The case of a government oil company

Should the US government enter the oil and gas business? Absolutely no! This is a capitalist country and …

Wait, maybe it makes sense.

Since 1975, the United States has been buying and selling oil for the Strategic Oil Reserve, a national reserve set up for times of emergency. This year, President Biden authorized the release of 180 million barrels of oil, a quarter of the total, to help fight gasoline prices which rose to a peak of $ 5.02 per 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 take a step or two further? On the national security website War on the Rocks, energy industry veterans Ryan Kellogg and David Brunnert argue the need for a national reserve of oil and gas wells drilled but not completed on federal land that could be exploited during a crisis to increase the energy capacity of the United States. This would give the government the ability to actually produce oil and gas, instead of simply reselling the previously purchased barrels on the market. The government could own those backup wells outright or pay private sector companies to maintain and operate them when needed.

Energy historian Gregory Brew of Yale University has suggested that the government could stabilize energy markets and lower prices by subsidizing U.S. oil refinery operations or even setting up a National Refining Company to add gasoline production capacity without worrying. to make a profit. President Biden has already said he is willing to use emergency government authorities to increase gasoline production, following the same scheme used by the government to speed up vaccine production and address other pressing issues during the COVID pandemic.

Laissez-faire capitalism can only get you this far

Americans generally resist direct government involvement in the business sector, which has allowed US companies to thrive and become hyper-efficient. But laissez-faire capitalism has lost its luster as millions of manufacturing jobs have left the United States for cheaper foreign countries and China has become an economic superpower thanks to massive government support for industrial sectors. The recent congressional pass of the CHIPS + Act, which will subsidize domestic semiconductor manufacturing, was a step towards more aggressive industrial policy in the United States, even amid complaints that it amounted to “corporate welfare.”

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The US energy industry is notoriously independent, but cowboy bravado has succumbed to the tough economy as climate change turns the oil and gas business model upside down and investors tighten energy bets. The pressure to reduce carbon consumption makes energy companies reluctant to add oil and gas production capacity and invest in long-term projects. US refinery capacity, for example, has declined slightly since 2020, when COVID hit, everyone went ashore, and the fossil fuel industry lost billions of dollars. Demand has increased during the recovery, but refineries still don’t want to add capacity that may not produce a good return before renewables start replacing carbon. Reduced capacity is a factor pushing gasoline prices to all-time highs earlier this year.

The profit motive in oil and gas is no longer generating all the products consumers need in the present. As a solution, Kellogg and Brunnert advocate a new “Energy Security Administration” that ensures ample supplies of oil and gas, including refining capacity and energy transportation infrastructure. The capacity targets would be higher than what the ordinary market could support, but the spare capacity would be deactivated during normal times. Although the government can set priorities, it will work with industry to follow up on existing projects and technical expertise. Contracts should be structured so that the government cannot anticipate profitability by forcing excessive production and energy companies cannot deceive taxpayers by obtaining subsidies to produce what they would do anyway.

This could anger environmentalists

Environmentalists may complain about subsidies for fossil fuel production. Conservatives may regret the government’s involvement in the board’s decision-making process. But the Biden administration’s bash-and-coax strategy is hardly any better, and it’s not clear that no president can effectively balance the need to tackle climate change with the fossil fuel shortage we depend on today. Oil and gas prices have fallen slightly in the past six weeks, but the crisis could still get much worse this winter as Ukraine and its allies try to squeeze Russian energy exports and Russia seeks 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 sector. Yet the United States is unusual in this regard, as virtually all governments of the OPEC oil cartel control or play an important role in their national 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, while here in the United States the president can ask politely (or beg) but not. forcing privately-owned companies to produce more energy.

The ambitious inflation reduction bill, which Democrats may be able to pass by the end of the summer, includes some federal interventions on national energy markets. The bill includes $ 375 billion in clean energy incentives, but also some measures that could stimulate new 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 for cleaner energy in the future by safeguarding the fossil fuels we depend on today. If we have learned anything from 2022, it is that neither of these things preclude the other.

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