Last week, by nearly a 100-vote margin, the U.S. House of Representatives voted to do what OPEC has been unable to: defend a higher price for oil.

Although oil was just at a 19-month low, I’m sure that wasn’t precisely the intent of H.R. 6. The “Clean Energy Act of 2007” could have been more accurately titled the “Cleaning Up Our Energy Act of 2007,” because it was mainly about repealing tax credits and royalty exemptions for the oil and gas industries so that the money could be squirreled away in a fund for later spending on home-grown renewable energy and efficiency.

Big Oil has admitted that it didn’t need most of those tax breaks. How could they, when they have been racking up record profits—obscene profits, according to some—for the last few years?

But I don’t think H.R. 6 is quite what they had in mind.

The CBO estimates that H.R. 6 will generate $6.3 billion in savings from direct spending over the next ten years. And the Joint Committee on Taxation estimates that over the same period it will generate an additional $14 billion in revenues.

That adds up to a $20 billion kitty to be spent on renewable energy! For those of us who invest in renewable energy, that’s cause for a Slim Pickens “Yeeeee-hawww!!”

Like Taking Candy from a Cry-Baby

In particular, some of the bill’s provisions will:

• Eliminate some income tax deductions for domestic production of oil and natural gas.
• Close a loophole (created by a clerical error) which allowed some Gulf of Mexico leases to avoid royalty payments. Oil companies now can choose to renegotiate the leases and pay by the existing royalty schedule (about $9 a barrel), or they can pay a “conservation of resources fee,” or . . . they can be barred from bidding on future drilling leases altogether.
• Repeal additional royalty relief on future production, which had been granted in the Energy Policy Act of 2005.
• Remove an inadvertent tax benefit in the Jobs Act of 2005, which lowered the income tax rate paid by oil companies by reclassifying oil and gas production as a “manufactured good.”

Naturally, the oil companies and their friends have been vocal in their opposition to H.R. 6. Grover Norquist, the guy who wanted to shrink the federal government until he could “drown it in the bathtub,” says H.R. 6 will “decrease domestic energy production and provide a boost for OPEC producers—thereby increasing our energy dependence.”

Methinks the lady doth protest too much.

The domestic oil industry is now earning $78 billion in profits every year. Just one of the big oil companies, ExxonMobil, earns $40 billion of that. And they would have you believe that setting aside an aggregate $2 billion a year, or 2.5% of Big Oil’s profits today, for investments in renewable energy and efficiency is going to break their backs.

See this? It’s the world’s smallest violin, playing “Poor, Poor, Pitiful Me.”

If the oil industry were paying one dollar in taxes, no doubt Norquist would say it was a buck too much.

The Rest of the Story

But they do have a point: the Clean Energy Act of 2007 probably will slow down the pace of Gulf of Mexico production somewhat. Without a big federal subsidy (in the form of royalty-free leases and fat tax credits) that the “free marketers” love so much, international oil companies might prefer to lift oil from somewhere else in the world, for now. And that will, in turn, increase imports to make up for decreased domestic production. Which will lead to higher crude prices, and more money in the pockets of foreign producers.

That’s where the free market-lovin’, Alaskan oil-drillin’ crowd would like to stop the narrative: OPEC and other oil producers win; you pay more at the pump and America becomes more “dependent.” Those Democrats are going to war with Big Oil, the winners will be the terrorists and the loser will be you.

But of course, that’s not the end. That’s maybe the next chapter or two. Allow me to tell the rest of the story.

If we’re not at the peak of oil production yet, then we soon will be. Easily within the time scale (10 years) of this bill. The things we’re doing to mitigate that, like increasing domestic ethanol production, will help, but they can’t make up for the shortfall in oil production. That means that oil prices are going higher—much higher—and that’s true no matter how much oil we produce domestically! Everyone from Matthew Simmons to Goldman Sachs has worried publicly that we could see spikes to $180/barrel, depending on how the cards fall.

So the domestic oil that we don’t sell today, when it’s cheap, will be worth much more in the future. And it will be even more vital to our national security than it is today, when we can call tankersfull to us, at will, for mere cash. Ten years after the peak—say, 2017—exports, no matter how vital, may come to be of secondary importance to just keeping one’s own lights on for some oil producers (like all of the producers in the UK).

As we move into the future, oil and gas prices will rise and carbon-based fuels will be disfavored, be it by agreement or mandate or a market mechanism like carbon credits. Meanwhile, the cost of renewable energy and efficiency improvements will decline. Those two trend lines meet somewhere in the near future. The far future holds a new paradigm, one that is based on clean, green fuels. Countries known for their long-term strategic planning horizons, such as Sweden and China, are already choosing the clean, green path.

The sooner we make the necessary investment to begin that transition, the easier and cheaper it will be. Modern materials like carbon fiber, highly refined silicon and specialized plastics, which are essential to building a renewable energy infrastructure, are a whole lot cheaper and easier to get right now than they will be in ten or twenty years.

Domestic production from renewables offers long-term security and keeps more of that precious, miraculous oil around for the future, when we may desperately need it for much more valuable things (like making plastics) than just burning it in a 10% efficient engine. Drilling our oil today only offers security of supply for the short term.

We don’t yet know the difficulties of tomorrow, but on the current trajectory it’s not looking pretty. The simple fact that we are about thirty years late in getting serious about renewable energy and conservation should be reason enough to ask Big Oil to help pay for the transition. Who better to make the investment in tomorrow’s energy than today’s energy companies?

In a perfect world, with perfect markets, we would have started choosing domestic renewables over foreign oil long, long ago. If our markets had good feedback mechanisms for the real costs of oil, and the extraction of something nonrenewable had an appropriate cost, and our carbon emissions weren’t “externalized” but actually paid for by somebody, and a hundred other things—then, instead of being twisted like corkscrews, the Invisible Hand would have already put its big Invisible Finger on renewables.

How many trillions of dollars have we spent to have our military protect our oil supplies in foreign lands? How many people have died for it? Nobody counts it. But we spent it, and they died, all to get us right here where we are today: waist deep in the Big Muddy without a paddle, if you will. (Cue The Fugs’ “Wide, Wide, River.”)

The IEA says the world will spend $20 trillion in new investment in oil and gas over the next 25 years just to keep supplies up with demand. Wouldn’t you rather spend that money to get you out of the blood-and-oil game altogether?

So, we’re really talking about 1/1000^th of the investment that humanity is prepared to make in oil and gas over the next 25 years, no questions asked, after which we would be even deeper in the Big Muddy.

This isn’t a war on Big Oil. We’re just starting to play catch-up with reality.

Chris Nelder