Convincing Americans It's Time to Drill on Federal Lands

Convincing Americans It's Time to Drill on Federal Lands

New government statistics show that economic growth in the United States has stalled and the employment outlook is bleak. America's oil and gas renaissance offers a solution to these troubling trends. But, for increased energy exploration on federal lands to be politically viable, Americans have to see its direct benefits.

Rather than continuing to allocate most of federal oil and gas royalties to the Treasury's general fund, the United States could follow the example of Norway, the country in the Organisation for Economic Co-operation and Development with the soundest fiscal condition, and create something similar to an oil and gas-funded sovereign wealth fund. Norway's fund, established in 1990, is worth $838 billion. Since then, the fund has generated an average gross annual return of 5.7 percent.

Despite America's recent oil and gas boom, the number of federal acres leased for oil and gas exploration has decreased 24 percent since 2008. In 2013, the federal government leased only 36 million federal acres. To put this in perspective, 131 million acres were leased in 1984. This harms not only economic growth, but also federal revenues.

Still, over the last 5 years, U.S. oil production has grown nearly 50 percent. This is small compared to the over 400 percent increase in shale gas production from 2007 to 2012 (the latest data available).

Despite the bleak economic picture, the nation's political climate makes common-sense proposals such as opening up federal lands for increased energy exploration or turning over energy authority to the states impossible. That is, without political tradeoffs.

The federal government owns the mineral rights below federal lands. Because of this, the government charges royalty rates of 12.5 percent on oil and gas production. This is lower than most private and state rates. For instance, Texas's royalties are 25 percent, North Dakota's are 18.75 percent, and Colorado's are 16.67 percent. Raising royalty rates in exchange for expedited and increased federal permits would be a fair, economically-beneficial political bargain.

In fiscal year 2013, the federal government earned $2.5 billion in royalties from onshore oil and gas drilling. Energy royalties are already the largest non-tax contribution to the federal budget. With increased drilling opportunities, and higher royalty rates, revenues would rapidly increase.

Though raising royalties would undoubtedly increase the cost of energy exploration, this alternative is preferable to the status quo of limited federal lands available for drilling.

A sovereign wealth fund would allow the revenues to be used for specific purposes. For example, and for the sake of political agreement, the funds could go towards refundable tax credits or anti-poverty initiatives. Americans could then see the direct benefits of increased energy exploration. The money earned would go to democratically-determined priorities, and higher revenues would lead to more funding being available. This would create a broader coalition of interests that support energy exploration.

Though additional oil and gas production lowers energy prices and helps grow the American economy, it can be difficult to see the direct effect on individuals. This remains the case even though lower energy prices disproportionately help low income Americans. While the top fifth of income earners spend 4 percent of their incomes on natural gas, electricity, and gasoline, the bottom fifth of earners spend 24 percent of their incomes on these essentials.

Initiatives similar to Norway's are not unheard of on this side of the Atlantic. Many U.S. states have their own sovereign wealth funds.

The most well-known (and well-funded, with a market value over $50 billion) sovereign wealth fund is Alaska's. Approved in 1976, the fund's purpose is to use a portion (at least 25 percent) of the state's mineral proceeds to benefit all generations of Alaskans. The fund is not meant to invest in economic or social development-its purpose is to make a maximum return within an acceptable range of risk while maintaining the principle investment. These returns may then be spent in any way the Alaskan Legislature approves.

Other U.S. state sovereign wealth funds include the Texas Permanent School Fund ($30 billion), the New Mexico State Investment Council ($17 billion), the Permanent Wyoming Mineral Trust Fund ($5.6 billion), and the recently established North Dakota Legacy Fund ($1.7 billion), among others. All of these are funded by proceeds from oil, gas, or mineral production.

It would not be wise to provide a national U.S. fund with a mandate to reduce financial instability. The Alaskan approach of maximizing return on investment, rather than investing in a countercyclical manner (as Chile's does), would provide returns that can be used to fund other programs. This would also eliminate conflicting goals within the federal government, as one of the Federal Reserve's mandates is to maintain price stability.

Additionally, forcing the fund to invest in social or economic projects would open it up to cronyism and abuse. Investing in a mix of equities, fixed income, and real estate (as Norway's does) would lower the opportunities for exploitation. Transparency and regular outside audits would also be necessary to mitigate this risk.

Something similar to a sovereign wealth fund would provide the federal government with the deficit-neutral ability to fund social welfare programs or cut taxes through expanded oil and gas exploration of federal lands. Support for energy exploration and production would grow as people began to see the direct benefits of increased production to their daily lives.

This, combined with higher federal royalty rates, should make opening up American's federal lands to oil and gas exploration a politically-feasible possibility. Doing so is an economic necessity-let us hope that, with the right tradeoffs, it can become a political reality.


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