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Regulatory: Considering energy regulations—Oil

3 aspects of federal oil regulation may change the shape of the country’s energy sector, and its economy, for decades to come

Federal regulation of oil as an energy source currently has three principal aspects: regulation of drilling, especially off-shore drilling on the Outer Continental Shelf (OCS); review of a proposed pipeline to bring oil from Canadian tar sands to U.S. refineries; and regulation of consumption of motor vehicles to limit tailpipe emissions of greenhouse gases. The policies emerging from these stovepipes are only loosely coordinated. The outcomes depend upon the unique politics of each policy area, which factor in the public’s strong aversion to high gasoline prices.

Offshore drilling. New technologies and techniques developed since the late 1990s have greatly increased the ability to recover oil from deep waters (greater than 600 feet). Today, 30 percent of domestic U.S. oil production occurs in the Gulf of Mexico, and off-shore drilling enjoys popular support in all Gulf states except Florida. However, 85 percent of the OCS (especially off the East Coast and California) is closed to drilling.

To lower pump prices and enhance national energy security, in March 2010, the Obama Administration proposed to permit drilling off Virginia and the eastern Gulf near Florida. Three weeks later, the Deepwater Horizon rig exploded. The administration publicly imposed a moratorium on further offshore drilling and withdrew its proposal.

Litigation losses ultimately forced the administration to withdraw the moratorium and replace it with regulations imposing greater health and safety requirements on individual wells, and requiring the drilling industry to deploy a response and remediation capacity commensurate with the scope of the risks. However, the administration has adopted a de facto “go slow” policy, and is granting just enough drilling permits to avoid further litigation. New production from the Gulf will be slow in coming.

Tar sands pipelines. Canada ranks second worldwide in proven oil reserves, thanks to its abundant oil sands. Advances in technology have made it possible to extract petroleum from these sands by burning natural gas to create steam that is pumped into underground formations.

The president is considering a petition to construct the Keystone pipeline to transport Canadian oil to U.S. refineries. The project would use well-understood technology to deliver oil that would enhance the diversity and security of the country’s oil supply. The petition has engendered substantial opposition, however, because the carbon dioxide released through this production method is materially greater than emissions from normal extraction techniques.

The president faces a stark choice between new policies that focus on reducing greenhouse gas emissions and the policy considerations (effects on prices, energy security, reducing country risk) that traditionally have dominated oil supply decisions.

Fuel economy standards. The greatest use of oil in the American economy is in vehicle fuels. While the U.S. has reduced tailpipe emissions of traditional pollutants by 99 percent since 1975, the transportation sector still emits large quantities of carbon dioxideRather than seek authority for a direct tax on fuels to encourage pollution reductions, the Department of Transportation and the Environmental Protection Agency have issued regulations that require manufacturers to reduce tailpipe emissions of CO2, and double the average mileage of new cars. The rules will force automobile companies to develop new technologies to meet these requirements. Proponents hope that the rules will facilitate a transition to vehicles powered by alternative technologies other than oil.

This concerted effort to force a change in the fuels used to power the U.S. vehicle fleet is one of the greatest engineering and behavioral experiments ever required by a federal regulation. Its outcome will change the shape of the country’s energy sector, and its economy, for decades to come.

Contributing Author

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John Cooney

John F. Cooney is a partner in the Washington, D.C., office of Venable.

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