turning a blind-eye to this off-shore oil trading, Senator Reid’s bill will ensure the CFTC makes a priority of protecting American energy consumers. The Majority Leader’s approach is aimed at bringing down the price of oil in the near term, by having effective regulation of speculation. Some big hedge funds probably won’t like it, but it will help the average consumer.

And now I will talk for a minute about the second issue which both the Congress and the administration should be addressing.

If we are going to get commodity markets of all kinds to act in a more rational manner, we also need to do something about our overall fiscal policy in this country. The United States is borrowing money on world financial markets because we can’t summon the political will to actually pay for the things we want our government to do. We are fighting a war in Iraq on borrowed money, to the tune of over a half-trillion dollars since 2002. A number of us have proposed to strengthen and extend tax incentives to spur energy production from renewable sources, but those are being opposed by many here in the Senate, for the simple reason that we are proposing to pay for them, instead of borrowing even more money from overseas to cover their cost. Because of the mismanagement of our economy and our high borrowing overseas, the value of the dollar has fallen dramatically, and the price we have to pay for international commodities like oil is rising. That’s another major factor driving up the price of oil. We need to face up to it, here in the Senate. If Senators want to lower high oil prices, getting our budget house in order will do much more to strengthen the dollar and lower gasoline prices, and sooner, than any of the new drilling called for in the Republican Leader’s amendment.

I’ve covered the two most important things we can do to address high oil and gas prices – curbing oil market speculation and getting our budget and fiscal policy in order.

Let me turn now to the Republican leader’s proposal. The amendment is a grab bag of energy-related provisions which have little connection either to the current or the future price of oil or gasoline.

Although the amendment contains various other disconnected proposals, the main thrust of the amendment is to increase the amount of federal land available for leasing for oil and gas exploration and production. The areas proposed for leasing are two: 1) The OCS off the Atlantic and Pacific coasts, and 2) a portion of the Arctic National Wildlife Refuge.

The underlying assumption of the proposal is that our lack of supply is a result of our refusal to permit exploration and drilling on enough of our federal lands, and that changing the law to permit drilling in these specific areas will solve the problems.

What about that basic assumption? Is our ability to produce oil and gas domestically being held back because of our unwillingness to lease the OCS off the East coast and OCS off the West coast and the area known as the Arctic National Wildlife Refuge? Let’s look at the facts.

What is happening on the supply side for oil produced in the United States? Last year, we saw the amount of crude oil produced in the United States remain constant, instead of falling. That may not sound like a big achievement, but it is an improvement on previous trends It is no doubt a reaction to higher prices, but it also reflects bipartisan support to increase production on Federal lands in places where it is appropriate.

Here are three charts that illustrate the general trend of what has been going on.

Last year we leased 4.6 million acres of Federal land for oil and gas production onshore in the United States. That’s in places like New Mexico, Wyoming and Colorado. That is almost double the 2.6 million acres we put up for leasing in 2000, and these figures do not include all the leasing we did last year on the Outer Continental Shelf (OCS).

Similarly, last year we approved 7,124 permits to drill oil and gas wells on Federal lands, again, all onshore. That is more than double the amount approved in 2000, and this is partly due to the direct funding stream we put in place for this process as part of the Energy Policy Act of 2005.

As a result of the increased number of drilling permits, we had actual drilling start last year on 5,243 new oil and gas wells. That’s approaching a doubling of the number drilled in 2000.

Similar positive trends are underway in the Gulf of Mexico, although the overall results to date are more modest. According to the latest report by the Minerals Management Service, total production of oil in the Gulf of Mexico was up slightly in 2007, to 1.3 million barrels per day. That is an increase of about 10,000 barrels per day of oil over 2006. We’ve gone from drilling 134 deepwater wells in the Gulf of Mexico in 2006 to 142 new deepwater wells last year. There were also 8 announced deepwater discoveries in the Gulf of Mexico in 2007. We certainly are not in decline in oil production in the Gulf of Mexico, but the increase in activity painted by these statistics is not overwhelming, either.

So, there is still much more that we could be doing to support domestic production of oil and gas. But the most effective strategy we could pursue is something that is not in the Republican Leader’s amendment.

To understand where our biggest opportunity for making progress on increasing domestic production lies, we need to focus on a significant problem in our management of oil and gas on Federal lands, including the Outer Continental Shelf.

Simply put, all of the policy emphasis has been on having more lease sales, but not enough emphasis has been placed on encouraging diligent development of Federal lands, once leased.

While it is generally true that leases must be produced within certain time parameters, Federal agencies have substantial discretion in managing these provisions and I am concerned that we may not be following the correct policies to bring about production in the timeliest fashion.

I have asked the Government Accountability Office to examine this topic, but let me illustrate my overall concern with the following charts.

