by Raymond J. Keating –
High energy costs are hitting consumers and small businesses hard. Unfortunately, rather than working in a productive manner to help alleviate these problems, President Biden and his administration actually are proceeding with a policy agenda that takes a bad situation and makes it even worse – now and in the future. Indeed, it’s hard to get everything wrong in a policy area, but President Biden seems intent on doing so when it comes to energy policies.
Of course, a change in the course of policy can happen, that is, if policymakers are serious about helping to bring down energy costs and to secure investments critical to meeting future energy needs. This is essential for our economy in general, and for small businesses as both consumers and producers of energy.
Unfortunate Policy Irony
The central policy problem is opposition to the use of and investment in fossil fuels. The irony here is rich – and unfortunate – when one considers that policymakers for many years bemoaned the idea that the U.S. would be seemingly forever dependent upon foreign sources of energy. But with investments in cutting-edge technologies and innovations – such as in horizontal drilling and hydraulic fracturing – the U.S. has become the world’s energy leader, including being the largest producer of oil and natural gas. (See the following two charts.)
Source: U.S. Energy information Administration
However, President Biden has stated that he intends to put an end to fossil fuels.
For example, on the presidential campaign trail, he told an environmental activist, “I want you to look at my eyes. I guarantee you. I guarantee you. We’re going to end fossil fuel.”
And John Kerry, the former presidential candidate and Biden’s climate envoy, warned the natural gas industry, “We have to put the industry on notice: You’ve got six years, eight years, no more than 10 years or so, within which you’ve got to come up with a means by which you’re going to capture, and if you’re not capturing, then we have to deploy alternative sources of energy.”
Indeed, our political system has been working to undermine fossil fuel production for at least the past decade-and-a-half – again, just at the same time as U.S. producers were working and innovating to make the U.S. the world’s leading energy producer. Indeed, it is a tribute to the entrepreneurs, businesses (from very small to large firms), workers and investors in the energy arena for these accomplishments despite the political environment. But politics and policy do matter, and the intensity of opposition to fossil fuels has been ramped up via political threats, tax proposals, and regulatory measures.
This, in turn, has real negative effects on the incentives to continue to invest in the fossil fuels energy sector, from maintaining and upgrading current facilities to expansion to innovation. That harsh reality is on display in our current energy challenges.
When elected officials choose politics detached from economic realities, there inevitability will be significant costs. No matter how much President Biden, various Members of Congress, and assorted special interests desire, subsidize and/or mandate, for example, solar and wind power to replace fossil fuels, economic realities cannot simply be ignored or wished away.
Inflation and Energy Prices
Of course, inflation has been running red hot since early 2021. Indeed, this is the worst inflation environment that the U.S. has suffered through since the 1970s and very early 1980s. The Consumer Price Index (CPI) jumped by 1.0 percent in May, and over the past year, CPI inflation ran at 8.6 percent. That was the fastest 12-month rate of inflation since December 1981. (See the following two charts.)
Part of this inflation story has been energy prices, including the price of gas at the pump. For example, the price of gasoline, according to the May 2022 CPI report, increased by 48.7 percent over the previous year. The following chart makes clear the recent rise in the price of gasoline (though in nominal dollars).
The price at the pump depends significantly on the price of crude oil. The following chart from the U.S. Energy Information Administration offers a look at the contributors to the price of gasoline, with crude oil by far the top single factor. It also should be noted that other costs can vary considerably by location.
For example, as the EIA pointed out, “Sales taxes along with taxes applied by local and municipal governments can have a significant impact on the price of gasoline in some locations.” Add state regulations and mandates to that. And in terms of distribution, marketing and retail dealer costs, “The cost of doing business by individual gasoline retailers can vary greatly depending on where a gasoline fueling station is located. These costs include wages and salaries, benefits, equipment, lease or rent payments, insurance, overhead, and state and local fees. Even retail stations close to each other can have different traffic patterns, rent, and sources of supply that affect their prices. The number and location of local competitors can also affect prices.” Again, state and local regulations come into play.
