Legislation recently signed into law by President Joe Biden, dubbed the “Inflation Prevention Act,” is being talked about ad nauseam by the media. Yet somehow, important new oil and gas leasing reforms included in that legislation are rarely, if ever, mentioned in the coverage.
The old status quo resulted in the oil and gas industry hoarding leases, which shortchanged taxpayers. It also helped enable the oil and gas industry to keep gasoline prices artificially high by not increasing production to meet demand.
For many years, lawmakers on both sides of the aisle have been pressing for leasing reforms, such as higher minimum bids, increased royalty rates and an end to noncompetitive leasing, but lobbyists always managed to secure enough votes to block them.
That didn’t happen this time, as several important reforms were included as part of this reconciliation bill, which needed only 50 votes to pass the Senate.
Gasoline prices skyrocketed earlier this year, and yet the oil and gas industry sits on almost 25 million acres of public land — an area the size of Kentucky — and roughly 9,000 unused drilling permits. For each of these permits, oil companies have all the permission they need to drill, but they have chosen not to.
Why have oil companies decided against ramping up production to meet demand and stabilize prices? It appears that they would rather boost profits by not investing in new production.
The strategy is working, too. Oil and gas companies recently reported record second-quarter profits. Exxon, for example, reported a profit of nearly $17.9 billion for the quarter ending in June, which is more than three times what it was for the same period a year ago. Chevron and Royal Dutch Shell also reported record profits.
The reforms included in the Inflation Reduction Act may not make the oil and gas industry fully responsive to the supply-and-demand principle that underpins our free enterprise system, but they should nudge them in the right direction.
For example, the rental rates for leases will increase over time from $3 per acre in the first two years to $15 dollars an acre in years 9 and 10, making it more expensive to hoard large amounts of public land.
The new law also increases the minimum bid price to $10 per acre and ends noncompetitive leasing, which allowed companies to squat on these taxpayer-owned parcels for virtually nothing.
It further protects taxpayers by raising the royalty rate on oil and gas production from 12.5% to 16.67%.
These are all important reforms, but the legislation fell short on a couple of fronts.
Oil and gas companies, as a condition of being allowed to drill on our public lands, promise to plug the wells, clean up the sites and restore the areas affected. They regularly renege on that promise and leave taxpayers on the hook for this cost.
According to the Department of Interior, there are at least 130,000 of these orphaned wells, and probably many times that number. We are talking about tens of billions of dollars in clean-up cost being shifted from the responsible parties to you and me.
The solution is actually very simple: Require companies to post bonds in amounts sufficient to cover fully the cost of plugging and restoring these sites.
Another area where the Inflation Prevention Act missed the mark is its baffling inclusion of a provision insisted on by Sen. Joe Manchin, D-WVa., that restricted the issuance of right of ways on federal public land for wind and solar development unless a mandated amount of land has been offered up for lease to the oil and gas industry.
This special-interest gift requires the Department of Interior to ignore the free market in favor of a prescribed mandate that simply encourages the oil and gas industry to hoard even more of our public lands.
And if the market demand for solar and wind development is higher than for oil and gas development, then those renewable energy opportunities may never get across the finish line.
We should certainly celebrate the oil and gas leasing reforms that are part of this new law, and the protection they afford taxpayers, but the sausage-making required to secure those reforms has left plenty yet to be done.
David Jenkins is president of Conservatives for Responsible Stewardship, a nonprofit based in Oakton, Virginia.