Economy Energy and Environment Oil & Gas

Natural Gas Could Be NM’s Ace in The Hole


Natural gas could revolutionize New Mexico’s economy. The fuel of which New Mexico is among the nation’s leading producers, has seen incredible growth in production with the advent of horizontal fracking and new drilling techniques resulting in a 25 percent increase in US production since just 2007.

The advent of cheap, plentiful natural gas has caused production and drilling to decline temporarily here in New Mexico, but the trend holds great opportunity for our state as well. Why is cheap, plentiful natural gas a good thing?

• It’s relatively green. Compared to coal, natural gas generates less than half of the carbon and a fraction of the sulfur dioxide, nitrogen oxides, and particles such as ash;
• It could drive a rebirth of American industry. Natural gas is a feed-stock in many chemicals and plastics. Having a cheap, plentiful supply here in the US could lead to the re-shoring of manufacturers and thousands of new jobs, a stated goal of the Obama Administration;
• It can be exported for the economic benefit of New Mexicans and the US as a whole. Japan is just one energy-poor nation that is eager to import natural gas from producers in New Mexico as the gas currently available in many overseas markets if four times as expensive as it is here.

So, why do natural gas prices remain depressed and why have producers like ConocoPhillips said they will suspend drilling operations in New Mexico?

Simply put, there is one major road block in the way, the Obama Administration. According to Bloomberg News, President Barack Obama’s administration is currently debating whether to allow these producers to export liquefied natural gas to countries with which the U.S. has no free-trade agreement. Until the Administration makes a decision, investments in the infrastructure necessary to export large amounts of natural gas from New Mexico will not be made.

Why would Obama not support an environmental win that could also boost the economies of New Mexico and several other natural gas-producing states?

Simply put, it’s an unholy alliance of “Big Business” and “Big Green”. Big business which includes Dow Chemical likes the concept of having feed stock for its products available at a fraction of the cost found overseas and, while the company supports free trade for its own products, they refuse to apply that same principle in ways that might reduce their competitive edge.

Big green groups like the Sierra Club are adamantly opposed to the fracking process which has been in use for decades. And, while natural gas is relatively clean, the group has opposed wind farms and solar projects as well and could accurately be described as simply “anti-energy.”

The point of this article is first-and-foremost to educate. New Mexicans uniquely benefit from the jobs and tax revenues associated with natural gas production and could benefit to an even greater extent if the Obama Administration embraces free trade in natural gas.

This article is meant to agitate as well. You can bet that “big business” and “big green” are swarming Capitol Hill and the White House looking to convince Washington that special favors for the few are actually beneficial to the many (when in reality that is not the case). We need average New Mexicans, the oil and gas industries, and our elected leaders including Gov. Martinez and our Congressional delegation to start making the case that free trade in natural gas will be a good thing for the Land of Enchantment and its people.

Our state has been poor for too long. That poverty exacerbates negative trends in areas as diverse as education, health, safety, and individual self-esteem. The boom in natural gas is a once-in-a-generation opportunity to embrace an economic trend that is clearly working in our favor. We need to demand that our representatives seize it!

Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Energy and Environment Oil & Gas RGF Events

Luncheon and Panel Discussion: Understanding Gas Prices and Oil and Gas in New Mexico

If you haven’t noticed, gas prices are on their way down in recent weeks. While the media has taken note, the reasons behind the decrease are not obvious. That is why the upcoming panel discussion being held on May 30 (which Rio Grande Foundation president Paul Gessing will participate in) is so important (details and event invite here). You are encouraged to attend this free event!

At the Rio Grande Foundation, we have always stated clearly that gasoline prices are set largely by the marketplace with several additional factors impacting them. If there were a “vast conspiracy” on behalf of higher gas prices, they would be kept high all the time and would be far higher than they are. Enjoy lunch with us and find out more details not only on our perspective, but what one of the top national experts and several local ones have to say on the issue.

You can bet that gas prices will rise again some day and the conspiracy theorists will be there to blame “big oil” and point fingers (usually at the wrong parties).