As for crude oil, the EIA has observed, “Increases in U.S. oil production in the past several years have helped reduce upward pressure on oil and gasoline prices.” That’s an issue of where the price would have been without expanded U.S. production. The following chart shows crude’s recent rise.
So, what factors have come into play regarding oil and overall energy prices? Of course, Russia’s war on Ukraine, rising demand, and ongoing, pandemic-related supply-chain challenges have contributed. But there’s more.
Tax and Regulatory Policies Work Against Investment in Energy Innovation and Production
During the 2020 presidential campaign and since taking office, Joe Biden has sent an unmistakable message of his administration’s position to put a stop to fossil fuel production and use. That message has been communicated via a mix of policies that would impose increased tax and regulatory burdens.
Opposition to Pipelines. In his first day in office, for example, Biden cancelled the permit for the Keystone XL pipeline, which would have brought crude from Canada and parts of the U.S. to Steel City, Nebraska, and from there to Gulf of Mexico refineries via existing pipelines. The message was clear: Do not invest in the infrastructure needed to meet the energy needs of American individuals, families and businesses if such infrastructure investments are related to fossil fuels.
Opposition to Oil and Gas Leases in Federal Areas. The president also suspended new oil and gas leases on federal lands and offshore waters. Also, in a separate action, Biden imposed a moratorium on oil and gas leasing activity in the Arctic National Wildlife Refuge (ANWR), as well as in offshore areas in Arctic waters and in the Bering Sea. This is noteworthy and troubling given the importance of onshore and offshore activity on federal properties (i.e., lands and waters).
As API has reported: “Oil production from federal lands and waters provides approximately 24% of total U.S. oil production. Additionally, natural gas production from federal lands and waters is approximately 11% of total U.S. natural gas production.” And when leasing does re-open, there will be less territory available and at higher fees. WorldOil.com reported: “Energy companies also will be forced to pay higher royalties for the oil and gas they extract from the newly leased land. The changes … would ultimately boost the cost of oil and gas development on federal lands.” Indeed, the Biden administration’s recent announcement of its five-year offshore oil and gas leasing plan reduces potential leasing, including the option of having no lease sales.
This, again, sends a clear and daunting signal against investing in oil and natural gas production and development.
Proposing Tax Increases. Congress naturally has stepped in with misguided measures as well. A so-called “Windfall Profits Tax” has been proposed, for example, by Senator Ron Wyden (D-OR). That tax would come on top of other income taxes, imposing an additional 21 percent tax on profits over 10 percent and apply to oil and gas companies with more than $1 billion in annual revenue.
And then there’s the “Big Oil Windfall Profits Tax,” introduced by Representative Ro Khanna (D-CA) and U.S. Senator Sheldon Whitehouse (D-RI), which actually isn’t a tax on profits at all but instead is an excise tax. The proposal would apply a 50 percent tax on the difference between the current price of a barrel of oil and the pre-pandemic average price per barrel between 2015 and 2019. Smaller producers would be exempt from the tax, and the bill also calls for quarterly tax rebates to taxpayers based on income (i.e., phased out phase out for single filers earning more than $75,000 and joint filers earning more than $150,000).
By the way, President Biden and members of his administration have indicated their willingness – indeed, enthusiasm – for a windfall profits tax. In recent, rather rambling comments, Biden declared, “Why don’t you tell them what Exxon’s profits were this year? This quarter? Exxon made more money than God this year. Exxon, start investing. Start paying your taxes.” And a House hearing earlier this year was titled “Gouged at the Gas Station: Big Oil and America’s Pain at the Pump” – so much for an unbiased, gather-the-facts inquiry into an issue.
Of course, prices and profits serve a purpose in the marketplace, that is, they incentivize investment and innovation, which the U.S. economy needs. However, at the same time, it turns out that oil and gas companies are not among the most profitable. As reported by Yahoo Finance columnist Rick Newman:
“Only thing is, U.S. energy companies have been among the least profitable firms during the last 10 years, and they’re not the most profitable now, even with oil prices up 60% during the last 12 months, to nearly $100 per barrel. In 2021, U.S. energy firms were the 10th most profitable sector of the U.S. economy out of 11, according to S&P Global IQ. Energy firms listed in the S&P 500 stock index posted an 8.3% profit margin in 2021. That was below the median for all 11 sectors, which was 10.6%. Financials led with a 25.3% profit margin. Tech was second at 23.2%. Pharmaceutical firms posted a 23.1% margin. The only segment worse than energy was consumer staples, with a 6.6% margin. Forecasts for 2022 are similar, with energy likely to post an 8.1% margin, according to analysts polled by Capital IQ.”
