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The New Energy Bill Another Huge Boondoggle

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
August 2, 2005

The New Energy Bill – Another Huge Boondoggle

IN THIS ISSUE:

1.  Highlights (Or Lowlights) Of The Energy Bill

2.  “Big Oil & Gas” Is The Big Winner

3.  Ethanol – Some Call It “Farm Bill II” 

4.  We Still Can’t Drill In ANWR

5.  Eminent-Domain & Possible Collusion

6.  Don’t Expect Gas Prices To Come Down

Introduction

Last week, Congress passed the “Energy Policy Act of 2005” which is likely to reach President Bush’s desk this week.  Most sources believe the president will sign it without reservation.  But as I will point out below, the new energy bill is just one more pork-barrel boondoggle that will cost taxpayers tens of billions of dollars and will NOT do much to solve our looming energy crisis.

For the last four years, President Bush has been trying to get a comprehensive new energy bill which, we were told, would boost domestic exploration, production and supply, help cut reliance on foreign energy, foster conservation, and increase the reliable delivery of electrical power.  All of this, we were told, would contribute to lower energy prices, or at least a slowing in the increase in energy prices over the next decade or longer.

Yet the new energy bill will accomplish little of that.  Instead, the new bill awards tens of billions to the big oil and energy industries, which are already enjoying record profits.  The legislation does almost nothing to slow the growth of dependence on foreign oil; it does little to encourage alternative energy sources; it does not do nearly enough to encourage a revival in nuclear power; and it does nothing to strong-arm the auto industry into producing more fuel-efficient trucks and vehicles.

The Wall Street Journal described the new energy bill as follows on Friday: “We can also say this for the bill: It doesn’t pick energy winners or losers. Everyone who produces so much as a kilowatt hour is a winner in this subsidy-fest of tax credits and new federal mandates.”  

In the next few pages, we will look at the good, the bad and the (mostly) ugly aspects of the new energy bill.  I will make the case that President Bush should veto this bill, and make the spend-happy members of Congress completely revamp it!  Unfortunately, that won’t happen.   President Bush said last week, “I look forward to signing it into law" and called the legislation "critically important to our long-term national and economic security".

Highlights (Or Lowlights) Of The Energy Bill

The Energy Policy Act of 2005 will provide at least $12.3 billion of increased direct federal spending over 10 years, largely to the energy industry.  Never mind that the $12.3 billion alone is almost double the $6.7 billion the Bush administration asked for.

But that’s only the tip of the iceberg.  The new bill also authorizes $14.5 billion of new tax breaks for energy and related companies.   The bill also authorizes dozens of new taxpayer-funded subsidies, incentives and programs, some of which I will discuss below.  If all of these programs are funded and the tax breaks utilized, Congress itself estimates the cost at $66 billion over the next decade!  The private watchdog group, Taxpayers For Common Sense, estimates that if all these programs are funded and the tax breaks utilized, the cost will be over $80 billion!

Here is a summary of the highlights of the new energy bill:

* Total cost to the government after revenue offsets: $12.3 billion over 10 years.
* Tax breaks of $14.5 billion over 10 years for energy companies, renewable energy sources and promotion of efficiency.
* Requirement for refiners to use 7.5 billion gallons of ethanol annually by 2012, double current production.
* Extension of daylight-saving time by a month, beginning in 2007.
* New efficiency standards for commercial appliances, from air conditioners to refrigerators.
* Requirement for utilities to meet federal reliability standards for the electric transmission grid, hoping to avoid blackouts such as the one in the summer of 2003.
* Increasing imports of liquefied natural gas by giving federal regulators final say over import terminals.
* $1 billion for coastal environmental management in states where there is offshore oil production.
* Loan guarantees and other subsidies for clean energy technologies and new nuclear reactors.
* A $1.8 billion program to promote clean coal research and development.
* Requirement for an inventory of all offshore oil and gas resources, including some areas now off limits to drilling.

Consumers also will see tax credits for the purchase of hybrid-electric cars and get tax breaks for making energy conservation improvements in their homes as I will discuss below.

“Big Oil” Is The Big Winner

As the Wall Street Journal quote on the previous page makes clear, the oil and energy industries are the big winners in the new energy bill.  Of the $14.5 billion the government will dole out in tax breaks, apprx. $9 billion of that will go directly to oil and gas companies and others in the energy sector, most of which are already enjoying record profits. 

