ACTUALLY DOING SOMETHING ABOUT $100 OIL

Yesterday (11/08), the Wall Street Journal ran an article giving ten reasons Why $100 Can't Float.  They were good, persuasive reasons.  Yet taken together, they were not sufficiently persuasive as they ignored the political dimension of the problem.

Put in a nutshell, we have near $100 oil instead of energy independence at a fraction of the cost because Congress is an obstacle rather than a solution to the problem.

Right here in America, we have enormous energy reserves of coal, natural gas, liquid oil, and oil shale.  The Green River Basin (mostly in Colorado) alone contains a billion barrels of oil per square mile in a thousand square mile deposit – a trillion barrels in all, enough to supply total US oil consumption (at the current level of 20 million barrels a day) for 137 years.

And Shell Oil has developed an "in-situ" (in-ground) process to extract it.

Then there's coal – we have more of it than anywhere else on the planet.  Just counting up the largest and most accessible deposits, with new coal-to-oil technology producing two barrels of oil from one ton of coal, we have 400 billion barrels – another 55 years' supply.

And there's the gigantic supplies of natural gas on our continental shelves, as we saw in The Natural Gas Solution. 

With foreign oil now so expensive, it should be easy to produce our own energy at far less cost.  And it will be easy if Congress does three things:

1.  Eliminate the depreciation schedule.

We're about the only country in the world that forces companies to write off the cost of their capital assets over years, sometimes decades, instead of letting them be expensed.  It's like loaning all those millions or billions to the IRS at zero interest. 

That's why Intel will build a chip plant in China and not here because in China they can write off the entire cost right away.  So if you want energy companies to spend billions in new refineries, in-situ oil shale extraction or coal-liquefaction plants, etc., abolish the depreciation schedule and let them expense the capital cost.

But if Congress allows expensing just for energy-related investments, enormous distortions will result, vast sums flowing into energy boondoggles and starving other investment sectors.  The only rational, legitimate way (the way Congress is allergic to) is eliminate depreciation period.

2.  Establish a mechanism to prevent predatory price drops by OPEC.

Remember when oil went to $10 a barrel in 1999?  That was done on purpose by the Saudis to wipe out investments in competing energy production.

The best way to protect such investments would be a tax holiday for any domestic energy production (including "proceeds taxes" imposed by various states via the constitutional grounds of affecting inter-state commerce) triggered by a drop in foreign oil below a certain level.

3.  Allow the Secretary of Energy to waive environmental laws and override judges' attempts to enforce them regarding energy production on federal lands. 

Along with the depreciation schedule, the biggest obstacle to increasing domestic energy production is enviro suits blocking it.  By some miracle, Congress created the model for this by giving the Secretary of Homeland Security the authority to waive enviro laws regarding building US-Mexico border fences in the 2005 Real ID Act.

Thus, when a federal district judge agreed with suing enviros and ordered a delay in border fence construction last month, DHS Sec. Chertoff invoked his authority and overruled the judge.  The fence will be built despite the judge's decision.

Much of the coal, gas, oil, and oil shale deposits are on federal land.  The only way to extract them is to get the enviros and enviro judges out of the way.

The day Congress enacts these three things, speculators will panic and the price of oil will plummet.  Don't be surprised to see them in the first Energy Bill proposed by President Giuliani.