I think of Gilda Radner’s character Emily Litella on Saturday Night Live who would be outraged about something, and then after being informed that she had all of her facts wrong, she would say, “Never mind.” In fact, it would be nice if the elected officials who have their facts wrong in attacking energy companies actually would say “Never mind” and turn policy in a more productive direction.
Of course, tax increases, such as a windfall profits tax and others, would raise costs, and reduce resources available and diminish incentives for investments in production and development. A windfall profits tax was imposed in 1980, and as assorted analyses show, the primary result was decreased domestic oil production. There is no economic logic to higher taxes on energy firms; instead, the proposals are born out of pure politics, whereby elected officials, including President Biden, attempt to shift or assign blame to energy firms, rather than taking a hard look to the consequences of their own energy-related policies.
Costly Regulation Over Sound Economics and Policies. Refinery capacity – in the U.S. and globally – actually has fallen since pre-pandemic levels. The Wall Street Journal editorial board recently explained the role played by hostile U.S. government policies, including ramped-up EPA renewable fuel standards. As the Journal noted:
“A major culprit is U.S. government policy. Some older refineries have closed because companies couldn’t justify spending on upgrades as government forces a shift from fossil fuels. They also have to account for the Environmental Protection Agency’s tighter permitting requirements… The EPA recently published its final renewable fuel standards for this year, which the American Fuel and Petrochemical Manufacturers called ‘unachievable.’ They usually are.”
Regarding rising regulatory costs, Benjamin Zycher of the American Enterprise Institute raised an additional question regarding the impact on incentives for U.S. producers. As reported by the New York Post:
“But US firms have less incentive to produce more oil while facing heavy regulations – meaning they’re more likely to leave the oil in the ground and drill in the future when prices are higher, says Benjamin Zycher of the American Enterprise Institute. He contends under the ‘Green New Deal’ regulatory environment, the atmosphere in Washington is decidedly anti-oil.”
America’s Enemies? Finally, also noted by the New York Post and others, the Biden administration reportedly is in talks with the likes of Venezuela and Iran to see if they will boost output in order to provide some price relief at the pump. This is a bizarre policy choice in so many ways, but especially in choosing to work with unsavory regimes to boost energy production, while effectively waging a policy war against U.S. energy entrepreneurs, businesses, workers and investors. Are American entrepreneurs and workers hard at work in the energy sector really the enemy?
Energy is Small Business
For good measure, when pondering the energy sector and related policies, it would be productive to move beyond the political rhetoric and recognize the realities of the industry. In particular, I refer to the glib reference to “Big Oil.” Indeed, it seems that every possible tax and regulation imposed or threatened on the energy sector is justified by referring to so-called “Big Oil.”
Of course, given that all businesses, no matter their size, only survive and thrive by serving consumers well – and that’s the case with energy as with any other industry – inflicting costly policies on an industry makes no sense. Such measures cannot be justified by claiming that such policies are meant to impose burdens only on “big” companies.
In reality, consumers and all businesses within a targeted industry must deal with the resulting costs and disincentives of misguided policies. Indeed, it is well known that tax and regulatory burdens fall hardest on smaller businesses.
As made clear by the following tables (2019 data latest from the U.S. Census Bureau), sector after sector on the energy front – 13 sectors are highlighted here (including manufacturing directly using petroleum, such as plastics) – is overwhelmingly populated by small businesses. If we take the 100 employee mark, that is, the percentage of employer firms with fewer than 100 employees, the breakdowns are striking:
- 95.6 percent of employer firms in the oil and gas extraction sector have fewer than 100 employees.
- 93.2 percent of employer firms in the drilling oil and gas wells sector have fewer than 100 employees.
