Order Code RL30459
CRS Report for Congress
Received through the CRS Web
Coping With High Oil Prices:
A Summary of Options
Updated April 19, 2000
Robert L. Bamberger, Lawrence Kumins, Salvatore Lazzari
Specialists in Energy Policy and Public Finance
Resources, Science, and Industry Division
Congressional Research Service ˜
The Library of Congress
Coping With High Oil Prices: A Summary Of Options
Summary
Owing to a tightness in crude oil supply and accelerated drawdown of oil
inventories, the price of home heating oil in the Northeast and diesel fuel rose sharply
during the winter of 1999-2000. Gasoline prices soon followed. In the weeks prior
to a scheduled late March meeting in Vienna, some Organization of Petroleum
Exporting Countries (OPEC) producers indicated an inclination to raise production,
but there was no firm consensus how much they might be inclined to boost it, or what
the schedule for these increases would be. In the meantime, concerns were raised that
additional production might reach markets too late to ward off even higher prices for
gasoline in the spring and summer.
The Clinton Administration resisted any high profile intervention that would
affect prices, preferring instead to try to persuade OPEC to agree to raise the oil
production targets that had been agreed to in March 1999. Secretary of Energy
Richardson met with a number of oil ministers in late February and March 2000,
indicating that producing nations were recognizing the jeopardy to the world economy
of prolonged high prices and volatility. On March 28, 2000, OPEC agreed to boost
production. While some expect production worldwide to increase roughly 2.0 million
barrels daily as a result, many continue to press for action from Congress and the
Administration that would provide some relief from high prices, and forestall a similar
doubling in fuel prices in the future. Among these have been:
! lifting a portion of the federal excise tax on gasoline – or all of it, if
the price exceeds a specified threshold (S. 2285, H.R. 3749, H.R.
4111);
! assistance to domestic producers, and reconsideration of opening up
the Arctic National Wildlife Refuge (ANWR) to leasing;
! legislation to impose sanctions on nations determined by the
President to be engaged in oil price fixing (H.R. 3822); sanctions
language was dropped before House passage, March 22 (382-38);
! drawdown, or a “swap” of oil from the Strategic Petroleum Reserve
(SPR), an option which the Administration has strongly resisted;
! establishment of a regional reserve of home heating oil (S. 2047,
H.R. 3608), endorsed by the President on March 18, 2000, and
passed by the House on April 12, 2000, in H.R. 2884;
! approving an additional $600 million in emergency funds (H.R. 3908)
for the Low Income Home Energy Assistance Program (LIHEAP).
Some argue that intervention in markets to affect prices is unwarranted in the
present situation, and that high prices are temporary and are, in the meantime,
attracting product to where it is needed.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Short-Term Policy Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Diplomacy and “U.S. Intrusion” with OPEC Producers . . . . . . . . . . . . . . . 3
Drawdown of the Strategic Petroleum Reserve (SPR) . . . . . . . . . . . . . . . . 6
A “Swap” of Oil From the SPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Moratorium on Motor Fuel Excise Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7
Reimposition of the Ban on Alaskan Oil Exports . . . . . . . . . . . . . . . . . . . 10
Low Income Home Energy Assistance Program (LIHEAP) . . . . . . . . . . . 10
Long-Term Policy Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Establishment of a Regional Home Heating Oil Reserve . . . . . . . . . . . . . . 11
Requiring Oil Product Importers, Refiners and Distributors to Maintain
Specified Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Raising or Broadening the Corporate Average Fuel Economy (CAFÉ) Standards
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Policies to Boost Domestic Oil Production . . . . . . . . . . . . . . . . . . . . . . . . 13
Coping With High Oil Prices:
A Summary of Options
Introduction
A near tripling in the price of crude oil from March 1999 to the first months of
2000, coupled with other developments, initially brought about sharp increases in the
price of home heating oil and diesel fuel, which are essentially the same product.
Gasoline prices then increased. Concerns were raised that a commitment from
Organization of Petroleum Exporting Countries (OPEC) producers to boost
production by roughly 2.0 million barrels/day (mbd) would be needed to replenish
worldwide crude and product inventories, and to forestall the potential for price
volatility and spot shortages of gasoline in late spring and summer. These
developments brought about discussion of what might be done to mitigate price
increases and possible spot shortages, and what might be done to prevent a similar
situation in the future.
Meeting in Vienna on March 27-28, 2000, OPEC committed to an increase
variously reported in a range of 1.45 mbd in the second quarter of the year, followed
by commitments of additional production from Mexico and Norway that appear likely
to raise the effective boost in production to roughly 2.0 mbd. OPEC has indicated
that its objective is to keep prices within a band of $22-$28/barrel (bbl). If prices
should fall below $22/bbl, production would be cut by 500,000 b/d; if prices rise
about $28/bbl, production will be comparably increased. During the week following
the meeting in Vienna, crude prices declined and were in the $25-$26/bbl range in
mid-April.
The Energy Information Administration (EIA) indicated on April 6 that it
believed gasoline prices had peaked, and that the national average price during the
summer might not exceed the $1.51/gallon price observed in mid-March. Owing to
local circumstances, EIA added that the Northeast and California might see some
spikes to higher levels.1 As even this revised prediction is still sharply higher from
year-ago prices – as well as for other reasons – Congress, before recessing for the
Easter holiday, continued to debate possible short- and long-term courses of action.