More importantly, with oil above $60 per barrel, these energy producers are already ramping-up exploration efforts, production capacity and refining capabilities at the maximum rate possible – without the new government handouts, tax breaks and other largesse in the new energy bill.

So the question is, why did Congress decide to give the oil and gas and energy industries tens of billions in pork when they don’t even need it?   Think campaign contributions.  And what will the energy industry do with the money?  Answer: pay less taxes on even greater windfall profits.

In another major bone to big oil, the new bill suspends royalty payments the big oil and gas companies must pay the government to pump oil on government-owned lands.  This would include all of the offshore rigs operated off the coasts of the country, since the land under the ocean is deemed to be owned by the government.  One report I read over the weekend estimated that the suspension of these royalty payments will mean a $5 billion windfall for the major oil and gas companies that operate all of the offshore drilling rigs. 

In an April 2005 speech to the US Hispanic Chamber of Commerce, President Bush stated, “With oil at more than $50 a barrel, energy companies do not need taxpayer-funded incentives to explore for oil and gas.”  With oil now at approximately $60 per barrel, the argument is even stronger.

So again, you have to ask yourself why Congress would more than double the size of the energy bill the president asked for – including a projected total outlay of $66 billion over 10 years and cast most of that money and tax breaks at the feet of the oil and gas companies.  I suspect that if we look into the campaign contribution records of these Congressmen, we may just find the answer.

Of course, if President Bush feels strongly that the big oil companies do not deserve this largesse, he should veto the bill and send Congress a message.  Unfortunately, it doesn’t look like that is going to happen.

Ethanol – “Farm Bill II”

To the disappointment of many, the new energy bill does not reduce government subsidies for the production of ethanol.  In fact, just the opposite – the bill calls for annual production of ethanol to be doubled by the year 2012 and provides even greater incentives for doing so.

Not surprisingly, Midwestern state senators and representatives – Republicans and Democrats alike – voted in lockstep to get the extra pork for the corn farmers in their home states.  Of course, this massive increase in the production of ethanol will also benefit agribusiness giants like Archer Daniels Midland and Cargill who produce most of the ethanol in the US.

There have long been those who claimed that the production of ethanol is actually a net-negative energy equation.  In other words, it takes more energy to produce ethanol than we actually get from the final product, or so they claim.  According to a new study from Cornell University, the energy derived from a gallon of ethanol is less than the energy used to make it.  Yet the new energy bill will double annual production of ethanol by 2012.  Go figure!

Conservatives (including me) roundly criticized President Bush for signing the latest Farm Bill in 2002, which was also loaded with pork.  Now some of those same conservatives are calling the new energy bill “Farm Bill II.”   Many liberals are calling it a “bonanza for big oil.”  In the case of the new energy bill, both sides may be correct!   

Tax Breaks For Consumers As Well

Under the new bill, consumers are eligible for up to a $500 tax credit for money they spend on energy improvements in their homes. Homeowners can get a $300 tax credit for purchasing a highly efficient central air conditioner, heat pump or water heater. Installing energy-saving windows could be good for a $200 credit.  Also, the manufacturers of energy efficient washers, dryers, refrigerators, etc. are eligible for tax breaks as well.

Consumers are also eligible for a 30% tax credit, up to a maximum of $2,000, for purchasing a solar-powered water heater or any fuel cell equipment for their home. Consumers who want to take advantage of the energy bill tax breaks for their home must do so between January 1, 2006 and December 31, 2007.

American car buyers are also eligible for a number of tax breaks as part of the new energy bill.  If you purchase a hybrid or diesel car after January 1, 2006, you can get a tax credit anywhere from $500 to $3,400 dollars, depending on the fuel efficiency of the car.  The tax credit for a Toyota Prius, for example, would range anywhere from $2,500 to $3,000, according to Toyota.

Currently, the price tags on the relatively few hybrid vehicles that exist are so high that a buyer is not likely to make up the difference with fuel savings.  Even so, the price is not high enough to allow the automakers to turn a profit on these vehicles.  Assuming the tax credits can help make these vehicles more economically viable, they may expand the population of hybrid vehicle buyers beyond those who embrace the new technology for purely philosophical reasons.

