Sequestration: A President’s Folly or an Opportunity

Congress decided to let the sequester take place, but the Obama Administration decided where the cuts would occur. Unfortunately, for the American public, many of the cuts seem to have taken place in order to hurt the public rather than to benefit it. For example, air traffic controllers were furloughed by the Federal Aviation Administration (FAA) in large numbers at the same time, causing flight delays until Congress directed that cuts be made elsewhere by the Department of Transportation to cover FAA’s reduction. In contrast, the military is purchasing bio-fuels at $59 per gallon when they could be purchasing conventional jet fuel for about $3.73 per gallon. This one change alone would cover at least $200,000 of the military’s reduction if the contract for exotic and expensive bio-fuel had been cancelled and even more if the next contract option is not exercised. Now, the Obama Administration decided to make less domestic crude oil available in the future by using the sequester to cut its Department of Interior budget by postponing oil and gas lease sales in California which would actually raise revenue..

These examples raise the question whether the Obama Administration is making the wise decisions on the small cuts it needs to make to satisfy the sequester (about a 2 percent reduction in spending), or are the cuts designed to make Americans feel the pain?

The Bio-fuels Purchases

The Defense Logistics Agency (DLA), part of the Department of Defense, signed a contract with the renewable chemical and bio-fuel company Gevo to supply 3,650 gallons of renewable jet fuel. This contract — worth $215,350 or $59 per gallon — has the option to be increased to 12,500 gallons, which would cost up to $737,500. And, this is just the “initial testing phase.”[i] According to the DLA, conventional JP-8 jet fuel costs $3.73 per gallon at fiscal year 2013 rates. Under other contracts, Gevo supplies renewable jet fuel to the U.S. Air Force and U.S. Navy.

Virent Inc., a company based in Wisconsin, recently delivered 100 gallons of bio-fuel to the U.S. Air Force Research Laboratory at Wright-Patterson Air Force Base in Ohio. The jet fuel produced from 100-percent renewable plant sugars will be tested against applicable standards at a research lab in Wright-Paterson. The air force uses 2.5 billion gallons of jet fuel a year and must reach a goal of getting it from alternative fuels by 2030, apparently even if it is more than 15 times the cost of conventional fuels.

Virent was awarded $1.5 million from the Federal Aviation Administration and the U.S. Department of Transportation to establish a demonstration facility in Madison, Wisconsin that has the capacity to produce 5,000 gallons of bio-fuels per year.[ii]

The Defense Department has failed to explain to the American people why dabbling in exotic bio-fuel is a worthy use of taxpayer dollars. If the concern is about foreign oil imports on our national security, it would be far more cost-effective if the Department of Interior would open lands and waters to produce oil rather than hoping bio-fuel technology improves. Given these realities, it appears that the Defense Department is making these decisions for political reasons instead of making decisions based on protecting America or by carefully using taxpayer dollars.

Postponement of Oil and Gas Lease Sales in California

On May 3, 2013, the Bureau of Land Management (BLM) issued a press release, announcing the postponement of 4 parcels of public lands covering 1,278 acres that were to be offered for oil and gas lease sales in California on May 22. BLM has indicated that the lease sales would not occur in California during this fiscal year. According to BLM’s website, “Due to budget constraints resulting from the sequester and an emphasis on the higher priorities for conducting Inspection and Enforcement on existing leases and processing new Applications for Permit to Drill, the California State Office of the Bureau of Land Management (BLM) has postponed all oil and gas lease sales in California for the remainder of Fiscal Year 2013.” Of course, little consequence is given to the fact that these lease sales could help to increase domestic production of oil in the future, and keep conventional petroleum-based jet fuel at reasonable prices.

This lease sale would have provided access to the Monterey shale formation, which stretches from the middle of the state south to Los Angeles County and is estimated to hold 15.4 billion barrels of recoverable petroleum, more than the Bakken and Eagle Ford shale formations combined.[iii] Allowing access to the Monterey shale could have boosted oil production in California, which has been steadily declining since 1985 and improved the state’s job market and economy. In 2012, California’s oil production, 195,680 thousand barrels, was half its production in 1985, its peak production year. California now ranks fourth among the states in oil production, exceeded by Texas, North Dakota, and Alaska.

