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Keith Hennessey
Assistant to the President for Economic Policy and Director of the National Economic Council

August 4, 2008

Keith Hennessey
Hello from the White House. Washington, DC was built on a swamp, and we’re always reminded of that in August. I’m here today to discuss energy policy.

The national average price of gasoline is $3.96 per gallon, and it’s much more in some areas. If you’re like me, you get upset every time you have to fill up your car or truck. Why don’t those people in Washington DO something about it?

Well we’re trying, and we need the help of Congress. The President’s basic answer is that we need to do everything. We need to reduce demand by encouraging car manufacturers to make more efficient cars, and we did that last year by proposing and enacting the first increase in mandated fuel economy since the 1970’s. We also need to encourage the purchase of hybrid vehicles, which we’ve done with a hybrid tax credit. We need to encourage the development of alternatives to oil and gasoline, whether that’s ethanol made from corn or biodiesel made from other agricultural products. We need to accelerate research on new technologies for better batteries to make plug-in hybrid vehicles cost effective, and into alternative fuels so we can make ethanol from sources other than corn. And, most importantly, we need to expand both the domestic and global supply of oil. It’s going to take years for new technologies to be developed and come online, and in the meantime we’re stuck depending on oil as our principal fuel source. So we need more oil supply, here and around the world.

The more oil is produced domestically, the less we will have to transfer dollars earned in the US to those who own the oil in other nations. And the more oil is produced domestically and globally, the more relief there will be on the price of fuel at the pump.

These solutions are not magic bullets, and they will have only a modest immediate effect. It takes years to explore for and develop new oil fields. But that’s all the more reason to start now rather than waiting. We’re in this fix in part because our predecessors dilly-dallied for years without increasing supply. We need to take the steps to increase supply now. That will have a small positive effect today (because oil markets adjust based on what investors think will happen in the future), and a larger benefit in the future.

The President has proposed four policy changes that Congress should enact immediately. Congress should:

1. repeal the prohibition on leasing for oil and gas drilling off the U.S. coast, and allow environmentally responsible drilling to begin, as it is now happening in the Gulf of Mexico and off the Alaskan coast
2. repeal the prohibition on leasing for oil production from shale in the Rocky Mountain area
3. repeal the prohibition on drilling or oil in Alaska
4. create an expedited process for the expansion of new refineries in the US.

We think it’s likely that a majority of the House and the Senate would support drilling off the U.S. coast. Unfortunately, Speaker Pelosi and Leader Reid have so far used their control of the legislative process to prevent a clean up-or-down vote on this question. We hope that will change when the Congress returns in September.

Now let's get to some questions.

Kim, from Kentucky writes:
Hi Mr. Hennessey, Most European countries depend upon their numerous nuclear facilities to generate their vast energy needs. However, the U.S. has not built a new facility for several years. Is this due to numerous lawsuits that tie up the construction of such sites? If this is the case, can't the federal government override such suits due to what is in the nation's best interest?

Keith Hennessey
The first thing to understand about Europe, and especially France, is that they lack something that we have in abundance: really cheap coal. Europe has to rely on other fuel sources for power -- that generally means natural gas and, especially in France, nuclear power. France is the world's leader in nuclear power, and they have been developing and expanding their capacity while the US has remained stagnant.

Within the US, you've basically got it right. One significant barrier to the adoption of more nuclear power is that there were some examples a couple of decades ago in which a nuclear plant was built, and then protests shut it down before they could turn it on and start operating. If you think of it from the standpoint of an investor, it's a big risk to spend billions of dollars on an investment that might get shut down before it can begin to operate.

Unfortunately, opponents of nuclear power have made it extremely difficult to change the law as you suggest (much as might like to do so). But we have a new regulatory process in place that is designed to reduce that risk. There are now applications at the Nuclear Regulatory Commission for 19 new projects. You can learn more about that here:

The other big problem is the storage of nuclear waste. We need a permanent solution so that spent fuel can be removed from reactor sites and stored. Unfortunately, Sen. Reid (from NV) has been blocking the necessary legislation to make that happen at Yucca Mountain.

We need more nuclear power, and President Bush has taken every step possible to get more of it faster. I'm hopeful we'll see results from that push over the next several years.

Robert, from Virginia writes:
Will the President call a special session of Congress to vote on oil drilling?

Keith Hennessey
I don't think so. The problem isn't whether Congress is in town. The problem is that two people control what the Congress votes on when they are in town, and both have so far refused to allow a clean up-or-down vote on a bill or amendment to allow drilling.