Other Pros & Cons of the Bill

I should point out that I do agree with having a comprehensive energy policy, and that some of the provisions outlined above are very positive.  One such provision allows for more nuclear power plants to be built in the US.   Currently nuclear power accounts for only about 20% of electricity produced in the US, while it accounts for over 78% of all power in France.

US nuclear power development has been paralyzed by fears of another Three Mile Island or Chernobyl incident.  However, France has enjoyed a long history of nuclear power without serious incident.  If the French can do it successfully, then there is no question that we can do it just as well and probably better.

The problem, as discussed above, is that the lion’s share of the billions to be doled out in the new energy plan goes to the oil and gas industry, not the nuclear power industry.

On the other side of the fence, however, there are some serious negative provisions of this bill beyond the fact that most of the money goes to an industry that needs it the least.  One of the biggest problems is that much of the bill is directed toward making fossil fuels more efficient rather than development of new technologies and renewable sources of energy.

Sure, the bill does have provisions for solar, wind and hydrogen fuel cell technology, but the amount of money allocated to the development of these technologies pales in comparison to what is given to existing sources.  Some may argue that this is necessary because new technologies will take years to develop, so we need to maximize the efficiency of our current sources.  Others, however, insist that the longer we put off major funding of alternative technologies and sources of energy, the longer we will be increasingly dependent upon foreign oil.

That’s why the destination of much of the current funding is such a sore point.  Money is flowing to an industry that is currently enjoying a huge windfall from the price of oil and gas, so it doesn’t need a subsidy to explore additional reserves and more efficient technologies.  Thus, this would have been a perfect time to divert most of the funding and tax breaks to alternative sources, possibly giving them a much bigger boost when we need it most.

No Drilling In ANWR

Another shortcoming of the bill, in my opinion, is that it did not include drilling in the Arctic National Wildlife Refuge (ANWR), as President Bush had proposed.  Bowing to Democrats who promised to filibuster the bill if it included drilling in the ANWR, the final bill left that vast energy resource untapped.

Here’s my take on this issue.  It’s true that the known reserves in the ANWR would not make us energy independent, even if fully tapped.  We would still be dependent on foreign oil, although to a much lesser extent.  However, if we were to tap that large resource, it would send a powerful message to the members of OPEC that we are willing to make hard choices to reduce our dependence upon them, even if it means bucking a strong environmental lobby here in the US.

As for any environmental impact on the ANWR, I think it would be minimal.  I equate the doomsday scenarios painted by those who oppose drilling in environmentally sensitive areas to those aimed at stopping the Alaska Pipeline decades ago.  Great environmental catastrophes were predicted if the pipeline was allowed to be built.  There were none.  I think the same thing is now occurring in regard to the ANWR.

Eminent-Domain & Possible Collusion

Many politicians in Washington expressed great concern when the Supreme Court ruled in June to expand the right of local governments to seize private property for public use.  Yet in the new energy bill, the government is given substantially greater eminent domain powers at the federal level to seize private lands to clear paths for utility lines.  This has been a major issue with the utility lobby, and Congress came to their rescue.

Perhaps the energy bill’s most far-reaching provision is the repeal of the Public Utility Holding Company Act of 1935, which has blocked the owners of utilities from owning other companies and has prevented mergers in the electricity industry.  Utility officials and other proponents of repeal say it will attract capital, helping utilities build transmission lines and generating plants that will prevent blackouts.

Those who oppose this repeal believe the Public Utility Holding Company Act has been an essential consumer protection that ensured that electric utilities exist to serve the people, and not the profit interests of large corporations.

Consumer advocates warn that the repeal will trigger a flurry of mergers and acquisitions within the utility industry, including the likely entry of foreign companies wanting to get in on the act.  They claim this will lead to increased utility rates and more opportunity for Enron-type fraud.

Supporters, however, point out that the electricity industry will still be regulated by a slew of state and federal agencies. But both sides agree the repeal of the Public Utility Holding Company Act will greatly transform the industry in coming years, eventually thrusting as much as $1 trillion in utility assets into the global marketplace.  “This will be one of the biggest economic changes in the country in 70 years,” said Lynn Hargis of the liberal consumer group Public Citizen

Daylight Savings Extended

As noted above, the new energy bill increases daylight savings time by one month, beginning in the spring of 2007.  Daylight savings time will begin three weeks earlier on the second Sunday in March, and it will be extended by one week to the first Sunday in November. The original House energy bill would have added a month in the spring and another in the fall.

