Federal Control is Spiking Oil PricesFebruary 21, 2012
Fuel costs in the United States have, for nearly a decade, reflected the roller coaster rides of speculation and demand. Now, perhaps for the first time in over 20 years, questions about real supply threaten to push oil prices to new records, yet again. Despite this reality -- driven at best by a loose alliance of oil-rich nations intent on squeezing the U.S. and Europe for money and stature in world affairs, at worst by much more sinister outcomes -- domestic oil production policies have changed very little. Oil exploration remains a heavily regulated enterprise. Barriers to entry are high and sometimes insurmountable by smaller outfits. Applications for permits and leases are often greeted by years of red tape and inaction as oil companies lie in wait for approvals. Environmental regulations are often confusing and difficult to comply with, yielding only marginal utility and mixed results.
In effect, policies have remained stubbornly static as prices have done the opposite, and the blame for this lies squarely with the federal government -- and its insistence on controlling the energy industry.
The question we often ask in this space is one we'll again present: where does the federal government get the power to impose its will on the energy industry? Its intervention can be traced back, without much surprise, to the 1930's, when industry players wanted to cut production in order to prop up prices and the Roosevelt administration sought regulation of the industry public utility-style. Following this fight were decades of price controls, as well as regulations of drilling and transport. But the question remains: where does the federal government get the power to make the rules of oil exploration, set the prices in the oil markets, or, really, have any say-so whatsoever regarding energy production?
Constitutionally speaking, the federal government does NOT have the power to regulate oil exploration. It may use now-generic justifications like the interstate commerce clause of Article 1, Section 8 of the Constitution, a fallacy we've explained here multiple times (read this explanation) that has had, applied to it, the misinterpretation that the federal government can interfere with transactions between private citizens and corporations, or it might simply invoke the mere existence of the Department of Energy or the Environmental Protection Agency as sources of power. But those agencies are themselves constitutionally suspect -- especially where their activities involve interference in the actions of private individuals and corporations at the state or local level. In short, no true authority is granted the federal government to tell an oil explorer that it cannot drill into the land or water within a single state's boundaries.
The federal government further lacks the authority to set price controls or otherwise interfere with the various energy markets. Despite decades of practice doing this (read about this as prepared by the Cato Institute), there is nothing in the Constitution that allows this at the federal level -- not even the interstate commerce clause (see above). Per the Tenth Amendment, any such regulation, were it deemed necessary, would be a state decision.
Some Republicans -- in the interest of politics -- have offered the half measure of changing federal policy to one that favors domestic energy production. Such offers have deflated speculation in the past, one recent example being the collapse of oil markets in 2008 brought about by economic deterioration AND then-President George W. Bush's call for more domestic energy production. But the best way to pressure prices lower immediately -- and keep them lower -- is to constrain the federal government back into the parameters laid out by he Constitution. Send energy production decision-making back to the states. States that wish to open up their lands to energy exploration would be free to do so, and such states would be free to sell those energy sources as they see fit, without additional federal oversight over domestic energy markets. This boon of supply would restore cheap energy and relieve a good amount of the pressure on today's economy -- setting the stage for the strong recovery that everyone seeks.
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