We Know Big Oil Wants to Keep Gas Prices High
By Pegah Jalali and Elliot Goldbaum
How do we get gas prices to come down?
Though gas prices have started to drop just a bit from the record highs we’ve seen this year, they’re still a big concern for families across the country, and policymakers are looking for ways to lower costs more. While some in Washington have floated the idea of a gas tax holiday (we wrote back in April about why that probably wouldn’t help), others are saying the only way to bring prices down is to increase fuel supplies.
Global events, especially the war in Ukraine and ensuing sanctions like banning Russian oil imports, are driving prices to record levels and are largely outside of our control. While the pandemic continues to create supply chain problems that are driving inflation, including the price of gas, the other main factor in the cost of gasoline is a sharp increase in demand now that more people have returned to daily commutes to and from work. More oil production should lead to bigger supplies to meet that demand and, at least in theory, lower gas prices.
So are they going to increase supply?
Based on statements from Colorado oil and gas executives on earnings calls with investors, we know the industry isn’t especially interested in trying to meet that demand and get prices back to normal levels. Instead, they’re using the spoils of high gas prices to further enrich themselves and their shareholders. This comes despite the industry engaging for months now in what is clearly a disingenuous lobbying campaign for more drilling on our public lands.
Despite already sitting on 12 million acres of undeveloped leases and 9,000 unused drilling permits, the industry was demanding even more access to public lands. Instead of caving to pressure, the U.S. Interior Department came up with a smart plan that will protect cultural areas, wildlife habitat and migration corridors, and areas with low development potential. The wisdom of the decision to limit the amount of land available for leasing was confirmed when oil and gas companies left nearly one third of available land parcels sitting on the table at last month’s federal oil and gas lease sale.
To understand why this matters, let’s take a closer look at federal oil and gas leasing.
How does federal oil and gas leasing work?
The Bureau of Land Management (BLM) manages the federal government’s onshore oil and gas program, which oversees oil and gas leasing and development on federal lands. BLM field offices first prepare plans which determine what lands can be open to oil and gas leasing. Any individual or company can then nominate—at no cost and anonymously—any of the lands that are open to leasing to be included in the next federal onshore oil and gas lease sale. Next, BLM holds public auctions where bidders can compete for a lease by placing bids. The highest bidder gets the rights to explore the leased land for oil and gas deposits.
Before being issued the lease, the lease holder must pay a bonus, which is the amount of highest bid, as well the first year’s rental fee of $1.50 per acre. Initial lease terms are set for 10 years, with the rental fee increasing to $2 per acre after the first 5 years of the lease. After production begins, the leaseholders have historically been required to pay 12.5% of their production value in royalties. The term of the lease is automatically extended as long as production continues.
How much are royalties from public oil and gas leases worth?
A report released by Department of Interior in November 2021 showed federal onshore oil and gas development provided over $3.46 billion in revenue in FY 2020. That includes $2.3 billion in royalties, $92.9 million in bonus bids, and $23 million in rentals.
Those numbers would be much bigger if the federal government updated royalty rates, according to a report by Taxpayers for Common Sense. That report estimated that if the federal government had increased the onshore royalty rates to 18.75%, the same rate it charges for offshore leases, it would have earned up to $13.1 billion in revenue between 2012 and 2020. Many oil and gas producing states have updated their royalty rates for leases on state land several times over the past decades. Colorado, Pennsylvania, and Texas have a 20% royalty rate.
When oil prices rise as a result of global market fluctuations, the lost royalty revenues to the federal and state governments also increases. Onshore revenues fund water reclamation projects and may also contribute to the National Parks and Public Land Legacy Restoration Fund.
In Colorado, the Department of Local Affairs distributes the Federal Mineral Lease revenues to local governments directly and through grant programs. As shown in the chart below, royalty revenues are distributed to the state public school fund (48%), Colorado water conservation board (10%), direct distribution to school districts (1.7%), and local government mineral impact fund (40%). Increasing royalty rates gives Coloradans a fair return and helps us invest in our schools and other important services.
While the Interior Department smartly increased the federal onshore royalty rate to 18.75 for the sale in June, there are other ways the oil and gas industry exploits these century-old rules at our expense.
What happens when leases go unsold?
Despite the industry calling for opening up as much land as possible to drilling and nominating over 700,000 acres of public lands that the BLM initially evaluated for lease, they still left a lot of it on the table and didn’t try to bid on it. When nominated land goes up for sale but doesn’t receive any bids, it becomes available for what is known as “noncompetitive” leasing. That means companies can swoop in and buy federal leases for pennies on the dollar.
Because a little less than one-third of the leases up for sale in the June lease sale went unpurchased, they will now be up for noncompetitive leasing—including over 2,000 acres of public lands in Colorado alone that went unsold last month.
This is just another example of how our federal oil and gas leasing system, most of which hasn’t been updated for over 100 years, is allowing the oil and gas industry to line their pockets at the expense of wildlife, clean air and water, the communities who live on the front lines of oil and gas drilling, and all Coloradans who miss out on critical revenue due to outdated oil and gas royalty rates.
What can be done to help gas prices?
Making the increase in royalty rates that was adopted for the June lease sale permanent would mean more money for our communities through federal royalty revenue.
Additionally, Colorado’s own Senator John Hickenloooper has made the issue of ending noncompetitive leasing a priority. “Non-competitive leasing encourages speculation on public lands at taxpayers’ expense,” Hickenlooper said in a press release when the bill was announced. “Westerners lose out when large swaths of land are set aside for speculation instead of conservation or recreation.”
While the newly announced Inflation Reduction Act does include some reforms to the federal oil and gas leasing program, it also includes less helpful policies that will tie the hands of the Interior Department and potentially make it harder to protect our public lands. While the bill contains a lot of other important provisions, especially related to climate change and fair taxes, there’s more work to be done to fix some of these issues.
Western voters agree that these reforms are important for maintaining our state’s beauty and the health and safety of our public lands and our communities, according to a poll conducted in February by Colorado College. These common sense reforms would go a long way towards protecting our communities from both an environmental and fiscal standpoint.
As far as gas prices go, In the short term, there’s not much we can do to lower them by big chunks. That’s why it’s more important than ever for us to find ways to transition to clean energy, end our dependence on fossil fuels, and continue our progress toward a carbon neutral future.
In the meantime, smarter, more fiscally and environmentally responsible leasing policies will be a big win for Colorado and the rest of the West.
