Over the last decade, there’s been a push to advance renewable energy solutions at multiple levels. Policymakers who embrace this agenda believe moving away from fossil fuels is inevitable, and perhaps this is true. But the timetable for making such a transition is far from clear. Americans continue to rely heavily on oil and gas for their energy needs making policies that curb such production risky. It is in this environment that new rules for oil and gas leasing of public lands have been implemented. Specifically, the royalties for drilling on public lands recently rose significantly. And this could not only have an impact on costs of domestic drilling but oil and gas production as well.
(Get the lowdown on the Inflation Reduction Act in this Bold story.)
In essence, the new rules for oil and gas leasing were in part required by the Inflation Reduction Act. But additional policies have also been pursued that requires significantly higher bond amounts for drilling companies. This means upfront money is required to continue existing drill sites. While this offers resources for environmental clean-ups, it also could put smaller oil and gas companies out of business. Ultimately, both the higher royalties for drilling on public lands and higher bond requirements undermine drilling activities. This may be better for the environment in an ideal world, but that’s not the case for America’s energy situation. In reality, these new rules and policies could spell serious trouble ahead, especially for the consumer.
The New Rules for Oil and Gas Leasing
The last time that the royalties for drilling on public lands for fossil fuels were raised was in 1920. More than a century ago, the royalty fee was set at 12.5%. But as mandated by the Inflation Reduction Act, this rate was increased to 16.67% recently. The legislative act also required the minimum bid at auctions for these lands to be set higher. Previously, auction bids began at $2 per acre. Now, the initial bid must start at $10/acre instead. While this does not seem like a tremendous increase in either area, these new rules for oil and gas leasing will generate significant revenues. According to expert analysis, an additional $1.5 billion will be collected over the next eight years. As such, these laws and regulations are certainly significant from oil and gas companies’ perspective.
While these increase in royalties for drilling on public lands was mandated by law, other increases were not. However, recent policy changes now require oil and gas drilling companies to put up significantly higher bonds. The last time these figures were updated goes back to 1960. Previously, a bond worth $10,000 had to be secured prior to leasing. Based on recent policy shifts, this figure increased over 15-fold to $150,000. In addition, bond requirements for leasing multiple public lands at once were raised from $25,000 to $500,000. Combined with the other new rules for oil and gas drilling, it’s evident costs for oil and gas companies will rise considerably. And in all likelihood, this will affect decision mad about drilling by these companies.
The Negative Repercussions to Follow
According to some analysts of the fossil fuel sector, the new rules for oil and gas leasing public lands shouldn’t affect production. But this may only be true for some of the larger corporations. The higher royalties for drilling public lands could break smaller oil and gas companies, forcing closures. If this happens, then the reduced drilling would significantly affect states and local cities that benefit from these operations. While some of the proceeds from the new rules will go to states, this may not compare to drilling-related revenues. Even if smaller companies could handle the royalties, the required bond now might be inhibitive. Overall, it’s therefore likely these changes will result in reduce oil and gas supplies.
Assuming the potential for reduced oil and gas production occurs, this bodes poorly for American consumers. In terms of oil specifically, it provides roughly a third of the nation’s energy needs. And when it comes to transportation, gasoline is used by over 90% of the transportation sector. Understanding this, if the new rules for oil and gas leasing reduce supply, prices will certainly rise. This will be due to less domestic oil production and higher imports with their associated rates. The higher royalties for drilling on public lands will therefore be felt at the pump by consumers in a short amount of time. This is not the direction we want to go to be energy independent and to boost the nation’s economy.
(American oil, wherefore art thou? Find out in this Bold story.)
Forcing a Square Peg in a Round Hole
The primary reason for creating these new rules for oil and gas leasing relates to a push for renewables. By mandating higher royalties for drilling on public lands, this provides disincentives for drilling. Presumably, this encourages energy companies to invest more in wind, solar, and hydroelectric. But neither the nation nor its energy infrastructure is ready for such a shift. Fossil fuels remain the most affordable and efficient source of energy for Americans at present. While this evolution is needed, it cannot be forced at the risk of economic prosperity. This is why the new mandates and policies are getting things wrong as they strive to push change ahead of its time.
In addition to being premature, the increase in royalties for drilling on public lands actually could negatively impact the environment. If several smaller fossil fuel companies go out of business, the number of abandoned drilling wells could increase. Abandoned well that are not properly closed and sealed represent a serious source of methane production. As a greenhouse gas, methane greatly contributes to global warming. Certainly, the higher bond requirements attempt to address orphaned wells and other cleanup measures. But they also promote more of these wells overall. In assessing these effects, it seems like these new rules for oil and gas leasing are poorly conceived. Taking a more realistic view of our nation’s energy situation is therefore needed.
