The case of a government oil company
Should the US government get into the oil and gas sector? Absolutely not! It is a capitalist country and….
Wait, maybe that makes sense.
Since 1975, the United States has been buying and selling oil for the Strategic Petroleum Reserve, a national stockpile established in times of emergency. This year, President Biden authorized the release of 180 million barrels of oil – a quarter of the total – to help tackle gasoline prices that soared to a high of $5.02 a gallon after Russia invaded Ukraine and the West imposed sanctions on Russian energy exports. At some point in the future, Washington will buy oil to replace this year’s releases.
Why not go a step or two further? On the national security website War on the Rocks, energy industry veterans Ryan Kellogg and David Brunnert argue for a national reserve of drilled but uncompleted oil and gas wells on federal lands that could be exploited in a crisis to add to American energy capacity. . This would give the government the ability to actually produce oil and gas, instead of just reselling barrels already purchased on the market. The government could own these unused wells or pay private sector companies to maintain and operate them if necessary.
Energy historian Gregory Brew of Yale University has suggested that the government could stabilize energy markets and lower prices by subsidizing oil refining operations in the United States or even creating a national refining company to increase gasoline production capacity without worrying about making a profit. President Biden has already said he is ready to use emergency government authorities to boost gasoline production, following the same playbook the government has used to ramp up vaccine production and address other pressing issues. during the COVID pandemic.
laissez-faire capitalism can only get you so far
Americans generally resist direct government involvement in the corporate sector, which has allowed corporate America to thrive and become hyper-efficient. But laissez-faire capitalism lost its luster as millions of manufacturing jobs left the United States for cheaper foreign countries and China became an economic superpower thanks to massive government support for industrial sectors. . Congress’s recent passage of the CHIPS+ Act, which will subsidize domestic semiconductor manufacturing, was a step toward more aggressive industrial policy in the United States, even amid complaints that it amounted to “good – to be companies”.
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America’s energy industry is renowned for its independence, but the cowboy swagger has caved in to a tough economy as climate change upends the oil and gas business model and investors sour on the energy bets. Pressure to reduce carbon consumption is making energy companies reluctant to add oil and gas production capacity and invest in long-term projects. US refinery capacity, for example, has fallen slightly since 2020, when COVID hit, everyone crashed, and the fossil fuel industry lost billions of dollars. Demand has boomed during the recovery, but refiners still don’t want to add capacity that might not generate a healthy return until renewables start replacing carbon. Constrained capacity was one of the factors pushing gasoline prices to historic highs earlier this year.
The profit motive in oil and gas no longer generates all the products consumers need today. As a solution, Kellogg and Brunnert argue for a new “Energy Security Administration” that would ensure sufficient supplies of oil and gas, including refining capacity and energy transmission infrastructure. Capacity targets would be higher than what the mainstream market could support, but unused capacity would be disabled in normal times. While government could set priorities, it would partner with industry to piggyback on existing projects and technical expertise. Contracts should be structured so that the government cannot preempt profitability by forcing excessive production and energy companies cannot defraud taxpayers by obtaining subsidies to produce what they would do anyway.
This could irritate environmentalists
Environmentalists might howl about fossil fuel production subsidies. Conservatives may regret the government’s involvement in board decision-making. But the Biden administration’s bash-and-coax strategy isn’t much better, and it’s not clear that any president can effectively balance the need to tackle climate change with a shortage of the fossil fuels we depend on. today. Oil and gas prices have fallen slightly over the past six weeks, but the crisis could deepen further this winter as Ukraine and its allies attempt to cut Russian energy exports and Russia seeks ways to retaliate.
Currently, there is not much discussion in Washington about an operational role for the US government in the domestic energy industry. Yet the United States is unusual in this respect, given that virtually all of the OPEC oil cartel governments either control or play a major role in their domestic oil industries. The reason Biden has “asked” countries like Saudi Arabia and Venezuela to produce more oil is that those governments can choose to do so, while here in the US the president can kindly ask ( or beg) but not coerce private companies. companies to produce more energy.
The ambitious Cut Inflation Act, which Democrats may be able to pass by the end of the summer, includes some federal intervention in national energy markets. The bill includes $375 billion for clean energy incentives, but also some measures that could spur new oil and gas production and make it easier to transport fossil fuels. If the bill is passed, it could serve as a model to pave the way for cleaner energy in the future while preserving the fossil fuels we depend on today. If we’ve learned anything from 2022, it’s that neither of these things excludes the other.
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