Energy and Environment Oil & Gas

‘Fracking’ Essential To Future

Mora County Commissioner John Olivas wants a ban on oil and gas drilling in Mora County because he is concerned with the environmental impact of a drilling process named hydraulic fracturing – or “fracking,” as it is colloquially called.

Mora County is not alone in its concern about fracking. Santa Fe, Rio Arriba and San Miguel counties have halted or discouraged drilling and fracking with ordinances and moratoriums.

Fracking involves a process wherein, once a well has been drilled to hydrocarbon-bearing rock (usually shale), the rock is blasted by a mixture of water, sand and chemicals. Fractures in the rock then allow the trapped gas or liquids to make their exit.

Why are county commissioners in New Mexico jumping on the “ban wagon”?
Maybe they have been watching too many Michael Moore-like documentaries on Netflix. An Oscar-nominated documentary, “Gasland,” says that fracking contaminates our water supply with chemicals. In the movie, some homeowners set their tap water on fire. Industry experts maintained that the film was fraught with errors and misinformation, but nevertheless it dealt fracking something of a blow.
The movie got a lot of attention (maybe Commissioner Olivas’?), but the movie’s arguments against fracking turn out to be deceitful.
Apparently, the dramatic tap water blaze had little to do with fracking. In many parts of America, there is enough methane in the ground to leak into people’s well water. The best fire scene in the movie was shot in Colorado, where the filmmaker is in the kitchen of a man who lights his faucet.
But Colorado investigators went to the man’s house, checked out his well and found that fracking had nothing to do with his water catching fire. His well-digger had drilled into a naturally occurring methane pocket.
It’s not overstating the case to say that unconventional hydrocarbons have shifted the world’s energy balance of power. The “shale gale” has spread the wealth around. Vast volumes of hydrocarbons are not just Middle Eastern plays anymore.
This shift has been enabled by new technology, revolutionary, really. Across the world, we’ve seen vast, stunning improvements in applied mathematics and computational abilities. Just on that basis along, today’s energy industry works with much-better exploration tools than in the past, better seismic and geochemistry.
Then there are new dramatically improved capabilities in directional drilling, with better drill bits and better fluids. After the holes are drilled, there’s fracking. The modern energy industry has more powerful pumps, more control of down-hole pressures and even better nanomaterials for holding the cracks open in the fractured shale and other tight rocks. What’s more, there are better post-completion treatments.
Here, in the U.S., the shale gale has eliminated the need for liquefied natural gas imports, likely for several decades and perhaps longer. In addition, the shale gale has the potential to significantly reduce Russia’s influence over the European natural gas market. At the same time, the shale gale will dramatically diminish the “petro power” of other major OPEC players, such as Iran and Venezuela.
Fracking plays a very important role in energy production nationally and in New Mexico.
A recent report from the American Petroleum Institute concluded that if Congress were to place additional federal regulations that govern the oil and gas industry practice of fracking, the number of new U.S. wells drilled would plummet 20.5 percent over a five-year period.
The oil and gas industry provides significant revenues to the state of New Mexico and local municipalities. For fiscal 2010, oil and gas revenue payments in the form of taxes, royalties and other revenues totaled nearly $2.2 billion – that represents a 27 percent contribution to the state’s general fund.
Natural gas is not risk-free, but no energy source is. Perfect is not one of the choices, Commissioner Olivas.
Thomas Molitor is an adjunct scholar with the Rio Grande Foundation in New Mexico and a regulatory analyst with the American Action Forum in Washington D.C.
Economy Oil & Gas Tax and Budget Taxes

Eliminating Tax Credits Won’t Solve Budget Problem


With a $400 million budget deficit facing lawmakers when they return to Santa Fe, the 100+ tax credits and deductions that the state offers have justifiably come under greater scrutiny. While we applaud the increased concern over New Mexico’s fiscal condition, there are a few important points to keep in mind.

