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Letter to Congress Re: Responding to Energy Price Increases

To: Members of Congress

Re: Responding to Energy Price Increases

The recent increase in energy prices poses a serious threat to U.S. economic growth. As the economy slows because of weaknesses in the financial services sector, the skyrocketing cost of gasoline, diesel and other fuels is a serious additional vulnerability that will further stress struggling consumers and businesses. High energy prices have already resulted in a loss of jobs, higher costs for our manufacturing and service industries, increases in the cost of living for hard-pressed consumers and greater transfers of wealth to oil-exporting nations.

Our CEOs consider energy prices among the highest cost pressures they face. High energy prices should be a top priority for policymakers and are rightfully a central focus of the president and Congress. Progress on energy will require bipartisan approaches. There are bipartisan initiatives underway in both chambers; Business Roundtable members are closely reviewing these proposals and will address them when Congress returns in September.

The causes of recent price increases are complex and will not disappear overnight. There are no assured short-term fixes. We instead need wise and balanced long-term strategies that achieve an alignment between supply and demand and increase U.S. energy security. These strategies must be integrated and comprehensive and cannot neglect any tool that will improve our energy situation.

In our recent report More Diverse, More Domestic, More Efficient, (http://businessroundtable.org/studies-and-reports/more-diverse-more-dome...), Business Roundtable emphasized that reducing energy demand is an important component of a comprehensive energy strategy. Improvements in the fuel economy of the vehicle fleet and deployment of advanced automotive technologies are already underway and hold much promise. We can also reduce energy demand with smart transportation strategies that reduce the distances that Americans travel in their cars. Biofuels can provide a further cushion by supplementing conventional gasoline and diesel supplies to help meet demand. Outside the transportation sector, there are promising opportunities to improve the efficiency of commercial and residential buildings.

We proceed at our peril, however, if we do not simultaneously increase the supply of crude oil and natural gas. Expanding supply is a priority internationally; oil producing nations need to raise output by welcoming outside investment, supporting robust exploration programs and employing advanced production technologies. We also need to boost supply here at home. Although the world’s largest oil consumer, U.S. production has steadily declined since the 1980s and now represents only 30 percent of consumption. Production will shrink further unless we take steps to increase it. Moreover, the U.S. cannot credibly advocate increased production elsewhere in the world while refusing to increase its own domestic supplies.

This is why Business Roundtable strongly supports President Bush’s decision to lift the executive order barring oil and gas exploration and drilling in the Outer Continental Shelf (OCS) and now urges Congress to lift the statutory moratorium on OCS access. One fourth of U.S. oil production presently comes from the limited portions of the OCS available for drilling. Almost 86 billion barrels of oil and 420 trillion cubic feet of natural gas are estimated to exist on the OCS. About 18 billion barrels of oil and 77 trillion cubic feet of natural gas exist in OCS areas now off-limits to exploration and development. These portions of the OCS are known to have large deposits of oil and natural gas some of which, after being adequately explored, can be relatively quickly developed using nearby infrastructure. Other OCS areas will take longer to explore and bring to production since regional geologic knowledge of them is less advanced and there is little or no infrastructure in those areas.

It is reasonable to expect that, over time, expanded OCS access can contribute at least 1 million barrels per day (mbd) to meeting U.S. demand, which is now 20.8 mbd and projected to grow even with increased fuel efficiency and growth in biofuels. This addition to U.S. crude supplies would replace a large portion of our imports from OPEC and other foreign suppliers. The result would be more American jobs and economic support for local communities, as billions of dollars that would otherwise be transferred to foreign governments are now invested here at home.

It has been argued that, before increasing access to tracts currently off limits, the industry should fully develop existing but currently non-producing federal oil and gas leases. The premise that the oil and gas industry is overlooking promising opportunities from existing leases, and failing to capture their production potential, is simply incorrect. Oil companies must maintain a varied portfolio of leases in order to stay in business, and while the leases may look inactive, the acreage often is in various stages of permitting, exploration and development. Current law sets time limits on lease terms, establishes annual rental payments for leases that are not yet in production and requires diligent development of all available resources. Companies have every incentive to bring their leases to production so they are not relinquished back to the government.

Equally important, available tracts compete for investment based on the size of potential reserves and the cost of finding and developing them. Many leases are simply uneconomic. Expanding the opportunities for development increases the likelihood that large, profitable reserves will be discovered and exploited and thus magnifies the potential for increases in supply. Prohibiting additional leasing until “idle” leases are brought into production will force companies to make uneconomic investments or shift their resources overseas at the expense of our potentially most attractive oil and natural gas resources here at home. This is not sound energy policy.

The traditional reluctance to provide access to the OCS has been based on concern about damage to marine resources and populated coastal areas. This concern may have carried more weight when U.S. production was higher than it is today and energy prices were considerably lower. However, in today’s challenging energy environment, it is reasonable to reexamine the environmental impacts of offshore drilling in light of the industry’s track record and the technology and practices now employed to prevent spills and protect marine ecosystems. These factors provide a high level of assurance that broader OCS development is compatible with stringent environmental protections. It is telling that governors of some of our largest coastal states now favor OCS development on this basis.

While the benefits of increased OCS access will not be realized immediately, the longer we wait, the steeper the price we will eventually need to pay. Just like improving vehicle efficiency and developing new biofuels, expanding development of OCS resources is a prudent investment in America’s energy future and an essential component of a balanced and far-sighted energy policy.

We urge Congress to take action now.

Sincerely,

Michael G. Morris

Chairman, President and CEO
American Electric Power Company, Inc.
Chairman, Sustainable Growth Initiative
Business Roundtable

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