We're hopeful that Speaker Pelosi and Senator Reid may change their minds over August, when they and other Members of Congress are back home in their districts, listening to the people who elected them. We'll continue to explain the importance of drilling (as well as other solutions) and push for a vote when they return in early September.

Wesley, from Fort Worth, Texas writes:
Is it true that China has oil wells 50 miles off the Florida coast and the USA Congress won't let us drill 50 miles off the USA coast, most places? Thanks

Keith Hennessey
Not quite, but close. Cuba is less than 50 miles from Florida, and the waters between Cuba and Florida are split between our waters and theirs.

Cuba has talked with some foreign countries, including China, about the possibility of drilling in Cuban waters that would also be less than 50 miles from the US coast. As best I can remember, however, none of those wells have so far been developed. But that could change in the future.

Tony, from W.P.B Florida writes:
Why didn't the president open up the OCS and ALASKA ON HIS FIRST TERM AS PRESIDENT when the republicans controled congress, And if this is such an important thing to do why did he not push for this 7 years ago?

Keith Hennessey
The President has been trying to open up Alaska (what's called "ANWR") since he first came in to office. We didn't have the votes even when Republicans controlled Congress, since you need 60 votes to get past a filibuster, and not all Senate Republicans support opening up ANWR to environmentally responsible leasing.

He did successfully push for opening an additional portion of the Gulf of Mexico, which resulted in a new law in 2005 that is now creating new leases down there.

It is true that the push to drill off the East and West Coasts is new for us. It just wasn't legislatively feasible before gas prices started spiking -- and now we hope that it is.

Ian, from Boca Raton, FL writes:
We enrich our enemies by buying their oil, and this money comes right out of our economy and weakens it. What kind of policy is this and why has nothing been done other than ethanol mandates and minor mpg requirement indexing? Under this administration oil has skyrocketed and the economy has been poor, who would you say fumbled the ball?

Keith Hennessey
Members of Congress who have for years blocked our ability to expand domestic oil production in environmentally responsible ways. This goes back even to before President Bush took office.

Lisa, from Salt Lake City, UT writes:
I doubt you will address my question publicly, in this forum or otherwise, but here goes: Since the government's own Dept. of Energy states that allowing additional offshore oil drilling would not have a significant impact on domestic oil production or fuel prices until 2030, and, also given the fact that we do not currently have enough rigs, oilfield workers or refineries to handle additional domestic oil production, why does our President, in direct contradiction of the goverment's own data, continue to insist that offshore drilling will alleviate our current high energy costs?

Keith Hennessey
You're right (and so is DOE) that it takes years to bring a new oil field online and start production. And the President has said that he doesn't have a magic wand that will cause a significant price decline immediately.

But that's no reason not to take action. We're in this position precisely because Washington swings wildly between two extremes. When gas prices are low, people say, "We don't need to do anything about it, and it will take a long time so we'll see no short-term benefit from taking action now." When gas prices are high, people say, "DO SOMETHING NOW!!!"

A long journey begins with the first step. We need to take that first step now.

Also, futures markets react to projections of future changes in supply and demand, and they "bring forward" those changes to affect the current price. If markets were confident that there would be a significant increase in US oil supply years into the future, that would affect (lower) the market price today.

Malcolm, from Unknown writes:
Hello,Thank you for considering my question. I'm curious why cant President Bush sign an Execitive Order declaring drilling for Oil in Anwar and certain off shore areas essential for HomeLand Security. I think he has that power if we are threatened. I think we are threatened due to or heavy dependence on imported oil. If the kings and dictators suddenly stopped selling oil to us that would halt our war time operations. Hence a threat to National Security.

Thanks for time.


Keith Hennessey
The law doesn't allow him to do so. There are explicit bans in current law that prevent (1) drilling for oil in ANWR, (2) drilling for oil off most of the US coast, and (3) accessing oil shale resources, for instance in CO, WY, and UT.

An Executive Order is a tool the President can use to better organize his management of the Executive Branch and to more effectively implement the law. The problem in this case is the law, and that's why we're asking for Congress to change it to allow the above three things.

Kim, from Kentucky writes:
Hi Mr. Hennessey, Was the initial reason that the Outer Continental Shelf was closed to drilling and exploration in the 1980's due to damage to marine life? How have techniques changed to lessen the impact on the environment if drilling were to resume once again?