First and foremost, while the Tax and Revenue Department lists the film subsidy as a “tax credit,” this is a misnomer that can lead to poor policy decisions. The full spreadsheet of credits, exemptions, and deductions is available on our website The film “credit” provides a 25 percent rebate on each dollar the film industry spends in the state. In FY 2009, this amounted to a $76 million outlay while in FY 2010, the total expenditure was approximately $66 million. This wealth transfer is inherently inefficient and should be considered for elimination.

The rest of the tax credits and deductions and involve people or businesses not paying taxes on activities that would otherwise have been taxed. From both an economic and moral perspective, the film subsidy is far different than a credit or deduction. Transferring money from one taxpayer to another is far different than simply allowing a taxpayer to hold onto his or her own money.

The other thing to keep in mind is that eliminating tax credits and deductions is inherently a tax increase. Also, tax credits and exemptions are often used to alleviate inherent inefficiencies found in New Mexico’s tax system.

Approximately half of the exemptions and deductions (including some of the largest ones) apply to New Mexico’s mineral and other extraction industries. Any efforts to raise revenue by taxing those industries will make our state less attractive to those who do business in the state and employ thousands of New Mexicans and pay millions and even billions of dollars in taxes to the state annually.

Of course, that leaves dozens of other tax credits and exemptions. When it comes down to it, the impact of most of them is measured in the hundreds of thousands of dollars, not in millions. That means that their elimination would be of limited value when one considers that the state faces a $400 million deficit this year.

The biggest single deduction is the approximately $200 million gross receipts tax exemption for groceries against the gross receipts tax. I’m not sure that Gov. Susana Martinez wants to go down that path after the contentious debate we saw last session.

A second, much smaller exemption is the $67 million the state forgoes by taxing new vehicle title transfers at 3 percent instead of the 5 percent statewide rate. From a tax perspective, it may not make economic sense to tax vehicles at a lower rate than other consumer goods, but the Rio Grande Foundation will fight tooth and nail against raising this tax.

One tax that might be re-worked is the exemption granted under Richardson for payments to health care providers by third-party-payers (insurance companies). This deduction reduces state revenue by approximately $60 million annually.

With everything going on in the health care sector these days, I’m not sure if this is a wise way to raise $60 million, but from a taxation perspective it would make more sense to exempt patient payments (direct payments) from taxation than third party payments. After all, restoring the patient-doctor relationship must include a fiduciary relationship. Nevertheless, such a shift is not going to solve the budget problem.

These are just a few of the larger tax credits and deductions offered by the state. Other, far smaller incentives are focused on the aged, handicapped, job creation, wine and microbrewers. The fact is that eliminating any or all of these will have significant economic repercussions in the form of higher taxes on average New Mexicans.

The reality is that all of the “easy” cuts and “revenue enhancements (tax hikes)” have been done. Real spending cuts are both possible and necessary to secure New Mexico’s economic future. If legislators want to undertake more drastic reforms to the state’s tax structure, reforming or eliminating the gross receipts tax entirely (and moving to a straight sales tax) may be the way to go.

Paul Gessing is the president of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Energy and Environment Oil & Gas

Renewables Draining Economy


Under New Mexico’s “Renewable Portfolio Standard” law, regulated electric utilities must derive 15 percent of their electricity needs from renewable sources by 2015, with 20 percent to come from renewable sources by 2020. Starting in late June, Public Service Company of New Mexico will begin holding Integrated Resource Planning public meetings to determine how it will comply with the renewable mandate over the next decade-plus.

Already, organizations like New Mexico Industrial Energy Consumers are expressing concern over rates that have gone up by 24 percent in the past three years.

PNM for its part has requested a 21 percent increase. To be fair, these hikes have not been driven by New Mexico’s foray into renewable energy, which now stands at 6 percent of electricity sales, but mandated increase in more costly renewable sources will result in even greater hikes over time as these mandates take hold.

Unfortunately, not only is New Mexico’s mandate forcing New Mexico utility customers to pay for more expensive “renewable” electricity, the law which originally allowed utilities to use the renewable energy source that made the most economic sense was later changed to force utilities to adhere to specific “mandates-within-a-mandate.”