- 94.4 percent of employer firms in the support activities for oil and gas operations have fewer than 100 employees.
- 83.4 percent of employer firms in the oil and gas pipeline and related structures construction sector have fewer than 100 employees.
- 80.2 percent of employer firms in the oil and gas field machinery and equipment manufacturing sector have fewer than 100 employees.
- 55.4 percent of employer firms in the pipeline transportation of crude oil sector have fewer than 100 employees.
- 58.1 percent of employer firms in the pipeline transportation of natural gas sector have fewer than 100 employees.
- 49.3 percent of employer firms in the pipeline transportation of refined petroleum products sector have fewer than 100 employees.
- 98.6 percent of employer firms in the gasoline stations sector have fewer than 100 employees.
- 25.0 percent of employer firms in the petroleum refiners sector have fewer than 100 employees.
- 74.6 percent of employer firms in the petroleum lubricating oil and grease manufacturing sector have fewer than 100 employees.
- 87.1 percent of employer firms in the petroleum and petroleum products merchant wholesalers sector have fewer than 100 employees.
- 81.2 percent of employer firms in the plastics product manufacturing sector have fewer than 100 employees.
|Oil and Gas Extraction Sector||Percent of Firms by Number of Employees|
|Fewer than 10 employees||81.4%|
|Fewer than 20 employees||89.1%|
|Fewer than 100 employees||95.6%|
|Fewer than 500 employees||98.1%|
|Drilling Oil and Gas Wells||Percent of Firms by Number of Employees|
|Fewer than 10 employees||69.8%|
|Fewer than 20 employees||79.6%|
|Fewer than 100 employees||93.2%|
|Fewer than 500 employees||97.2%|
|Support Activities for Oil and Gas Operations||Percent of Firms by Number of Employees|
|Fewer than 10 employees||69.4%|
|Fewer than 20 employees||80.2%|
|Fewer than 100 employees||94.4%|
|Fewer than 500 employees||98.4%|
|Oil and Gas Pipeline and Related Structures Construction||Percent of Firms by Number of Employees|
|Fewer than 10 employees||42.7%|
|Fewer than 20 employees||56.7%|
|Fewer than 100 employees||83.4%|
|Fewer than 500 employees||94.2%|
|Oil and Gas Field Machinery and Equipment Manufacturing||Percent of Firms by Number of Employees|
|Fewer than 10 employees||40.4%|
|Fewer than 20 employees||55.5%|
|Fewer than 100 employees||80.2%|
|Fewer than 500 employees||89.8%|
|Pipeline Transportation of Crude Oil||Percent of Firms by Number of Employees|
|Fewer than 10 employees||38.6%|
|Fewer than 20 employees||47.0%|
|Fewer than 100 employees||55.4%|
|Fewer than 500 employees||59.0%|
|Pipeline Transportation of Natural Gas||Percent of Firms by Number of Employees|
|Fewer than 10 employees||39.3%|
|Fewer than 20 employees||49.6%|
|Fewer than 100 employees||58.1%|
|Fewer than 500 employees||64.1%|
|Pipeline Transportation of Refined Petroleum Products||Percent of Firms by Number of Employees|
|Fewer than 20 employees||43.6%|
|Fewer than 100 employees||49.3%|
|Fewer than 500 employees||54.9%|
|Gasoline Stations||Percent of Firms by Number of Employees|
|Fewer than 10 employees||80.1%|
|Fewer than 20 employees||93.3%|
|Fewer than 100 employees||98.6%|
|Fewer than 500 employees||99.6%|
|Petroleum Refiners||Percent of Firms by Number of Employees|
|Fewer than 20 employees||20.0%|
|Fewer than 100 employees||25.0%|
|Fewer than 500 employees||37.5%|
|Petroleum Lubricating Oil and Grease Manufacturing||Percent of Firms by Number of Employees|
|Fewer than 10 employees||37.9%|
|Fewer than 20 employees||52.5%|
|Fewer than 100 employees||74.6%|
|Fewer than 500 employees||86.3%|
|Petroleum and Petroleum Products Merchant Wholesalers||Percent of Firms by Number of Employees|
|Fewer than 10 employees||51.5%|
|Fewer than 20 employees||66.1%|
|Fewer than 100 employees||87.1%|
|Fewer than 500 employees||95.5%|
|Plastics Product Manufacturing||Percent of Firms by Number of Employees|
|Fewer than 10 employees||38.2%|
|Fewer than 20 employees||53.0%|
|Fewer than 100 employees||81.2%|
|Fewer than 500 employees||93.5%|
Viewing this data, the central role of small businesses on the energy front cannot be denied, and the use of charged terms like “Big Oil” to support increased taxes, and more regulation and government restrictions should be discarded as political gamesmanship. U.S. energy sectors and key related industries are largely about small businesses and their employees. Indeed, if one claims to be pro-small business, then one cannot be anti-U.S. energy.
