The case of a government oil company

Should the US government get into the oil and gas business? Absolutely not! This is a capitalist country and….

Wait, maybe it makes sense.

Since 1975, the United States has bought and sold oil for the strategic petroleum reserve, a national reserve established for times of emergency. This year, President Biden authorized the release of 180 million barrels of oil, a quarter of the total, to help combat gasoline prices that spiked to as high as $5.02 a gallon after Russia invaded. Ukraine and the West imposed sanctions that affected Russian energy exports. At some point in the future, Washington will buy oil to replace this year’s releases.

Why not take a step or two more? On the homeland security website war on the rocks, energy industry veterans Ryan Kellogg and David Brunnert advocate for a national reserve of drilled but unfinished oil and gas wells on federal land that could be tapped in a crisis to boost U.S. energy capacity. That would give the government the capacity to produce oil and gas, instead of simply reselling previously purchased barrels on the market. The government could directly own those spare wells or pay private sector companies to maintain and operate them when needed.

Yale University energy historian Gregory Brew suggested that the government could stabilize energy markets and lower prices. Subsidize US oil refinery operations or even creation of a National Refining Company to add gasoline production capacity without worrying about making a profit. President Biden has already said that he is willing to use government emergency authorities to boost gasoline production, after the same playbook the government used to speed up vaccine production and address other pressing issues during the COVID pandemic.

Laissez-faire capitalism can only take you so far

Americans generally resist direct government involvement in the corporate sector, which has allowed American companies to prosper and become hyper-efficient. But laissez-faire capitalism has lost its shine as millions of manufacturing jobs have left the United States for cheaper foreign countries and China has become an economic superpower through massive government support for industrial sectors. . The recent approval by Congress of the CHIPS+ Lawwhich will subsidize domestic semiconductor manufacturing, was a step toward a more aggressive industrial policy in the United States, even amid complaints that amounted to “corporate welfare.”

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The US energy industry is famous for its independence, but the cowboy swagger has given in to tough economics as climate change disrupts the oil and gas business model and investors have soured on energy bets. Pressure to reduce carbon consumption makes energy companies reluctant to add oil and gas production capacity and invest in long-term projects. U.S. refinery capacity, for example, has dropped slightly since 2020, when COVID hit, the whole world went to earth, and the fossil fuel industry lost billions of dollars. Demand soared during the recovery, but refiners still don’t want to add capacity that might not deliver healthy output before renewables start displacing carbon. Limited capacity is one factor that pushed gasoline prices to record highs earlier this year.

The profit motive in oil and gas no longer generates all the products that consumers need today. As a solution, Kellogg and Brunnert advocate a new “Energy Security Administration” that would secure ample supplies of oil and gas, including refining capacity and energy transportation infrastructure. Capacity targets would be higher than the ordinary market could support, but spare capacity would be deactivated during normal times. While the government could set the priorities, it would partner with industry to take advantage of existing projects and technical expertise. Contracts would have to be structured so that the government couldn’t preempt profitability by forcing excessive production, and energy companies couldn’t cheat taxpayers by getting subsidies to produce what they would produce anyway.

This could anger environmentalists.

Environmentalists might scream about subsidies for fossil fuel production. Conservatives might deplore the government’s involvement in boardroom decision-making. But the Biden administration’s hit-and-convince strategy is no better, and it’s not clear that any president can effectively balance the need to address climate change with scarcity of the fossil fuels we rely on today. Oil and gas prices have receded somewhat over the past six weeks, but the crisis could still get much worse this winter, as Ukraine and its allies try to squeeze out Russian energy exports and Russia looks for ways to retaliate.

At the moment, there is not much talk in Washington about an operational role for the US government in the national energy industry. However, the United States is unusual in that regard, given that virtually all of the OPEC oil cartel governments control or play a major role in their domestic oil industries. The reason Biden has “asked” nations like Saudi Arabia and Venezuela to produce more oil is that those governments can decide whether to do so, whereas here in the United States, the president can nicely ask (or beg) but not compel. to private property. companies to produce more energy.

The ambitiously named Inflation Reduction Law, which Democrats can 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 stimulate oil and gas production and make it easier to transport fossil fuels. If the bill passes, it could be a model for how to pave the way to cleaner energy in the future while safeguarding the fossil fuels we rely on today. If we’ve learned anything from 2022, it’s that neither of those things excludes the other.

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