This additional mandate means that investor-owned-utilities must derive at least 20 percent of their renewable power from wind, 20 percent from solar, 10 percent from “other technologies” like biomass and, by 2015, 3 percent of the electricity must be derived through distributed generation.

So-called distributed generation is yet another onerous requirement on utilities. Specifically, this means that PNM and other investor-owned-utilities such as El Paso Electric must now rely on output from many small energy sources. This has the makings of a paperwork, security and reliability nightmare that will further drive up costs for consumers.

Because of these policies, particularly the solar requirement — although the “other technologies” and distributed generation requirements are problematic — New Mexicans face higher electricity prices. That is, even after significant federal subsidies for renewables, which they are paying for yet again, are priced-into the equation. Nonetheless, the cost of solar thermal electricity, made by using the sun’s heat to boil water and spin a turbine, would be nearly three times that of coal and more than twice that of natural gas.

All of these costs and subsidies are passed on to consumers.

Of course, in today’s difficult economy, with jobs and economic growth taking precedence over supposedly high-minded “green” energy mandates, politicians should realize that unrealistic mandates will kill New Mexico’s economy and hurt the very consumers they are supposed to protect.

Take California as a prime example.

There are many reasons that have caused California to become an economic basket case. Idealism in pursuit of unrealistic environmental goals like the state’s renewable portfolio standard is one. In an executive order issued in November 2008, Gov. Arnold Schwarzenegger set in law goals of generating 20 percent of all electricity from renewable sources by 2010 and 33 percent by 2020. According to the state’s leading utility, PG&E, the state is currently at 12 or 13 percent renewable.

There are really only two viable ways forward at this point.

First, and in the shorter term, regulations and laws must be loosened in order to give utilities the flexibility to determine what sources to derive “renewable” energy from. After all, since wind is half as expensive as solar, shouldn’t PNM and other utilities at least have the freedom to generate energy from the least-costly source?

Ultimately, the public, utility customers and our elected leaders must decide when the economic costs of “renewable” energy exceed benefits. The only logical and, dare I say moral, thing to do is to give consumers the freedom to choose for themselves. If it is worth it for a business or consumer to pay extra for the peace of mind of supporting the growth of renewable energy sources like solar or wind, they should have the freedom to do this.

It is simply unfair and wrong for a minority to use government to force their preferences on the majority of consumers who wish to buy the least expensive and most reliable electricity possible.

Consumers have two opportunities to weigh in on this issue. Once in the upcoming public hearings and again in November when three slots on the PRC are up for election.

Here’s hoping that economic reality will get average citizens and not just renewable energy zealots to engage in the process.

Paul Gessing is president of the Rio Grande Foundation, an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Energy and Environment Oil & Gas

Misguided Energy Policies Harm Us All

Misinformed and misguided laws and policies affecting how New Mexico and the nation generate and use energy are in danger of being enacted. These policies will cost consumers money, hurt the state and national economies at a perilous time, and increase reliance on oil imports from countries that are hostile to America.

Unfortunately, the proposed laws and regulations largely are based on a “sound bite” approach rather than real knowledge of energy and the economy. Superficially, these plans sound good but the results would be just the opposite.

These elected and appointed officials appear to have developed their proposals for two reasons rather than a rational, “fact-based” methodology.

They appear motivated by an ideological dogma that “hydrocarbons are bad” and should be done away with via regulation and taxes or de facto prohibition. “Hydrocarbons” in layman’s terms means oil and natural gas, and coal. The supporters of “green” (aka “renewable”) energy are generally the same ones who have feeling of disgust (that’s not too strong a word for their sentiment) for the hydrocarbons like oil and gas, etc.

Based on the framework outlined above, New Mexicans and Americans need to be alert to the following:

The Obama Administration wants to single out America’s oil and gas companies and eliminate them, and only them, from a previously enacted tax law that encouraged U.S. industrial production. The Congressional Research Service late last year reported that the result of this change will be increased reliance on imported oil, rather than improved energy security as the administration says it wants. Such a narrowly-focused, punitive tax seems obviously based on a misguided attempt to discourage investment in oil production altogether.

