How Biden's oil-leasing agenda falls short

[Editor's note: This story originally was published by Real Clear Energy.] By Benjamin Zycher Real Clear Energy The Biden administration announced late last week that it would resume leasing of federal lands for fossil fuel exploration and production, but at a scale (144,000 acres) about 80 percent smaller than the 733,000 acres that had been nominated by…

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[Editor's note: This story originally was published by Real Clear Energy.]

By Benjamin Zycher
Real Clear Energy

The Biden administration announced late last week that it would resume leasing of federal lands for fossil fuel exploration and production, but at a scale (144,000 acres) about 80 percent smaller than the 733,000 acres that had been nominated by energy companies for evaluation by the Department of the Interior. (Over 90 percent of the acreage to be offered for lease is in Wyoming.) Moreover, the royalty rate to be paid on future fossil production from these leases is to be increased from 12.5 percent to 18.75 percent, “to ensure [a] fair return for the American taxpayer and on par with rates charged by states and private landowners.” This action in part is a response to a court injunction last June from the western district of Louisiana forcing the Biden administration to resume such leasing. A few observations are appropriate.

In a way consistent with the incoherence of the overall Biden energy policy — ever-tighter constraints on investments in fossil fuel resources and associated infrastructure combined with vociferous pleas for greater production by producers foreign and domestic so as to relieve the political effects of high fuel prices — the administration is trying to have it both ways. To wit: The administration believes that the leasing announcement will allow it to argue that it is taking action to reduce gasoline prices while reassuring the leftist environmental groups that it is not backing off its climate policy agenda. That this gambit will work as a policy and political matter is a deeply dubious proposition, in particular because the effect on gasoline prices almost certainly will be close to zero.

The increase in the royalty rate, far from “ensur[ing a] fair return for the American taxpayer,” will have the opposite effect, by reducing the amount that the fossil producers will be willing to bid initially for the leases. After all, the expected value of a given lease — driven by estimates of likely fossil resources, geological conditions, production costs, and other such parameters — is what it is. That value will be reflected in the present value of the initial bid and the expected future royalty payments, and an increase in one must reduce the magnitude of the other. Notwithstanding the apparent assumption of the Biden administration officials, there really is no free lunch.

Moreover, the net effect of the increase in the royalty rate and the obvious attendant decline in initial bids is a shift of risk from the fossil producers onto the taxpayers. (The initial bids are certain, while the future royalty payments will be affected by future fossil energy prices and other conditions that are subject to substantial uncertainty.) An assumption that the taxpayers are the efficient bearers of that increased risk is deeply problematic: It is the fossil producers that are in the best position to evaluate the production potential and economic value of a given lease. Can it surprise anyone that the Biden administration does not understand how to think through such analytics?

There is the further matter that the royalty payments are analogous to an excise tax on fossil production, while the initial bid is analogous to a lump-sum tax that does not affect production decisions once the bidder obtains a lease. Accordingly, the combination of the increase in the royalty rate and the decline in the initial bids will have the effect of reducing fossil production from the leases that actually are granted. This will reduce the “return for the American taxpayer” that the administration claims to view as important; indeed, under some wholly plausible conditions the “return for the American taxpayer” under the higher royalty rate will be lower than under the lower royalty rate, even apart from the risk parameter noted above.

Moreover, fossil fuel resources are an important form of national wealth; the reduction in the longer-term production of fossil fuels caused by the reduction in both leasing and the output from the leases that actually are granted will result in an economy poorer rather than wealthier. The administration and its allies among the left-wing environmentalists would argue that the greenhouse gas emissions associated with the federal leasing program are a social cost; but that is preposterous, in that under any set of assumptions the future climate effects of the fossil production from federal lands would be virtually undetectable. The entire Biden net-zero policy would reduce temperatures in the year 2100 by 0.137 degrees, using the EPA climate model; and there is no evidence of a climate “crisis” in any event. And there are important benefits from a mild anthropogenic warming, only two of which are planetary greening and a reduction in temperature-related mortality.

The justification of the higher royalty rate as a mere matching of the rates on state and private lands is deeply disingenuous. The approval process for a federal lease often consumes up to a year, compared with a few days in Texas. A lease is not a permit; the latter requires environmental impact statements and ensuing legal challenges, reviews and litigation under the National Environmental Policy Act, endangered species analyses and litigation, cultural surveys and litigation, and on and on. Do the Biden officials believe that time is not money?

Such are some of the perversities, problematic assumptions, and wasteful outcomes made inevitable by the contradictions and incoherence of the Biden leasing policy. One would think that someone somewhere in the administration — perhaps the economists? — would point them out. One would think that at some point the administration might give serious weight to fundamental policy issues as distinct from short term political imperatives. One would think that even in the narrow political context the administration’s pollsters and other political gurus would make the case that blaming Vladimir Putin for the results of the Biden energy policies will prove a loser, and that the pursuit of sound policies now will yield political advantages in the not-too-distant future. And in all of these dimensions: One would be wrong.

[Editor's note: This story originally was published by Real Clear Energy.]

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