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October 7, 2005



PAUL GIGOT: The devastation brought by Hurricane Katrina produced at least one positive result: it brought attention to the country's precarious supply of energy, and it may have prompted some much-needed work by Congress.

Even before Katrina and Rita, gasoline production in the U.S. was already nearly at the breaking point -- straining at over 90 percent of refining capacity. There has not been a new refinery built in the US since 1976. Oil companies say it's cheaper to expand existing facilities than to build new ones. Critics say it's because new refineries would result in competitively lower per gallon prices which the oil companies don't want.

Then there's the matter of oil supply. The US imports just under 60 percent of its oil. Some of that dependency could be eased if Congress allowed oil and gas drilling where it is now banned by the National Environmental Policy Act -- off the Atlantic Coast of the US, virtually all of the Pacific coast, about half of the Gulf of Mexico, and in the Arctic National Wildlife Refuge in Alaska. Congress will decide the controversial Alaska question sometime this fall. But there are no quick fixes.

The same is true for natural gas shortages. Experts predict price jumps of greater than 70 percent this winter, faster even than gas prices. The U.S. has the sixth largest proven natural gas reserves in the world, but gas production in the U.S. has peaked and we have become increasingly dependent on Liquid Natural Gas -- or LNG -- from overseas.

Importing gas is not a simple solution. There are fewer than 150 specialized tankers that are able to carry LNG, and there are only five LNG receiving hubs and storage facilities in the US to handle all LNG from abroad.

Increasing domestic production is also complicated. The government wants to ease restrictions on drilling in offshore waters and federal lands which contain almost half of the untapped natural gas in the U.S. Proponents of easing those restrictions claim it could supply the U.S. for a hundred years. Environmental groups charge them with taking advantage of the hurricane disaster by pushing panic proposals that had been rejected in the recently passed energy bill.

PAUL GIGOT: Joining us now, Kim Strassel, a senior writer for the editorial page who has been covering the energy story. Kim, we've heard in that piece the problem. Is Congress going to finally do something about this?

KIM STRASSEL: Yeah, we have two energy crises in this country at the moment. We have a refining capacity shortage, and we also have a natural gas shortage. Congress is finally attempting to do something about both of those issues. There's a refining bill going through the house at the moment, put forward by Texas congressman Joe Barton, that would try to streamline the permitting process for refineries, also do some tax incentives to deal with this issue of boutique fuels, which are blends that actually refiners have to produce for different parts of the country. And there's also finally some discussion about opening the outer continental shelf to natural gas drilling. There's huge resources out there, but at the moment it's under federal moratorium.

PAUL GIGOT: Just to give you an indication of the problem on natural gas, the price of natural gas in the United States is $12.60 per million btu's. Compare that in China -- it's less than $5.00, and in Australia $3.85. That's doing real economic harm in the United States, isn't it?

KIM STRASSEL: No, people have to understand this. We had a huge debate last year during the presidential election about jobs going overseas, and outsourcing. One of the main reasons there are a lot of jobs leaving in industries like the chemical sector and other manufacturing business is because fuel costs are too high for companies to continue building new facilities and hiring people in this country. If there's high energy prices, we'll lose jobs.

DAN HENNINGER: And I think one point that we ought to make here, a distinction, is it's not so true to say that there's a shortage of gas in this country. There's a shortfall. There are plenty of crude ...

PAUL GIGOT: Production shortage.

DAN HENNINGER: Right. There's plenty of crude reserves, but because of the regulatory inhibitions and such, we can't get at it. There's a tremendous amount of gas on the north slope of Alaska, which is already open for development. All we need is a pipeline running from Alaska to the lower 48 states, and we can't get that built.

PAUL GIGOT: Now, is the politics of this beginning to change as people understand the consequences?

KIM STRASSEL: Well I think two things are happening. Yes, the politics are beginning to change because people understand that there are trade-offs. Every time you put a new environmental rule in place, you are in some way taking away what we can get for our energy supplies. That is one thing that people are beginning to realize. The other thing, I think, is that Congress is also beginning to realize that there could be some real money that flowed into Washington if they started giving out leases for more drilling.

