- Jun 6, 2007
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The Inflation Reduction Act that has passed the Senate and is scheduled for a vote this Friday in the House is a disaster for our country, it will fuel inflation not reduce it! The U.S. media has really sold out the American people not fully reporting on the flaws in this bill and the ramifications of these flaws. The country has a crisis with its inflation rate and one major culprit behind this is the high price of fossil fuels and instead of facilitating more domestic production of fossil fuels this bill will hinder and obstruct domestic production.
This bill increases the royalty rate that oil and natural gas companies have to pay the federal government for energy produced on leased land, the rate goes from 12.5% to at minimum 16.67%. In addition it increase the initial cost for a lease it lifts the minimum bid from $2.00/acre for two years on a ten year lease to $10.00/acre for each of those ten years of a ten year lease. Furthermore it increases the rental rate for the lease land these energy companies have to pay currently the law is the rental fee is at minimum $1.50/acre per year for the first five years than for the balance of five year it is $2.00/acre per year; the inflation reduction act raises the rate to $3.00/acre per year for the first two years than $5.00/acre per year for the following six years and then it lifts it to $15.00/acre per year after that.
The Democrats here are violating timeless wisdom which is simply when the government wants to increase an activity it doesn't make it more expensive to conduct such activity. These provisions will increase the cost of energy companies to produce energy on federal lands so they will do less of it. First off, the expenses of production companies have gone up ten to twenty percent for many companies over the past year, the costs of well pipes and drilling equipment and crew, etc. have been affected by inflation and the labor shortage. So if the Federal government with its increased royalty rate is taking a bigger cut of the profits there is less to cover these increased production costs and for profits. Also, good stewards of the economy should want and it is achievable, if supply is increased, to return the price of a barrel of oil to the $50 to $80 per barrel range not this $90 to $120 range the country is seeing in current times. So if oil returns to its normal range and you have the cost to produce a barrel of oil going up ten to twenty percent and you increase the royalty rate you will be really hurting energy companies profits and they will dial back production on federal lands.
Proponents of these provisions will say well these increases just bring the federal royalty rates and land rental rates into line with the state and private sector rates. But the state and private sector leases are generally for three years so energy companies that purchase these leases to justify the expense engage in prompt energy production on these leases. But the Federal government's interests are different than the states and private land owners whose interest is to maximize income; the Federal government's interests should be to have stable energy markets and markets where supply will never be pressured by demand. When one considers that the nature of oil and gas production is that oil and gas fields deplete at a steady rate so for the industry to work well energy companies need to have untapped leases in their inventory that they can expeditiously bring on line when their current fields are drained of their energy resources; this is where federal government leases come in, prior to this Inflation Reduction Act it was cost effective to carry a significant inventory of federal leases, it won't be acter the Act is enacted.
The Demcrats behind these provisions are very short sighted they exhibit a very narrow view about the industry and again display that they are poor stewards of America's capitalist economy for they largely think of just maximizing revenue from these leases. Good government stewards would factor in energy company executives perspectives which are energy prices often drop down very low sometimes approaching or breaching production costs so these executives have to be able dial back production in these lean times and dial up production in boon times so energy companies cannot allow themselves to be strapped with big expenses on leases in inventory which this Inflation reduction act will be generating - for this reason this move by Congress will reduce federal leasing and long term reduce domestic energy production. Further, this move by Congress here tamping down domestic production will just increase the importation of energy which will just decrease tax revenue, decrease employment in the energy industry and increase America's trade deficit.