Here is a pie chart that shows all the leased acreage on Federal land for oil and gas development, onshore in the lower 48 States. As you can see, about three-quarters of all the Federal land we have leased onshore is not currently being produced. Of the over 45.5 million acres of land that has been leased, oil companies are sitting on 31 million acres, on which no production is occurring.

A similar story can be told in terms of the Outer Continental Shelf. Of a total of 41 million acres leased, 33 million acres are not producing.

The Republican Leader’s amendment proposes to open up the entire Atlantic and Pacific coasts to leasing and development. Although the amendment speaks to petitions from Governors to lease in specific areas, the way the amendment is written, the Secretary can open for leasing even areas where no such request is pending, by including them in the next so-called 5-Year Plan from the Minerals Management Service.

But here is a map of all the leases in the OCS in the Gulf of Mexico. The blue squares represent areas that have producing leases. The much more numerous yellow squares represent leased blocks where nothing is happening. And the red blocks represent new areas that have been added through recent lease sales. For all of the increases in drilling activity that I have mentioned earlier in my remarks, you can see that we still have a lot of areas where no exploration or production is going on, even though they have been leased. And we have recently added even more leased areas.

Here is a second map, of oil and gas producing regions in Alaska. In the middle here is the private and State land. This small area to the right is the 1002 Area of the Arctic National Wildlife Refuge, which the Republican Leader’s amendment would open to leasing. This large area on the left, though, is the National Petroleum Reserve – Alaska. It was specifically set aside to be exploited for oil and gas development. The National Petroleum Reserve-Alaska totals 23.5 million acres, most of which can be developed and drilled. The mean estimate of oil resources in the National Petroleum Reserve is 9.3 billion barrels of technically recoverable oil. That is significantly more oil than that estimated to be contained in the federal portion of the coastal plain of the Arctic Refuge. To date, 3.8 million acres of the NPRA have been leased. That’s twice the size of the portion of the Arctic Refuge that is being talked about in the Republican Leader’s Amendment.

Here is a slightly more detailed version of the chart, which shows where those leased acres are. You can see that a large portion of the leased area is on the eastern side of the Petroleum Reserve, very close to the Alpine field, which is tied into the Trans-Alaska Pipeline System. So the infrastructure to take oil from the Petroleum Reserve to the lower 48 is very close at hand.

With all of those favorable factors in place, you might wonder how many production wells are operating on the 3.8 million acres of the Petroleum Reserve that have been leased. The answer – zero.

Zero current production from these leases should be a substantial cause for concern. It illustrates a more basic problem with our domestic production of oil and gas. It’s not that we haven’t leased Federal land for exploration and production. We have leased large areas of federal land, and we are leasing more all the time. Oil and gas companies certainly benefit from having the leases on their books and claiming the potential oil as part of their reserves. But we need to get these oil and gas resources out of the reserves column and into the production column.

What does the Republican Leader’s amendment do about any of this? Absolutely nothing. He is calling for more lease sales, in areas that are much more remote from oil and gas transportation infrastructure than the acreage we have already leased. It would take a decade or more for those resources to come into production, at the very best. And why would we expect oil and gas companies to rush these new areas into production, when they are sitting on literally millions and millions of acres of existing leases without carrying out any production on them?

The fact is, having a lease sale in the Arctic National Wildlife Refuge won’t do one thing to bring down gasoline prices anytime soon. Opening offshore areas such as off the East Coast and off the West Coast, where there is no infrastructure, is also a very ineffective response to the prices consumers are seeing today. These are not real solutions to what is wrong in energy markets today.

If we are serious about doing something to boost domestic production, we need to focus on better management of Federal leases. Let me describe two concrete suggestions in that regard.

First, we might consider imposing a production incentive fee on all the Federal acres that are under lease, a fee that would increase over time, but which would be cancelled out by royalty payments. That would provide a disincentive for just sitting on leases for purposes of inflating a company’s reserve estimates.

Second, we enacted some specific provisions in the Energy Policy Act of 2005 that reduced the pressure on the leaseholders in the National Petroleum Reserve – Alaska in terms of their responsibilities to develop the oil resources there. We changed the law to allow oil companies with a lease in the National Petroleum Reserve to hold it for 30 years or more without producing. I opposed those changes to the law, but was unable to prevail on that point.

Provisions that allow for decades of additional delay in developing oil on Federal lands that are dedicated to that purpose make no sense when oil is at $126 a barrel. If anyone in this chamber wants to advocate for oil production in Alaska on Federal land, then the threshold test is whether they are willing to change the incentive structure up there that rewards delay and inaction. That dysfunctional incentive structure was put in place in a law we passed in 2005. If we’re not willing to take decisive action to bring the 3.8 million acres already leased in Alaska into production, then there isn’t much credibility to the argument that somehow one more lease sale up there will greatly add to our energy security.