New Policy Direction
If elected officials are willing to recognize economic realities, and guide policymaking accordingly, then a far more productive energy agenda becomes quite clear – and much of it involves simply not doing what the Biden administration and many in Congress want to do. For example:
- First, the Biden administration should open federal lands and waters to leasing. That includes approving leases in the Gulf of Mexico and the Arctic.
- Second, Congress and the administration need to stop targeting the U.S. energy sector with increased taxes.
- Third, the administration should make clear its support for infrastructure investments, such as pipelines, needed to meet the energy needs of American individuals, families and businesses. Speeding up the federal review process and cutting red tape would be big positives.
- Fourth, similarly, the president should fast track investments related to America’s vast supplies of natural gas. A streamlined review and permitting process capped at one year would make a real difference in meeting consumer and small business needs.
- Fifth, and perhaps most obvious, the Biden administration should be allying with and encouraging U.S. energy producers as opposed to playing games with unsavory regimes to boost energy production.
The president might want to take note that Harold Ford Jr, former Democratic congressman from Tennessee, agreed on these key points in The Wall Street Journal. Ford wrote:
“The president should unwind the bureaucratic hurdles to the federal permitting process that his administration installed. They made the regulatory environment so restrictive and unpredictable that construction of new U.S. energy infrastructure has ground to a halt. Investors are wary of the projects that would increase American energy supplies, fearing the administration will block them. Approving the Keystone XL pipeline would be a great way to signal that they need fear no more.
“Mr. Biden should also expand oil and gas leases on federal land. After a federal court reversed the president’s attempt to stop leasing on federal lands, in April the administration took to a new tactic of limiting what areas are available for energy extraction. The government will offer only 144,000 acres, though it owns and manages 640 million acres, or 28% of all the land in the U.S. Federal land in total is about six times the size of California. Yet the area the administration has opened to leasing is less than half the size of Phoenix. More that can be made available in a safe and responsible way.
“In addition, the administration should expedite creation and implementation of the Interior Department’s five-year offshore-leasing plan; the current program is set to expire on June 30. There’s plenty of oil and gas in the ground, yet the Biden administration has held only one offshore auction. Developing these resources would lower prices and make America less dependent on foreign oil, which is more polluting.”
And then there are the American people. Consider key results from a Morning Consult poll, done for API earlier this year:
- 90 percent of voters support the U.S. developing its own domestic sources of energy rather than relying on other regions of the world (Democrats 92%; Independents 86%; Republicans 90%).
- 85 percent believe producing natural gas and oil here in the U.S. helps America maintain a leadership role during a period of global uncertainty (Democrats 82%; Independents 78%; Republicans 91%).
- 85 percent believe that producing natural gas and oil here in the U.S. could help lower energy costs for American consumers and small businesses (Democrats 81%; Independents 80%; Republicans 90%).
- 84 percent agree that producing natural gas and oil here in the U.S. helps make our country and allies more secure against actions by other countries such as Russia (Democrats 83%; Independents 78%; Republicans 88%).
The American people – in a rather amazing nonpartisan way – apparently understand the benefits of increased energy investment and production from U.S. energy firms. And of course, the small businesses that overwhelmingly populate various energy sectors understand as well. Now we just need President Biden and Congress to understand, and set policies accordingly. A new direction on energy policy is needed immediately, with production and investment being incentivized, resulting in positive developments for the short run and over the long haul.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.