Stopping federal lease sales in order to save money is akin to cutting off one’s nose to spite one’s face.  The federal government makes billions of dollars per year from oil and gas leasing and royalties from oil and gas produced from their lands, although their collections are down significantly from their 2008 highs.  Last year, oil and gas production fell on federal lands while new historical records for natural gas and oil were achieved from non-federal lands.  In the case of oil, the rate of production increased faster than any time since the first oil well was drilled in 1859.  The country needs more federal oil and gas leases, not less, and those leases and the production and economic activity they would generate would add revenues to the Treasury.

Source: American Association of Petroleum Geologists

According to Julia Bell, a spokeswoman for the Independent Petroleum Association of America, “The last thing that the federal government should do if they want to garner more revenues for the federal Treasury is stop development of oil and natural gas. Using the sequester as a reason to withhold lease sales furthers the problem and does not do anything to solve the budget crises. More oil and gas production would not only boost the economy, it will boost the federal Treasury.”

Note that it is not big oil that is making these comments but the small mom and pop oil and gas companies. These independent producers develop 95 percent of the oil and gas wells in the United States and produce 54 percent of our oil and 85 percent of our natural gas, much of which is located on federal lands.

A study by the University of Southern California (USC), “Monterey Shale and California’s Economic Future”, estimated that development of the Monterey shale formation could generate half a million jobs and $4.5 billion in oil-related tax revenue by 2015 and boost the state’s economic activity by as much as 14 percent. USC also projected that as many as 2.8 million new jobs and more than $24 billion in state and local tax revenue would be generated in the next 7 years from developing the Monterey shale formation. Personal income is projected to increase by $40.6 billion to $222.3 billion.[iv]

According to BLM, federal land leases on shale are now going for $500 per acre from $2 to $5 per acre just a few years ago.[v] The Bakken shale formation in North Dakota, which is half the size of the Monterey formation based on the latest USGS resource numbers, has fueled a boom that has driven N.D.’s unemployment rate to 3.3 percent, the lowest in the nation. California’s unemployment rate is 9.4 percent, the third highest in the country.[vi]

To develop the Monterey shale formation, hydraulic fracturing and directional drilling would need to be used, as it is in the Bakken shale formation in North Dakota, the Eagle Ford in Texas and an increasing number of areas throughout the country. Hydraulic fracturing, a process that involves injecting large volumes of water and sand with some chemicals deep into the ground to break apart rock and release oil, has been used in California for decades. Unfortunately, California politicians are trying to ban its use. Recently, politicians in California’s Assembly introduced measures to impose a moratorium on hydraulic fracturing, and Governor Jerry Brown’s administration released draft regulations that would require companies to disclose the chemicals used and the well locations.  While disclosure of chemicals used is not a problem and is common, individual companies use proprietary “recipes” in some cases which, if disclosed, would give rival companies their research and development for free.

Conclusion

Sequestration is having an effect on government programs, which it is designed to do by cutting spending. However, the Obama Administration has chosen to cut in areas that seem to make no sense. Clearly, there are many uneconomic programs that could be cut, such as forcing the military to use bio-fuels and spending lavishly on them rather than ensuring increased domestic oil production on federal lands to support future domestic conventional jet fuel production and revenue to lessen the deficit.

According to Secretary of Defense Chuck Hagel, sequestration would cause “suspension of important activities, curtailed training, and could result in furloughs of civilian personnel.”[vii]  The defense department could easily cut its green fuels program for renewable jet fuel that is costing over 15 times the cost of conventional jet fuel. To see how ridiculous this is, ask yourself the question, “Would you spend $59 a gallon for gasoline if you could buy it at $3.73 a gallon?  The Obama Administration is choosing to say “yes” while cutting in other areas.  If governing is about prioritizing programs and expenditures, their choices raise very serious questions about those priorities.