After "Drill, Baby, Drill," Obama Should Embrace Another GOP Energy Plan

April 2, 2010 | Jesse Jenkins, Yael Borofsky,

Update: Michael Lynch, an energy consultant and MIT faculty, writes as an op-ed contributor to the New York Times that total oil and gas tax revenues from new offshore production could reach at least $10 billion per year and likely no more than $25 billion. His estimates are quite a bit higher than ours because he counts both royalty payments and other taxes paid by oil and gas exploration and production companies. Lynch also notes that there would be about $20 billion a year in additional taxes if we open up California and other Pacific coastal areas, which he advocates.

Jesse Jenkins and Yael Borofsky

With President Obama's announcement Wednesday that the Administration would support expanded offshore oil and gas extraction, it's now apparent that price pressures on oil make political pressures on politicians impossible to ignore and that some expansion of offshore drilling is inevitable.

But despite Green backlash against the Obama administration's apparent embrace of "drill, baby, drill," it's actually another Republican energy plan Obama should turn to if he wants to make a real dent in America's dependence on oil. Embracing a GOP plan to put the hundreds of billions in potential federal revenues from new oil and gas royalties into a fund to accelerate clean technology innovation could offer Obama a bona fide opportunity to "reach across the aisle," strengthen America's energy security, and help make clean energy cheap.

Don't believe it? Here's the breakdown...

While much of the rhetoric used to advocate for offshore drilling deals with the threat of rising prices at the pump and our nation's energy security, EIA projections show that "access to the Pacific, Atlantic, and eastern Gulf [offshore] regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030." At that point, access to the new portions of outer continental shelf (OCS) previously off-limits would cut gasoline prices at the pump by just three cents, a clearly insignificant step towards "energy independence."

What could have a significant impact on our energy security, however, would be to invest the hundreds of billions in potential federal revenues from oil and gas royalties to accelerate clean tech innovation and deployment, helping America develop the clean and affordable energy sources needed to truly diversify our energy mix and secure our freedom from oil.

How much money are we talking about?

According to EIA estimates, there are about 8 billion barrels of crude oil and 58 trillion cubic feet of natural gas (about 59.6 billion mmBTUs) potentially available in Eastern/Central Gulf of Mexico and Atlantic OCS areas previously off-limits to exploration and extraction (another 10 billion barrels of crude and 18 trillion cubic feet of gas may lie off Pacific coastal areas). That estimate does not include potentially recoverable oil and gas in the Arctic Alaska coastal areas also opened up in the President's new proposal.

At today's oil prices of roughly $85 per barrel, that works out to about $680 billion worth of new oil production and another $238.5 billion worth of gas at today's relatively low natural gas prices (about $4/mmBTU). Add in the recoverable reserves off Alaska's North Slope and let's call it an even trillion dollars worth of new oil and gas production (more if prices climb in the future).

The federal Minerals Management Service (MMS) controls oil and gas leases in the OCS and collects 1/6 of the value of oil and gas produced from OCS areas. That means, the MMS has the potential to collect over $165 billion in royalties from new offshore drilling. That's far from a trivial sum of money.

Of course, those royalties will be collected over the course of a couple decades and likely won't start flowing until 2014 or later, but even after individual states close to drilling sites claim their share of the revenue there will still be a sizable chunk of change available that could be invested in the development of clean energy technology.

(And there could be ways to front-load the royalty payments to get money flowing to cleantech sooner, such as a requiring a portion of the royalty value paid in advance upon signing the leases; this would have the additional benefit of helping discourage speculative efforts to lock up sites but not produce oil, accelerating production of new oil and gas).

After all, we simply cannot drill our way to energy security. The New York Times reports that at current rates of consumption, estimates show that there could be as much as a three-year supply of oil and around a two-year supply of natural gas in the OCS areas. That's not exactly a long-term 'fix' for an oil-addicted nation, which is why Obama noted Wednesday in his speech at Andrews Air Force Base that offshore drilling is meant merely to aid in the "transition to cleaner energy sources;" drilling is no alternative.

We can, however, invest and invent our way to freedom from oil. That's where (somewhat ironically!) the Republicans 'all of the above' energy plan, AKA the "American Energy Act," has a leg up on the President -- at least for now.

Under the GOP proposal, put forth by House Republicans in June 2009, 90% of the federal share "of the revenues created by OCS exploration would go to a renewable energy trust fund to pay for a variety of renewable, alternative and advanced energy programs." This "American Renewable and Alternative Energy Trust Fund" would be dedicated to efforts accelerating the development of clean energy technologies that can truly help end America's oil addiction. If the federal government retained 75% of the royalty revenues from new OCS and Alaskan Coastal Plain production, this formula could represent an infusion of over $110 billion for critical clean energy investments over the next twenty years.

So while the expansion of offshore drilling may seem like we're taking a step back from a future free from oil, investing the royalty revenues in clean tech RD&D could amount to a big leap forward in the transition to a clean energy economy by securing a revenue source for clean tech that is not tied to embattled efforts to establish a carbon price -- all while beginning the urgent work of securing America's clean tech competitiveness and ensuring our energy security.

Nearly the entire Republican caucus, not to mention a handful of Democrats, are already on record voting for this concept in the August 2008 vote on the New Energy Reform Act, introduced by the so-called Gang of 10 during the height of the oil price spikes in 2008.

If offshore drilling is to move forward over the next few years, the Obama Administration and Congressional Democrats should waste no time in embracing this clean energy investment plan.

Alternatively, Obama could look to pacify the deficit hawks by dedicating the royalty revenues to lower projected deficits -- ignoring for a moment that it will be new industries and a growing economy that will have the largest impact on rebalancing the federal budget. Obama could also heed the advice he's likely to get from Beltway Green Groups who will no doubt urge the President to use the lion's share of the funds for state revenue sharing in a (likely futile) attempt to entice votes from Southeast and Gulf Coast Senators for the troubled Kerry/Graham/Lieberman 'comprehensive energy and climate' bill. Either would represent another wasted opportunity to make a critical large-scale investment in our clean tech competitiveness and a future free from oil.

With offshore drilling seemingly unavoidable, wouldn't it be ironic if Republican plans for the resulting royalties wound up more supportive of clean-tech investment than President Obama and the Democrats?