Even the most promising estimates for renewable energy production foresee substantial reliance on traditional energy sources for decades to come. Pushing production overseas only reduces jobs, not our carbon footprint.

Leaders in the administration, both houses of Congress, Governor Richardson, et al, have jumped on the so-called “cap and trade” bandwagon as the favored way to reduce global warming. This, despite the fact that cap and trade has (a) not reduced CO2 emissions in Europe and (b) has been subject to “gaming the system” or outright corruption and fraud.

These problems have been brought to light by the U.S. Government Accountability Office (GAO), and by the United Nations which recently suspended clean energy project auditor in the European market. Even the environmental group, Friends of the Earth, is uneasy with the complexity of the proposed scheme.

According to Michelle Chan of Friends of the Earth, the cap and trade market “could take on the same characteristics as the mortgage derivatives market if investors are allowed to securitize emissions credits without strong regulatory oversight and enforcement…If we aren’t careful,’ she continues, ‘we could end up creating a massive, poorly regulated derivatives that not only poses risks to the broader financial markets, but also undermines efforts to save the climate.’

Finally, Governor Richardson is gung-ho for the Western Climate Initiative, a western-states climate “credit” exchange – a foolishly narrow attempt to solve a global problem that would nonetheless cost New Mexico as many as 4,689 net jobs, $1.2 billion in personal income, and $219 million in per capita disposable income according to a new study by the Beacon Hill Institute.

Congressional leaders and the Obama Administration seem poised to prevent oil and gas production along the Outer Continental Shelf (OCS), offshore along parts of the U.S. coastline.  A recent study by the American Energy Alliance shows why outlawing OCS drilling would be contrary to our national interests:  “With more than 85 billion barrels of recoverable oil and over 440 trillion cubic feet of natural gas located right off our shores, exploration in the OCS stands to contribute $273 billion annually to the national economy.”  Not using this resource, like the tax provision repeal mentioned earlier, also would result in increased reliance on foreign oil imports.

It does not make sense to treat American energy resources as an enemy when our economy needs both the emerging “green, renewable” resources as well as existing hydrocarbon resources. Yet, the members of our congressional delegation have largely been silent on the proposed taxes and laws mentioned above. Only Congressman Harry Teague has stated publicly that America needs both renewable and traditional energy resources. Senator Jeff Bingaman, who exercises great power as the chairman of the Senate Energy Committee, has toed the party line along with Nancy Pelosi and Harry Reid in their ongoing assault on energy.

Paul Gessing is President of the Rio Grande Foundation; a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Economy Energy and Environment Oil & Gas

Galisteo Drilling a Boon for Area and State


In most places in the United States, including New Mexico, oil and gas discovered on one’s land would be seen as a blessing, and in fact large fortunes have been made through surface leases and royalties. After all, oil and gas have been integral to our daily lives for more than a century and will remain so for the foreseeable future.

Eventually, economically viable (i.e. without government subsidies) alternative forms of energy might be found, but until then, oil and gas production benefits not only industry investors and company shareholders, but workers, landowners and government coffers.

Unfortunately, the fact that oil and gas drilling in the Galisteo Basin is even being considered by Houston-based Tecton Energy has caused an ill-informed but vocal group of anti-growth activists to protest that Tecton might make a profit on a venture in which they are willing to invest their own capital despite a significant risk of failure. If they do not succeed in their quest, only they and their investors lose: If successful, everyone wins.

Before we run Tecton out of town and the Galisteo Basin is shut off from future exploration, let’s look at the real issues, free of emotion. We all benefit from oil and gas production, from fuel for our automobiles, to fuel for the trucks that deliver food and other products to local stores. Beyond transportation, plastics used by everyone are hydrocarbon-based.

