Much as I can understand the political reasons why the administration might like to attribute our current inflation woes to Putin’s Price Hike™, the White House is going to have to work much harder if it expects that narrative to stick. Persuading Americans to forget that prices were already rising strongly before the run-up to the invasion of Ukraine (something Brian Riedl discussed in a recent piece for Capital Matters) won’t be easy.
And while it is true that the disruptions following the invasion will push up inflation still further — and not only in the energy space — this administration is going to find it hard to convince people that it is doing what it can to keep energy prices down, especially when there is news like this.
The Wall Street Journal (my emphasis added):
The Biden administration announced lease sales for oil and gas drilling on federal land Friday, but said it would sharply reduce the acreage available for leases and charge higher royalties on the oil and gas produced.
The Interior Department said it would make roughly 144,000 acres available for oil and gas drilling through a series of lease sales, an 80% reduction from the footprint of land that had been under evaluation for leasing.
Companies will also be required to pay royalties of 18.75% of the value of what they extract, up from 12.5%. Royalties for onshore oil and gas drilling generated about $1.5 billion to $3 billion a year for the U.S. Treasury during the last decade, according to the Congressional Research Service
Call me a pessimist, but that does not look like the best way to encourage oil and gas companies to invest in increased production. Obviously, the companies’ prospective rate of return on investment on this acreage will, everything else being equal, be hit, and it should be remembered that that rate of return also has to “pay” for those leases that turn out to be worthless.
Reducing the amount of land available for lease by 80 percent does not look much like the ideal way to boost production, either.
Not only that, but this greedy and grudging approach by the administration reinforces the message that it has previously sent to the oil and gas sector: Its efforts are tolerated, not appreciated, and the extent of that toleration will, the odd politically driven pause aside, be forever shrinking. This message, echoed by regulators and those on Wall Street who are — for reasons of power, profit, or both — playing along, will be received loud and clear. Under the circumstances, it is likely to discourage oil and gas companies from investing in new production not only on federal land, but elsewhere.
Bloomberg’s Jennifer A Dlouhy notes that:
Oil industry advocates argue the U.S. can’t afford to restrict oil and gas development on federal lands and waters that provide nearly a quarter of the nation’s crude production. They’ve argued the U.S. should accelerate domestic oil and gas development amid the war in Ukraine and concerns about Europe’s reliance on Russian energy supplies.
Oil industry advocates are right. Where this subject is concerned, the administration’s policies are a gift to Vladimir Putin, and offer a helping hand to inflation.
That’s not an ideal combination.