There is another area in which the Republican Leader’s amendment misses the mark on promoting domestic oil and gas production. His amendment leaves out the one place offshore where it would be easiest and fastest to get additional production – the Gulf of Mexico. His amendment opens up the entire Atlantic and Pacific coastlines for new oil and gas production, but leaves in place the oil and gas moratoria in the Gulf of Mexico. That’s out of touch with reality. The Gulf of Mexico is the first place we should be looking to for expanded production, not the one place we leave off the list.

When we last debated offshore oil and gas production in this chamber, we made what I consider to be a very bad bargain. We put off limits 10 times the amount of natural gas that we opened up to exploration and drilling. We made available for lease 2 trillion cubic feet of natural gas in the Gulf of Mexico while putting off limits 22 trillion cubic feet of natural gas. We also put new areas of the Gulf of Mexico under moratorium for the first time – including portions of the Lease Sale 181 Area that were closest to the existing oil and gas infrastructure. That area had been fully analyzed under NEPA, and was proposed for leasing by former President Clinton, with the agreement of former Florida Governor Lawton Chiles.

The portion of the Lease Sale 181 Area we put under moratorium for the first time contains a half billion barrels of oil and 4 trillion cubic feet of natural gas. The available infrastructure to take it to market is already there, and the interest by industry in these resources is intense. It was probably the most highly prized part of the original 181 Sale Area. As everyone in this chamber knows, it was put off limits by the Bush Administration for purely political reasons. If it were offered for lease, the oil and gas it contains would likely come on the market faster than any other new area offshore or in Alaska that we could open.

This weekend, I was reading the current edition of Barrons, the Dow-Jones business and financial weekly. In it is a column by Jim McTague where he quotes President Bush’s former economic adviser Al Hubbard as saying “If the other 49 states realized what Florida is doing to them, they’d be up in arms.”

McTague goes on to lament the fact that President Bush does not support revoking the lease sale moratorium on the OCS that were first imposed by his father in the early 1990’s. He then states, “Bush, during the 2000 presidential contest, promised his brother Jeb, Florida’s governor at the time, that he’d maintain the drilling ban.”

So, there you have it. If we are really serious about increasing domestic production and repealing existing moratoria, we ought to be looking to open up the entire original Lease Sale 181 Area. The Republican Leader fails to address that in his amendment, much to the detriment of his proposal.

Before concluding my remarks, I want to compliment the Republican Leader for including in his amendment one proposal that several of us have been consistently advocating for the past few years. That is the proposal to call to a halt the diversion of oil off the market into the Strategic Petroleum Reserve.

At over $126 a barrel, it simply makes no sense to be sticking oil underground. Industry analysts, the Government Accountability Office and quite likely a majority of Senators believe this is the wrong energy policy and the wrong fiscal policy.

Senator Dorgan has been pushing legislation along these lines for several months, and I have been glad to be his co-sponsor. Last week, Senator Domenici indicated that he had changed his view of the matter and would now support a temporary stop to this oil diversion. For that reason, Senator Dorgan’s provision is contained in the Republican Leader’s amendment, and that is progress.

Unfortunately, that is the only provision in the Republican Leader’s amendment that would have any near- or medium-term impact on energy prices. The remainder of the amendment is a combination of provisions that are largely disconnected from the near- or even medium-term realities of energy consumers and energy markets.

So, let me sum up the key reasons why the Republican Leader’s Amendment should be opposed.

First, the Amendment doesn’t do anything about speculation. That’s one of the key factors that have contributed to $126 per barrel oil. It’s the cost element for crude oil that could be reversed most easily. If you are concerned about energy consumers, then you ought to have dampening speculative forces at the top of your problem list for action. It’s not in the Republican Leader’s amendment. And, of course the amendment does nothing to address our looming financial problems.

Second, the Amendment misses the boat on how to quickly boost domestic production. The principal problem is not that we don’t have enough areas under lease. I have nothing against holding more lease sales. More lease sales make more resources eventually available. They also benefit oil companies who can burnish their financial reports with claims of having greater reserves. But additional lease sales, by themselves, are not going to make a difference to consumers in the near term or medium term. If we care about boosting domestic production quickly, then we need to find ways promote diligent development of the Federal leases which have already been granted.

And finally, with respect to future lease sales, the Amendment is out of touch with where the most promising areas are, as far as getting new supplies on line as quickly as possible. If that is the objective, then we ought to focus on opening up the rest of the original Lease Sale 181 Area in the Gulf of Mexico.

I appreciate the fact that the Republican Leader’s Amendment indicates that he agrees with one of the promising ideas for putting some more supply on the market quickly. That would be to stop the diversion of oil from markets into the Strategic Petroleum Reserve. That seems to be the one thing we can all agree on. I hope that we can adopt that provision, which will be voted on following the Republican Leader’s amendment.

As for the rest of the Republican Leader’s Amendment, it is not going to address the real energy issues we face, or provide any real relief to consumers. I will vote against the amendment tomorrow. And after that, I hope we can get the consideration of energy in the Senate off the partisan track that it is currently on. That’s a track that will lead nowhere, and the American people expect more of us than that.

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