Low-Energy Fridays: No Lease for You!
The Biden administration recently allowed for new offshore energy leasing. As part of securing Sen. Joe Manchin’s (D-W.Va.) vote for the Inflation Reduction Act (IRA), a new requirement for offshore energy leases was put into place: In order to sell renewable energy leases (offshore wind), the federal government must also offer fossil fuel leases (oil and gas). The move was significant, as the administration has been criticized for slow-walking oil and gas leases. While the intent of Sen. Manchin’s condition was for the administration to resume offering offshore oil and gas leases as normal, the newly proposed leasing schedule limits offshore oil and gas leases to just three. This might sound like a win for clean energy—which is how the administration characterizes it—but the framing of the lease limitation ignores economic and environmental nuance that makes the proposal bad for both the economy and climate.
As a matter of background, offshore oil and gas leases occur over five-year programs and typically number 15 to 20 during that period. About 15 percent of total U.S. oil production is from offshore sources, and 2 percent of total U.S. natural gas production is from offshore sources. Offshore wind generation currently accounts for less than 1 percent of U.S. electricity generation from wind, but it is growing. Essentially, offshore leases are most important for U.S. oil production, and there are two policy paradigms to consider: economic and environmental.
On the economic front, the effects of restricting offshore leasing are simple. The new lease proposal will reduce U.S. oil production, which will decrease the global supply and increase oil prices. Higher energy prices mean Americans will have less money to spend on other goods, reducing their effective income. Energy prices also affect inflation, which will be pushed higher. Additionally, because oil is a major traded commodity, reduced U.S. oil supply means less product exported and less demand for U.S. dollars abroad. Further, if more oil is imported, more U.S. dollars will go overseas and increase supply. This combination of factors will weaken the strength of the U.S. dollar (and consequently, Americans’ purchasing power). Reduced production from offshore leases also means lower royalty revenues to the government, necessitating future taxes to offset the revenue loss.
The environmental front is more complicated, as offshore energy production is especially nuanced. Offshore energy production poses a particular environmental risk that onshore production does not—namely, oil spills like the British Petroleum Deepwater Horizon incident in 2010. Regulations have improved though, and there have been no major U.S. oil spills since. Additionally, oil and gas produced from offshore resources are generally lower lifecycle greenhouse gas (GHG) emissions than the average, meaning a barrel of oil from the Gulf of Mexico is expected to cause less pollution than one from most other sources. For this reason, the Obama administration concluded that global GHG emissions would be higher with less U.S. offshore oil and gas production. A Carnegie Endowment study found that oil produced from the Gulf of Mexico is among the lowest lifecycle GHG emission profile of any oil in the world. Wood Mackenzie concluded similarly in 2021.
Essentially, it may sound reasonable that the United States could cut pollution by preventing the domestic production of oil and gas. But when considered in the wider context of large global demand for these resources and the fact that energy consumption is not perfectly zero-sum (less fossil fuel production does not equate to more renewables), such a policy at best has no environmental benefit and at worst increases global GHG emissions. Not to mention the negative economic effects outlined above.
While nobody but the administration really knows why it has taken this approach to offshore energy leases, the economic and environmental evidence do not seem to support it.