Clean-burning natural gas is used for home heating and provides
18 percent of America’s electricity generation, a number which is growing rapidly. Gas is really today’s clean, alternative energy source, but more is needed to offset declining U.S. production. Perhaps the Galisteo Basin will yield gas as well as oil — only drilling will tell.

Since Santa Fe County has no production yet, its residents benefit from long-established reserves in places like Farmington, Hobbs, Artesia and Roswell. If it is acceptable there, why are Santa Fe residents so against drilling in the Galisteo Basin? An old adage in the oil business is simply “oil is where you find it.” In other words, we cannot dictate where Mother Nature and the ancient processes of geology created it. The Galisteo Basin just might be one of those favored places!

Part of the issue is undoubtedly the fact that the median household income in Santa Fe is in excess of $42,000, while in San Juan County the number is $34,000, in Chaves County it is $28,500, and in Lea County the figure is $30,000.

To an objective outsider it would seem that for some local opponents of oil and gas production, such activities are fine for the folks in the northwestern and southeastern parts of the state, but heavy industry should be kept out of their sight. Many oppose exploration and production based on environmental concerns, primarily on the perceived threat of damage to fresh water aquifers.

This is a valid concern, but standard industry practice entails installing steel casing through aquifers that are usually shallower and separate from the objective oil and gas zones. Thus, the aquifers are sealed off from any contamination. Modern technology will utilize centralized drilling and production pads, limiting wellheads and facilities to a small footprint.

If the residents of the Galisteo Basin are so committed to preventing exploration of legally acquired surface and mineral rights, they and any other sincere residents of Santa Fe should form a consortium to buy those rights from Tecton and forego the rewards of potential oil production. They could even sell the water to Santa Fe, as a value will have been placed on that valuable commodity!

As residents of New Mexico, a state that is reliant for a greater percentage of its budget on severance taxes than all but Alaska and Wyoming, we benefit from the largesse that oil and gas revenue brings to the state. Before stopping drilling in Galisteo Basin, we should look at the pluses and not just the perceived minuses of drilling.

 Santa Fe County resident James B. Taylor serves the Río Grande Foundation as an adviser on oil and gas issues.

Economy Energy and Environment Oil & Gas

Renewable Energy, Fossil-Fuels Both Vital to U.S. Future


Jason Marks, the State Public Regulation Commissioner from the Albuquerque district, recently authored an article criticizing the vote by Congress, and specifically New Mexico Senator Pete Domenici, which would allow the current renewable energy tax credits to expire in 2008 as was determined when they were passed years ago. Unfortunately, Mr. Marks did not take into consideration all the issues at hand.

To begin with, we must recognize that alternative and renewable fuels are not in a race with traditional fossil-fuels as a means to provide energy for our current needs and those of the upcoming generations. They are both integral components of our long-range energy future.

It must also be noted that the renewable energy tax credits were tied directly to the passage of over $13 billion in new energy taxes to be levied upon our domestic energy producers. These new taxes would have dramatic negative economic consequences here in New Mexico and across our nation as they would be passed directly down to us all in the form of higher prices for gasoline, home heating oil and in the costs of general goods and services.

This would have come at a time when the costs of energy are at or near all-time highs, and when our economy is under a great strain and facing what many fear will be a recession. These higher costs-of-living would be especially difficult for individuals and families who are struggling simply to make ends meet and could be the last straw for businesses that are already under siege by higher costs, slowing demand and competition from global trade.

New energy taxes were proposed chiefly as a means to punish domestic energy companies for lingering high world energy prices over which they have no control. Yet, in their zeal to pacify angry voters, backers of this proposal overlooked the important ways in which higher energy taxes would harm our nation and our economy by further increasing American dependence on foreign oil.

Obviously, massive new taxes and disincentives for production will only make domestically produced energy more expensive than imported supplies. The net result of this is an overall decrease in domestic output and greater dependence on production by others; the polar opposite of our national goals.