PAUL GIGOT: Because when they give leases to private companies to drill, they get royalty benefits.

KIM STRASSEL: Exactly, exactly.

DAN HENNINGER: This illustrates a fundamental problem, which is markets can respond to crises before they happen. There are ways of anticipating problems. Politicians seldom respond to crises until after they've happened.

PAUL GIGOT: The case of Florida is interesting. Governor -- the governor is the brother of the President, Jeb Bush, and he started to move this week on off-shore drilling in the Gulf, did he not, Kim?

KIM STRASSEL: Yeah, and Florida has been a big state pushing back against any lifting of the moratorium. And this has really annoyed a lot of their next door neighbors, who already have some drilling interests. And they'd like to expand that. They have the infrastructure in place to really benefit from more ...

PAUL GIGOT: Neighboring states, you mean?

KIM STRASSEL: Neighboring states to Florida. Now he has finally signaled some willingness to maybe have a sort of opt-in or opt-out situation of the federal moratorium where states could do it. The Republicans are discussing adding that to a budget reconciliation.

PAUL GIGOT: Isn't there a problem there with the public? On the one hand we want cheap energy, Dan. But on the other hand, we don't want to take any environmental risks. We don't want to have anything interfere with our sea views. Of the course to Nantucket, they don't want windmills because that's going to interfere with their beautiful view of the Atlantic. This is a trade-off, and we don't want to confront it as citizens.

DAN HENNINGER: Yes, it is a trade-off. And it's kind of the way our politics works, unfortunately. The forcing mechanism here on both the political and public side has been these hurricanes. It's pathetic to think that you have to experience a Katrina, a Rita, or the four hurricanes that roared across Florida last year, for everyone to say, oh, we've got a problem with our energy sector, with our refining capacity, because the hurricanes have blown them out to sea. It is sad, but that is kind of the way it works in this country.

KIM STRASSEL: The environmental impact here is enormous. A good example: there has not been a refinery built in this country since ...

PAUL GIGOT: When you say the environmental impact, you don't mean the damage to the environment ...


PAUL GIGOT: You mean the impact of environmental rules restricting the development of...

KIM STRASSEL: Absolutely, right, exactly. Restricting our energy production. There has been no refinery built here since 1976. There's only one company out there that's even trying to build a brand new refinery. They have been working on getting their permits for seven years, out in Arizona.

PAUL GIGOT: Well, do you think that this bill is going to pass the House and then has a chance in the Senate?

KIM STRASSEL: No, I do. I think that there has been a realization that something needs to be done. Now, everyone is in a lot of negotiations now. They're trying to sort of strip back some of the things that they don't like. Chairman Barton actually deserves some credit. He actually did include some measures that would deal with some of the more onerous environmental programs. They might get taken out in the final bill, but I think that an actual bill that at least deals with getting refineries built more quickly will emerge.

PAUL GIGOT: I'll tell you, though. I have to think that the politics is not really going to change here unless people begin to connect, politicians begin to understand that they're going to pay a price for being blamed for three dollar gasoline and 12 dollar natural gas prices. And so far, they have been blaming everybody else, whether it be the Saudis or the hurricanes, and they haven't had to pay a price themselves. Somebody's going to have to stand up and say, you know, these two are connected, the high price of energy.

KIM STRASSEL: There's a flip side to that, too, which also isn't great. One of the things that you're probably going to see in this bill is a whole lot of money, a big vote to start throwing more money at federal programs, too, such as the Federal Home Heating Program, which sucks up billions and billions of dollars a year. And that's because the high energy prices, no politician wants to be on the side of the vote where they say they aren't handing out more money.

DAN HENNINGER: The silver lining is, it's a lot less money than when we were throwing 88 billion dollars at the synthetic fuels corporation in the 1980s.

PAUL GIGOT: Yeah, silver lining Dan, I guess. Okay, thanks. Next subject.