Louisiana Needs Increased Energy Production, Not Increased Energy Taxes

December 8, 2010

Domestic drilling would increase revenues, lower prices, and generate jobs

Ben Lieberman
Pelican Institute for Public Policy

Among the many suggestions for deficit reduction in the recently released Fiscal Commission report is a 15 cents-per-gallon increase in the federal gasoline tax. Granted, this proposed tax hike would raise revenues and make a modest dent in the deficit, but it would do so at the expense of the driving public and would disproportionately burden low-income motorists. There is a better way. If raising energy-related revenues is the goal, why not fill federal coffers in a manner that actually reduces the price at the pump? Washington can accomplish this by allowing more oil drilling.

The federal government controls nearly all offshore areas beyond three miles from the coast as well as vast expanses of energy-rich western lands. Unfortunately, only a fraction of these areas have been opened to energy leasing, due to legislative and regulatory restrictions. For example, a 2008 Department of the Interior report concludes that only 8 percent of the estimated 31 billion barrels of oil beneath federal lands is fully available for leasing, while 30 percent is subject to significant restrictions and 62 percent is entirely off-limits.

America’s offshore areas hold even greater potential but are also constrained. In fact, the Obama administration just announced that it is keeping both the Atlantic and Pacific coasts and the eastern Gulf out of reach. In addition, the post-Deepwater Horizon permitting process for the central and western Gulf has slowed to a crawl. No other energy-producing nation on Earth has limited its own potential to this extent.

Revenues from new energy leases reached $10 billion dollars in 2008. In 2009, the Obama administration’s first year, leasing revenues dropped below $1 billion, and the slow pace has continued into 2010.

The up-front money the highest bidders pay to win these leases for drilling rights—both offshore and onshore—is only the first installment in payments to the federal Treasury. Energy companies also pay annual rents on each lease, and—unless they hit a dry hole—they must pay royalties of up to 18.75 percent on every barrel of oil and cubic foot of natural gas produced. Royalty revenues vary with energy prices as well as production levels, but have exceeded $9 billion in some recent years. With more leasing, royalty revenues would go up in the years ahead, as new oil and natural gas wells come online.

Even more significant than the leasing and royalty revenues are the potential tax revenues. Energy company profits are subject to the federal corporate income tax as well as other levies—and the more energy produced the higher the taxable income.

Overall, the extra federal revenues from a judicious expansion in domestic energy production could easily reach into the tens of billions annually, quite possibly eclipsing the $25 billion or so from the proposed 15 cents-per-gallon gasoline tax increase. But unlike a tax hike, allowing additional supplies of domestic oil to come online would lower prices for gasoline.

It would be an understatement to call increased domestic drilling a win-win situation. Compared to the proposed gasoline tax, it would be win-win-win. While raising federal revenues in a manner that reduces energy costs, it would deliver yet another benefit no tax increase could provide—job creation. A 2009 study conducted by the American Energy Alliance estimates a potential gain of 270,000 jobs from expanded offshore leasing, including more than 29,000 in Louisiana.

There are now bills in Congress that would reap the multiple benefits from enhanced production of American energy, including the No Cost Stimulus Act (S. 570 and H.R. 1431), American Energy Innovation Act (H.R. 2828), American Energy Act (H.R. 2846), American Conservation and Clean Energy Independence Act (H.R. 2227), and others. All would serve as a good blueprint as the next Congress continues to grapple with high deficits, high energy prices, and high unemployment.

Ben Lieberman is a Senior Fellow in Environmental Policy with the Competitive Enterprise Institute, in Washington DC, and an adjunct scholar with the Pelican Institute for Public Policy in New Orleans.

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