Perhaps most dangerous for our nation in these times of great political unrest is the fact that higher energy taxes for domestic producers put our U.S. energy companies at a severe competitive disadvantage with state and foreign-owned companies worldwide. These entities control much of the world’s known energy reserves and are increasingly reluctant to allow us to participate. America faces growing risks of source-nationalism, limited access and infrastructure constraints at every turn. Taxes that limit energy companies’ ability to participate worldwide or reduce their incentive to develop greater domestic output are against our national interests.

The development of increasing pools of traditional energy and new sources of alternative and renewable power are not mutually exclusive goals, as Mr. Marks seems to believe. There is no reason to pit one against the other, nor is there any ambiguity in Senator Domenici’s past support of alternative and renewable energy coupled with his recent vote against new energy taxes. These are equally valid steps toward a continued search for answers to our national energy dilemma.

Paul Gessing is President of the Rio Grande Foundation; a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Energy and Environment Oil & Gas

Politics and the State’s Energy Problems

New Mexico businesses— whether directly engaged in the energy industry or not— should be wary of proposed policy changes supposedly targeted at energy companies. If enacted, these laws would actually harm users of energy (residential as well as business users).

The misguided proposals under consideration would tax alleged “windfall profits” and address global warming in a wasteful and counterproductive way. New Mexico politicians have a disproportionately powerful place in all this. Democratic Sen. Jeff Bingaman is the new chairman of the Senate Energy Committee and the senior Republican and immediate past chairman is Republican Sen. Pete Domenici. Meanwhile, our ambitious Gov. Bill Richardson, a former Energy Department cabinet secretary, has spoken out for both misguided proposals.

THE NEW CONGRESS AND THE “WINDFALL PROFITS TAX”: Although neither Bingaman nor Domenici seems to be enthusiastic about a proposed windfall profits tax on oil and gas companies, the newly resurgent Democratic leadership in both houses has control of the agenda and is making noise about such a proposal.

A little perspective is needed here: Even during the “spike” of gasoline prices when Hurricane Katrina knocked out much import and refining capacity, the price of gasoline came nowhere close to its all-time high. When we compare prices over time, we need to adjust them for changes in the purchasing power of the dollar. Adjusted for inflation, 1981 gasoline prices were some 24 percent higher than they were during last year’s $3-plus-a-gallon “spike.” Moreover, disposable income in New Mexico has increased since 1981. The average New Mexican’s disposable income could buy 88 percent more gasoline even at the peak of the 2005-06 “spike” than it could in 1981.

The last thing we need now is for government to make matters worse by bashing profits. Seeking profits (and avoiding losses) is what drives all sectors of that market economy; and it is why we are prosperous.

When we see rising profits we can be sure that more resources will be devoted to the profit-generating activity. It may come about a bit slower in the case of oil and gasoline (compared, say, to Microsoft) because of the difficulties of bringing new wells into production or of building and expanding refineries.

Oil companies’ profits may be a little higher than their long-term average; but those profits are not unreasonable compared to other industries. Moreover, taxes paid by oil companies are actually higher than their profits.

CARBON “CAP AND TRADE” AS A SOLUTION TO GLOBAL WARMING: Putting aside questions of whether recent temperature variations are outside the normal swings that have occurred over many centuries, and (if so) whether or not such changes are human-caused, a policy that administers a system of artificial caps on energy sources, poses serious problems for our national— and state— economies:   Giving federal and state bureaucrats control over how much carbon is emitted and from what sources would be counterproductive, highly complex and a nightmare to administer. It would mean higher energy prices and a system that is wide open to political favor seeking.

The politics of carbon emissions would inevitably result in large, unfair transfers of wealth. For example, under the Kyoto treaty, to which the U.S. is not a party, purchases of carbon credits are flowing from the European Union to Russia in massive amounts. Do we want to have the U.S. become victim to this sort of dollar outflow?

It turns out, intentionally or not, that the U.S. is at a real disadvantage when it comes to reducing carbon emissions compared to Europe and Russia. The year selected as the base year from which to reduce carbon emissions (1990) just happens to coincide with vigorous economic activity in the U.S. and recessions in Europe and Russia. In 1990 Europe and Russia were already well below their normal emissions. Nonetheless we find that Europe and Russia are unable to meet their targets.

