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Thursday, August 25, 2011

Obama's Interior Department Against Domestic Energy

Economic reality means that uprisings and strife in places like Libya, with unknown consequences for much of North Africa and the Middle East, will affect small businesses and consumers here in the United States.

Why? Well, consider that Libya has the largest proven oil reserves in Africa, running ahead of Nigeria and Algeria. And, as the EIA has reported, over a third of the world's liquid fuels are produced in the Middle East and North Africa region. Reliable, affordable energy is critical to the U.S. economy, and given the significant role of that part of the world to energy production, what happens in North Africa and the Middle East matters to Americans and their businesses.

Of course, however, the petroleum industry is not stagnant. Instead, it is dynamic, with investment and innovation translating into new and expanded oil and natural gas production around the world, including in the U.S. When energy firms make investments in domestic energy development, that's beneficial to individuals, families, businesses of all types and sizes, and the overall economy.

This raises a serious question: Why is President Obama's administration so hostile to domestic energy production?

A regulatory reign of terror raises costs, fosters uncertainty, and creates significant disincentives for investments in domestic energy production. This has been the case, for example, with the EPA pushing ahead with regulations on CO2 emissions, and the Obama moratorium and prohibitions on offshore energy development.

Now, the Obama Interior Department is trying to, in effect, steal a huge oil find in the Gulf of Mexico, which could produce billions of barrels of oil.

ExxonMobil and its partner, Norway's Statoil, have invested some $300 million to find and start the process of developing this offshore field. ExxonMobil applied for a typical extension for three of the five leases that cover the Julia field (the other two leases do not expire until 2013). But the Interior Department has turned down the extensions in an unprecedented move. If the leases are not extended, then the leases and the oil would revert to the federal government. The issue now heads to federal court.

By the way, as The Wall Street Journal reported, "Statoil asserted in its lawsuit that no request for an extension for a deep-water development ‘had ever previously been denied,'" while ExxonMobil noted in its lawsuit that the government has granted "thousands" of extensions. Indeed, the Obama administration is purposefully staking out new ground against domestic energy production.

What are the results?

First, the Obama administration, again, is creating enormous uncertainty in the energy marketplace. If the federal government is going to act like a pirate on the high seas, then why take the enormous risks and make the huge investments needed to explore and develop new energy sources?

Second, the development of the field under dispute will be further delayed, adding costs to the effort, and delaying or denying the benefits of new energy sources to consumers and businesses. Keep in mind, as noted recently on ExxonMobil's Perspectives blog, that this find is in "ultra deepwater," and that the companies have been planning how to access and develop this heavy oil in a manner that is responsible to the environment and to shareholders. That obviously takes time, and now the federal government is adding to the timeline for no good reason.

Third, this also means that the federal government will experience delays in receiving billions of dollars in lease royalties.

Fourth, in the end, energy costs will be higher and energy supplies less reliable.

So, there are no winners in this case of regulatory inflexibility and overreach by the Obama administration. Indeed, the only winners would be those opposed to any additional, cost-effective production of fossil-fuel based energy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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