Keith Hennessey
Yes, that was a big part of it. There was a nasty oil spill off the Santa Barbara coast that caused a backlash against drilling. That was in the 1970s, and technology has advanced dramatically since then, to make it safer and much less prone to spillage.

There are basically three classes of environemntal concerns with offshore drilling: the potential for spillage, damage to coral, and people don't like to look off their coast and see oil rigs.

Spillage is a much smaller risk than it was in the 70's or 80's. You may remember the Exxon Valdez spill in 1989 -- 240,000 barrels of oil were spilled. Now fast forward to 2007 when Hurricanes Katrina and Rita tore through the most productive portion of the Gulf of Mexico, hitting hundreds of oil rigs. Less than 6,000 barrels of oil were spilled under conditions dramatically worse than in the 1989 case.

On corals, it's pretty simple. The Marine Management Service is a portion of the Department of Interior that develops the leasing plan. They can and do look for sensitive areas of underwater coral, and they rule those areas off-limits for drilling.

On the horizon, don't forget that the Earth ain't flat. Even if you had infinitely perfect vision, you couldn't see an oil rig beyond 20 or 30 miles, because the top of the rig would be below the horizon. And all the bills being considered in Congress would allow drilling only much farther off the coast than that.

We think that it is possible to access billions of barrels of oil (at least 18B) off the US coast in ways that are environmentally responsible.

John, from kingman, AZ writes:
Will we ever see gas below $3.00 dollars a gallon again.

Keith Hennessey
Gosh I hope so. But I wouldn't count on it.

Gasoline is expensive because oil is expensive. And oil is expensive because demand around the world has been growing steadily, and supply has not.

Oil is sold in a global market. Big countries like China and India are growing fast, and adding lots of new drivers each day. Their demand for oil and gasoline has placed steady upward pressure on the world's supply.

The problem is that much of the world's supply is controlled by governments, and those governments don't always do what a private sector person might do. Normally, a high price is a signal to the producer, "What you can produce is very valuable right now. Make more." Those price signals encourage producers to increase supply until the price comes down again.

But when governments control supply, they don't always follow market signals. Instead, they restrict production, which quite obviously results in prices staying high, or even going higher.

I wish I could say this was just a problem in other oil-producing nations, but it's a problem here as well. Remember that the US is a major oil producer, and unfortunately the Congress has been ignoring the price signal and prohibiting new domestic oil production.

Until those policies change in the US and around the world, I find it hard to imagine a scenario in which the price of gasoline drops dramatically and for a sustained period.

Ken, from North Carolina writes:
If the president believes so strongly that off shore drilling is the answer to high gas prices, why doesn't he exercise some honesty and integrity and say how soon, how much and for how long the gas prices will drop. Why should I believe the oil company's will treat these leases any different than the ones they already hold but are not drilling on. Lastly what will stop the oil company's from saying drilling off shore is so expensive the need more tax breaks and gas will have to cost more.

Keith Hennessey
In Washington your argument is referred to as "use-it-or-lose-it". It turns out that a company with an oil lease has to start production before the end of its lease (usually 5, 7, or 10 years) or else they lose it. So this policy change is already current law.

With oil >$120/barrel, and with gasoline around $4/gallon, we need access to oil resources wherever they can be found, and then to allow market force to dictate where it can be produced most cheaply to have the greatest effect on the price at the pump.

As for the tax argument, our view is that oil companies do not need special new tax breaks, but that they also should not be signaled out for tax punishment. So when the Congress enacted a law in 2005 that created new tax relief for oil and natural gas, the President called on Congress to repeal those provisions. But when the Congress says they want to create a non-level tax playing field by picking out six specific companies and raising their taxes, that's just plain bad tax policy. To the greatest extent possible, private firms should compete on a level tax playing field, neither being particularly advantaged or disadvantaged by the tax code.

Lee, from Salem, OR. writes:
Do you know of or does the federal government offer any grant or financial assistance programs that middle income Americans can access to offset the cost of adding a solar or wind powered energy producing system to their home? Thank you in advance.

Keith Hennessey
Check out the Residential Solar and Fuel Cell Tax Credit, enacted in the 2005 energy law. It's due to expire at the end of 2008. It provdes a 30% tax credit, up to $2,000 max, for solar-electric and water heating systems.

Keith Hennessey
Thanks for joining this chat on Ask the White House. We’ll keep working here to help educate the Congress and the American public about the importance of increasing our domestic supplies of traditional and alternative forms of energy.

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