Catastrophe - Dick Morris [124]
In fact, American taxpayers will be subsidizing the major oil and gas companies for years to come, all because of the mistakes of Bill Clinton’s Department of the Interior. It’s estimated that its blunder will end up funneling up to $60 billion to Big Oil!492
Letting Big Oil grab $60 billion from the taxpayers—while we’re facing the largest deficit in history—qualifies as a catastrophe in anybody’s book.
The problem began when President Clinton and his interior secretary, Bruce Babbitt, decided to stimulate oil and gas exploration in the Gulf of Mexico by agreeing to reduce, or even outright eliminate, the royalty payments energy companies would normally owe the federal government for the right to drill there. The concept was to exempt them from royalties—which usually run between 12 and 16 percent of the cost of revenues—until they reached a certain volume of production, or until oil or gas prices rose above specific price levels.493
The basic idea was a good one. With America’s energy needs skyrocketing and domestic production of oil dropping, it was only wise that our eyes turn south—to the Gulf of Mexico. Estimates of how much oil is buried under its floor run as high as 4 billion barrels—oil that modern technology has finally made it possible to recover.
So Clinton and Babbitt urged Congress to pass the Outer Continental Shelf Deepwater Royalty Relief Act of 1995, which reduced the royalties the energy companies would have to pay to drill in the gulf. Congress provided that the royalty relief would remain in effect as long as oil and gas production from gulf leases remained below a certain volume. The legislators reasoned that, since the suspension of royalties was an incentive program to encourage exploration and drilling in the gulf, it would no longer be necessary after a significant volume of energy began flowing from these leaseholds.
Astonishingly, however, Congress overlooked one key factor: it failed to include any provision tying the suspension of royalty payments to the price of energy. No problem, the Clinton people said. We’ll just include the price threshold in the drilling contracts that the Interior Department issues to each energy company. New legislation to discontinue the royalty relief once prices rose, they said, was unnecessary. Famous last words.
At the time, the price issue didn’t seem too urgent. After a series of significant oil and gas discoveries in the North Sea and elsewhere, energy prices were low. India and China had yet to go through their rapid development; their surge of energy appetite was in the future.
So, in 1996 and 1997, Clinton’s Department of the Interior signed leases for gulf exploration and drilling with major energy companies, specifying that they would be exempt from royalty requirements unless the price of oil rose above $34 per barrel of oil and an equivalent price for natural gas.494 After all, the Clinton administration reasoned, if prices were high, the energy companies wouldn’t need relief from royalty payments. They’d be making plenty on the oil and gas they mined in the gulf.
Why didn’t Clinton and Babbitt ask Congress to amend the Royalty Relief Act to require full royalty payments if the price rose above a certain level? Why did they rely on the advice of their own lawyers that it was not necessary to ask Congress? We don’t know the answer, but we do know, in retrospect, that it was a huge mistake.
The program took off like a rocket. Deepwater oil production in the gulf shot up from 42 million barrels in 1996 to 348 million in 2004.495 Natural gas production jumped almost tenfold.
But then a funny thing happened: in the next two years, 1998 and 1999, all the leases issued to energy companies included the royalty relief but failed to mention the provision that the relief