War-Gaming an Energy Crisis

Led by Bob Rubin, a bipartisan group of former government officials gathered yesterday to playact a Presidential response to a nightmare energy scenario circa 2009: disruptions in the Caspian, confrontation with Iran and Venezuela, oil at $150/barrel, rationing, military urging reinstatement of the draft. NYT reports.

Though basically a publicity stunt, the event underscored how America's mammoth appetite for foreign oil (and Bush's unwillingness to curb this appetite) could spell disaster for whoever occupies the White House in 2008. This article is perhaps most instructive when considered alongside another excerpt from today's NYT business section. Apparently a federal judge has ruled that the Interior Department lacks authority to force energy companies to pay royalties on oil and gas they drill in publicly owned waters in the Gulf of Mexico. More accurately, that Interior lacks authority to withdraw previously granted exemption from royalty payments (usually 12 to 16 percent of sales) even though Congress intended for such royalty relief to cease if the market price of oil climbs above $34/barrel (today oil futures closed at $96/barrel).

Though I have not studied the nuances of the law in question, with a group of former policymakers calling for reform of America's dysfunctional energy policies, Interior being unable to end what is a now a useless and wasteful policy (GAO estimates continued royalty relief could cost the government $60 billion over twenty years) is not an auspicious sign.

Spare me the argument that royalty relief is actually in the spirit of the Rubin group's advocacy because it promotes domestic oil production. With oil prices on this trajectory firms will be pumping oil wherever they can find it even without government subsidies (to wit, see this NYT article on the revival of once defunct Texas oil fields). We would enhance energy security far more using the $60 at issue to fund increased energy efficiency (e.g. supporting tax credits for purchase of energy efficient equipment and appliances).