The New York Times had an article this morning about efforts in Congress to renegotiate federal oil and gas leases that gave the industry a windfall projected to be $20 billion over the next 25 years. The sums at stake are not huge for the country or the industry (the $800 million annual windfall is less than 1 percent of the industry's current profits), but the story does show the impact that the media can have when they do their job.
The windfall was part of the energy bill approved by Congress last year. It included a provision that gave an incentive for the industry to drill in deep water off the U.S. coast, by not requiring royalty payments. The prior energy bill also included this incentive, except royalties would be required if the price of oil crossed $34 a barrel. The new energy bill dropped the $34 threshold provision, making all oil and gas from these wells royalty free.Times reporter Ed Andrews wrote a series of pieces earlier this year exposing this little-known clause. The resulting outrage is forcing Congress to rewrite the legislation and require the government to renegotiate the leases. The press can do good. Two small points: 1) To an outsider from another planet, this proposed renegotiation of offshore energy leases might look similar to the recent renegotiation of energy leases in Bolivia, Ecuador, and Venezuela that have prompted such outrage from the media. 2) The principle of having royalty payments kick in when oil prices cross a certain level works pretty much the same way as a properly designed windfall fall profit tax. The idea is that the industry will have incentives based on an expected future price of oil, but if the price soars, presumably due to events beyond the control of the industry, the government takes back part of this unearned and unexpected windfall.
--Dean Baker