There are changes in energy policy that would be helpful and would especially benefit our energy producing state. We could strike a better balance between benefits and costs when it comes to regulation. We could allow the building of new refineries. We could relax restrictions on drilling and exploration for oil. All of these actions would reduce the costs and risks for producers, thereby benefiting New Mexico.

Economy Oil & Gas Transportation

Don’t Take Pols’ Hooey on Gas Prices


Have you noticed that politicians are constantly talking about gasoline prices?

As the 2006 election approaches, claims and counterclaims about the cause of high gasoline prices are becoming more intense. But the din of political opportunism has trumped sound economic analysis. Politicians are taking advantage of the complexity of oil markets, rather than trying to educate us.

For example, House Minority Leader Nancy Pelosi recently visited Albuquerque on behalf of Patricia Madrid’s bid to unseat Rep. Heather Wilson. Wilson was accused of being “beholden to big-oil,” with the implication that she and her Republican colleagues are somehow responsible for high gasoline prices. Nor has Wilson shown a keen awareness of energy economic realities with her “sound bite” approach, as is exemplified by her misguided and unrealistic effort to see “price gouging” where none exists.

What the public really needs – but has not been getting from at least this particular race, and indeed from few political contests – is a “fact-based” approach based on economic realities.

Because we can’t rely on politicians when trying to comprehend why prices at the pump are so high, let’s dig beneath the rhetoric to be better informed about gasoline prices: Prices are determined in a market by demand and supply. In the past few years, demand for petroleum products has been increasing, primarily because of increasing prosperity in China, India and a few other countries. Increasing demand, everything else being equal, increases the price of petroleum products. Also, risk of supply disruptions due to instability in some of the major oil producing regions has added a speculative component to demand, further driving up price.

Another factor driving prices higher is that the world’s oil supply has not increased as quickly as demand has grown. War and threats of more war have kept supply from increasing in the Middle East. Hurricanes, particularly Katrina, have reduced supply.

Most recently, pipeline problems experienced by British Petroleum reduced the amount of oil coming from Alaska by nearly 300,000 barrels – a loss of about 6 percent of U.S. daily output. In addition to the issues above, which can loosely be called “market-oriented supply problems,” other problems have been the direct result of government interference. Foremost among these is the reluctance on the part of Congress to allow more drilling for domestic sources of oil.

Politicians have also refused to allow increases in refining capacity for several decades and have also smeared oil companies as villains by threatening them with “price gouging” laws despite the lack of any evidence of such practices.

The fact is that oil exploration and drilling is inherently risky, and it takes millions of dollars and years of investment before the first barrel is pumped out of the ground. These political threats obviously add another element of risk that reduces supply. The threat of “windfall profits” taxes has also added a political risk to the risks faced by oil companies.

Although it may play well in the polls, bad-mouthing the oil industry and threatening it with higher taxes only raises its risk, which hampers research and development efforts and thereby reduces future supply. Did you know that cumulative oil industry research-and-development expenditures over the last few years have exceeded profits? Why would we want to discourage those efforts by piling on more risk?

So there you have it; there is no mystery to gasoline prices. The fundamentals of petroleum markets have caused the increase in gasoline prices, specifically increased demand without increased supply. Politicians like to talk like they can legislate away the scarcity of oil, but instead they make things worse.

Because of the increase in price, we have heard much misleading political rhetoric about evil big-oil profits. Yet the oil industry has profits that are generally in line with other industries. Those profits may be a little above average now – 8.5 percent of revenue versus 7.7 percent for all industries – but since the oil industry waxes and wanes with market conditions, it often sees profits that are below average. Big government actually takes more from big oil in taxes than the industry makes in profit.

If there is anything that is evil in the political din over gasoline prices, it is the politicians. Do not trust them to enlighten you.

Messenheimer is an economist with the Rio Grande Foundation, a free-market oriented think tank based in New Mexico.