If Congress wanted to make the system better I think they would be on track with the following policy provisions. One, mandate that for non-competitive lease bidding the purchaser has to pay the minimal bid price in th statute (which is $2.00/acre) or the lowest accepted bid for a lease in the respective state over the last year whichever is higher. The way the system works is that the BLM (Bureau of Land Management) puts out lease for bids if no one bids on the land for two years than a buyer can come in as a non-competitive lease buyer and purchase the lease at a nominal fee they don't have to pay the minimum bid fee of $2.00 per acre, this isn't fair to the taxpayers they deserve real compensation for the lease, this system promotes speculation, speculators that don't drill for oil or gas just buy the lease and sell it at a much higher cost to an energy producer at a later time. Secondly, it would seem to me that good policy would ban resale of leases which promotes speculation and thus higher expenses on the industry after three years if a lease holder wants out they should just be able to turn the lease back to the government and walk away with no more financial obligation. Thirdly, Congress should help energy companies have a good level of leases in inventory or reserves. Currently, the BLM leases are for ten years if a lessee (an energy company) after five years is not producing on the leased land it has to turn back the lease to BLM. To help energy companies with this reserve issue why doesn't Congress say okay energy company after these five years where you haven't yet produced oil or natural gas you can continue to hold the lease for an additional seven years still required to pay the annual rental fee but to compensate the taxpayer for their wait for you to decide it is right to commence energy production when it commences the royalty rate is raised from 12.5 % to 18.75%.
Another alarming set of provisions in the Inflation Reduction Act is these provisions that charge natural gas producers, natural gas pipeline companies and LNG terminal operators for natural gas releases, methane releases! Natural gas of course is a gas and gas has a nature that it easily escapes into the atmosphere and methane gas is eighty times more worse for the climate than carbon dioxide. Technolgy has come a long way in natural gas production, today there is no need for flaring and for losing significant amounts of natural gas at the well head. Prudence calls for significant fines and even per day fines for noncompliance in using state of the art technolgy to reduce methane releases into the atmosphere but per tonnage fees for releases that will just jack up natural gas costs for consumers. The system Congress is creating here will be a financial ball and chain on the industry, Congress in the bill is appropriating $4.75 billion for enforcement of these provisions; these energy companies will feel like they have a cockroach infestation of natural gas regulators. The American Gas Association wrote House and Senate leadership and said this scheme will raise the average American families natural gas bill by twelve percent over a year period. Other natural gas trade association have said it could raise tha average families bill by seventeen percent annually!
If Congress passes this Inflation Reduction Act into law this will just shoot adrenaline into inflation and the Federal Reserve Board will have to increase interest rates higher than it would otherwise it will cause a hard landing for the economy and a significant recession next year. Where next year corporate revenue will be down shraply and corporate executives to preserve profits will lay-off people and cut capital spending. You Democrats will look like real fools then because the deficit reduction in the bill will be used up by increases in Food Stamps, Medicaid, unemployment insurance and the spending bill Washington will have to pass to respond to the Recession crisis!
This bill increases the royalty rate that oil and natural gas companies have to pay the federal government for energy produced on leased land, the rate goes from 12.5% to at minimum 16.67%. In addition it increase the initial cost for a lease it lifts the minimum bid from $2.00/acre for two years on a ten year lease to $10.00/acre for each of those ten years of a ten year lease. Furthermore it increases the rental rate for the lease land these energy companies have to pay currently the law is the rental fee is at minimum $1.50/acre per year for the first five years than for the balance of five year it is $2.00/acre per year; the inflation reduction act raises the rate to $3.00/acre per year for the first two years than $5.00/acre per year for the following six years and then it lifts it to $15.00/acre per year after that.
The Democrats here are violating timeless wisdom which is simply when the government wants to increase an activity it doesn't make it more expensive to conduct such activity. These provisions will increase the cost of energy companies to produce energy on federal lands so they will do less of it. First off, the expenses of production companies have gone up ten to twenty percent for many companies over the past year, the costs of well pipes and drilling equipment and crew, etc. have been affected by inflation and the labor shortage. So if the Federal government with its increased royalty rate is taking a bigger cut of the profits there is less to cover these increased production costs and for profits. Also, good stewards of the economy should want and it is achievable, if supply is increased, to return the price of a barrel of oil to the $50 to $80 per barrel range not this $90 to $120 range the country is seeing in current times. So if oil returns to its normal range and you have the cost to produce a barrel of oil going up ten to twenty percent and you increase the royalty rate you will be really hurting energy companies profits and they will dial back production on federal lands.