The theory is that daylight savings time promotes energy conservation.  According to the California Energy Commission, energy use and the demand for electricity for lighting homes is directly connected to bedtime.  When people go to bed, they turn off lights, TVs and other appliances, which reportedly account for about 25% percent of America’s daily total use of electricity.

Studies done in the 1970s by the U.S. Department of Transportation show that America’s electricity usage is reduced by about 1% during each day that daylight savings time is in effect.  The senators who promoted the extension of daylight savings time estimated that the nation saves apprx. 100,000 barrels of oil per day.

But no one knows for sure.  So, the new energy bill calls for and funds a new study to be conducted to determine just how much savings are achieved by daylight savings time.

Bring Down The Price Of Oil & Gas

Finally, critics complain that the energy bill does little to ease the pain of high and rising gasoline prices at the pump.  However, anything other than sending everyone a government check to help pay for gas would be impractical, if not impossible.  The price of gas and oil today is a function of refinery capacity and worldwide demand (ie – market forces).   Congress can’t pass a bill to make Asian demand for oil any less, nor can they wave a magic wand and make more refineries appear.

With the inflation-adjusted price of gasoline still below that of the early 1980s, the pain is not so much that we are having to pay more; it’s that the price of gasoline tends to stay stable over a long period of time, and then jumps significantly in short periods.  This sends a shock wave through family budgets because of the swiftness and magnitude of the price increases.   Had the price of gasoline trended up slowly along with inflation since 1980, we would be paying an average of almost $3.00 per gallon of gas today.

Conclusions

While America definitely needs a national energy policy, the latest bill passed by Congress is mostly just another pork barrel boondoggle.  By its own estimation, Congress acknowledges that the program will cost $66 billion over the next decade.  It will very likely cost much more than that.

The bulk of the money that will be spent and the huge tax breaks and other incentives will go to the big oil, gas and other energy companies, most of which are enjoying record profits with oil above $50 a barrel.  These companies are already ramping-up exploration, drilling and production of energy as fast as they can.  They do not need a massive government handout, but they will surely take it.

This would have been the ideal time for Congress to have directed monies it wanted to spend on energy to those companies and industries that are working to develop alternative sources of energy and alternative technologies to lessen our dependence on foreign oil.  While some of the money doled out will reach these industries, the bulk of the money will go to big oil and gas, and we can bet that will mean greater campaign contributions in the future.

Midwestern senators and representatives showed that they can work together in a bipartisan manner when it comes to getting major pork for their constituents.  Ethanol production will be doubled by the year 2012, even though many question whether the production and use of ethanol adds any net energy to the equation.

While there are some good things in the new energy bill, as I have pointed out above, the negatives and the enormous costs far outweigh the benefits.  I am not alone in this view; just type in “new energy bill” on Google and read for yourself.  It’s hard to find anyone who believes this new bill is in the country’s best interest.

President Bush should veto the Energy Policy Act of 2005, and send it back to Congress.  But sadly he has said he will sign it.  While the new energy bill was supported by Republicans and Democrats alike, you can be sure that its passage will give liberals new ammunition with which to claim that President Bush and Vice President Cheney are “in bed with big oil.”  What else is new?   

Speaking of what else is new, take a look at the new highway bill.  Do an Internet search for “new highway bill” and you will see that we are about to get yet another pork-loaded bill out of Congress ($300 billion) that President Bush is also expected to sign later this year.

Congress is out on a “much needed” vacation.  Too bad they are coming back!

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

The Cut-and-Run Caucus in the House of Representatives.
http://www.opinionjournal.com/columnists/bminiter/?id=110007045

Bolton to Turtle Bay.
http://www.washtimes.com/op-ed/20050801-094054-4419r.htm

Filibustering judges has only hurt the Democrats (a good read).
http://www.opinionjournal.com/nextjustice/?id=110007041

Hillary’s pact with the centrist Democratic Leadership Council.
http://www.latimes.com/news/nationworld/la-na-outlook1aug01,0,1155775.column?coll=la-home-headlines&track=hppromobox


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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