Proponents of these provisions will say well these increases just bring the federal royalty rates and land rental rates into line with the state and private sector rates. But the state and private sector leases are generally for three years so energy companies that purchase these leases to justify the expense engage in prompt energy production on these leases. But the Federal government's interests are different than the states and private land owners whose interest is to maximize income; the Federal government's interests should be to have stable energy markets and markets where supply will never be pressured by demand. When one considers that the nature of oil and gas production is that oil and gas fields deplete at a steady rate so for the industry to work well energy companies need to have untapped leases in their inventory that they can expeditiously bring on line when their current fields are drained of their energy resources; this is where federal government leases come in, prior to this Inflation Reduction Act it was cost effective to carry a significant inventory of federal leases, it won't be acter the Act is enacted.
The Demcrats behind these provisions are very short sighted they exhibit a very narrow view about the industry and again display that they are poor stewards of America's capitalist economy for they largely think of just maximizing revenue from these leases. Good government stewards would factor in energy company executives perspectives which are energy prices often drop down very low sometimes approaching or breaching production costs so these executives have to be able dial back production in these lean times and dial up production in boon times so energy companies cannot allow themselves to be strapped with big expenses on leases in inventory which this Inflation reduction act will be generating - for this reason this move by Congress will reduce federal leasing and long term reduce domestic energy production. Further, this move by Congress here tamping down domestic production will just increase the importation of energy which will just decrease tax revenue, decrease employment in the energy industry and increase America's trade deficit.
If Congress wanted to make the system better I think they would be on track with the following policy provisions. One, mandate that for non-competitive lease bidding the purchaser has to pay the minimal bid price in th statute (which is $2.00/acre) or the lowest accepted bid for a lease in the respective state over the last year whichever is higher. The way the system works is that the BLM (Bureau of Land Management) puts out lease for bids if no one bids on the land for two years than a buyer can come in as a non-competitive lease buyer and purchase the lease at a nominal fee they don't have to pay the minimum bid fee of $2.00 per acre, this isn't fair to the taxpayers they deserve real compensation for the lease, this system promotes speculation, speculators that don't drill for oil or gas just buy the lease and sell it at a much higher cost to an energy producer at a later time. Secondly, it would seem to me that good policy would ban resale of leases which promotes speculation and thus higher expenses on the industry after three years if a lease holder wants out they should just be able to turn the lease back to the government and walk away with no more financial obligation. Thirdly, Congress should help energy companies have a good level of leases in inventory or reserves. Currently, the BLM leases are for ten years if a lessee (an energy company) after five years is not producing on the leased land it has to turn back the lease to BLM. To help energy companies with this reserve issue why doesn't Congress say okay energy company after these five years where you haven't yet produced oil or natural gas you can continue to hold the lease for an additional seven years still required to pay the annual rental fee but to compensate the taxpayer for their wait for you to decide it is right to commence energy production when it commences the royalty rate is raised from 12.5 % to 18.75%.
Another alarming set of provisions in the Inflation Reduction Act is these provisions that charge natural gas producers, natural gas pipeline companies and LNG terminal operators for natural gas releases, methane releases! Natural gas of course is a gas and gas has a nature that it easily escapes into the atmosphere and methane gas is eighty times more worse for the climate than carbon dioxide. Technolgy has come a long way in natural gas production, today there is no need for flaring and for losing significant amounts of natural gas at the well head. Prudence calls for significant fines and even per day fines for noncompliance in using state of the art technolgy to reduce methane releases into the atmosphere but per tonnage fees for releases that will just jack up natural gas costs for consumers. The system Congress is creating here will be a financial ball and chain on the industry, Congress in the bill is appropriating $4.75 billion for enforcement of these provisions; these energy companies will feel like they have a cockroach infestation of natural gas regulators. The American Gas Association wrote House and Senate leadership and said this scheme will raise the average American families natural gas bill by twelve percent over a year period. Other natural gas trade association have said it could raise tha average families bill by seventeen percent annually!
If Congress passes this Inflation Reduction Act into law this will just shoot adrenaline into inflation and the Federal Reserve Board will have to increase interest rates higher than it would otherwise it will cause a hard landing for the economy and a significant recession next year. Where next year corporate revenue will be down shraply and corporate executives to preserve profits will lay-off people and cut capital spending. You Democrats will look like real fools then because the deficit reduction in the bill will be used up by increases in Food Stamps, Medicaid, unemployment insurance and the spending bill Washington will have to pass to respond to the Recession crisis!