Legislation, S. 2285, introduced by Senator Lott on March 23, would repeal, from
April 16-December 31, 2000, the 4.3 cents per gallon (ct/gal) increase that was
enacted in 1993 in the Omnibus Budget Reconciliation Act. If the national average
price for regular unleaded gasoline exceeds $2 per gallon, the full excise tax of 18.4
ct/gal would be lifted on gasoline, as would the 24.4 ct/gal excise tax on diesel fuel,
1 “EIA Says Gasoline Prices May Have Peaked,”
Oil Daily, April 7, 2000: p. 1-2. EIA had
previously been predicting possible peak averages of $1.80/gallon.
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and 4.3 ct/gal tax on aviation fuel. The Highway Trust Fund (HTF) would be
reimbursed from the budget surplus for the lost revenue. The proposal sparked
considerable controversy, including opposition from some Republicans who argued
that the potential consequences on transportation funding to state and local
governments significantly outweigh the potential benefit that would accrue to
consumers. On April 6, 2000, the Senate voted 65-35 for a sense of the Senate
resolution expressing opposition to any rollback in the gasoline tax. Then, on April
11, 2000, a cloture motion to bring S. 2285 to the floor failed (43-56). The House
Majority Leader had previously indicated that the House would consider legislation
to suspend the gasoline tax only if the Senate passes such legislation.2
Senate Republicans have also established a task force to develop a package of
other initiatives, including assistance to domestic producers and opening up the
Arctic National Wildlife Refuge (ANWR) to leasing. Also on April 6, 2000, the
Senate narrowly voted 51-49 to retain language in the FY2001 budget resolution
(S.Con.Res. 101) which assumes revenue to the federal government from drilling in
the Arctic National Wildlife Refuge. However, the provision was deleted in
conference.3
Interest also remains in the establishment of some sort of regional petroleum
reserves, a concept that DOE and past Administrations have opposed, but which
President Clinton embraced in a radio address on March 18, 2000. While statutory
authority already exists for the Administration to establish a reserve by executive
order, the President said his preference would be for Congress to enact legislation.
Legislation was introduced (S. 2047, H.R. 3608) several weeks ago. The Senate
included a regional reserve in its version of S. 1051, reauthorizing the SPR provisions
of the Energy Policy and Conservation Act. The differences between the House and
Senate version of this legislation will be addressed after the Easter recess. Another
proposal that has gathered momentum would restore a ban lifted in 1995 on exports
of Alaskan North Slope (ANS) crude (H.R. 4017, H.R. 4007).
These policy options, and a number of other legislative proposals, are briefly
identified and summarized here. Readers are referred to other CRS products for
further information and analysis.
Except when prices are depressed, refiners, marketers, and oil producers are
generally critical of any intervention by the government in markets to affect prices.4
Analysts point out that the price of gasoline and home heating oil has seen current
levels before without drawing pressure for intervention in the marketplace. The
2
Congressional Green Sheets Environment and Energy Daily Report, March 30, 2000: p.
2-4.
3 “ANWR Plan Yanked From Budget Resolution,”
Oil Daily, April 14, 2000: p. 2.
4 In 1999, in response to prices that had fallen below $11/bbl during the first part of the year,
the 106th Congress approved a $500 million guaranteed loan program for oil and gas
producers (P.L. 106-51). For a description of the policies debated during that recent period
in the volatile trajectory of oil prices, see CRS Report RL30290, “Domestic Oil and Gas
Producers: Public Policy When Oil Prices Are Volatile.”
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problem, opponents of government action allow, is that the sharp spike which has
occurred in a concentrated period of time during the winter, and into the spring of
2000, has magnified the injury of higher prices; from this perspective, an unfortunate
but temporary development that warrants financial assistance to those most adversely
affected. It does not warrant intervention in oil markets, they argue. These higher
prices, the critics of intervention add, carry the seeds of their own remedy,
discouraging discretionary consumption and attracting product to areas where supply
is inadequate. There has been uncertainty about, and varying degrees of confidence
in, what the higher production quotas to which OPEC agreed at the end of March will
achieve with respect to moderating prices and rebuilding inventories. However, the
moderating of crude prices which immediately preceded the OPEC meeting and
continued in the first weeks following it, might be seen to suggest that markets should
be allowed to adjust unimpeded as additional production continues to enter the
market.
However, proponents of intervention were pointing to the impacts which a
virtual doubling in residential home heating costs, and sharply higher gasoline prices,
have imposed on people with fixed incomes who may lack means to absorb the
increase in the face of other essential expenses to maintain health and well-being. As
the increases spread to diesel fuel and gasoline, supporters of various policy options
noted that the increases were no longer strictly a regional issue. From this point of
view, price increases had already had, or were threatening, the sort of “adverse
economic impact” which would, for example, seem to justify some use of the
Strategic Petroleum Reserve (SPR).
One bill that has passed the House prior to the OPEC meeting was the Oil Price
Reduction Act of 2000 (H.R. 3822), introduced by Rep. Benjamin Gilman, Chairman
of the House International Relations Committee. The bill, as passed by the House on
March 22, 2000, would require [1] the President to report to Congress within 30 days
of enactment on the security relationship between the United States and each major
oil-exporting nation, including the nature of U.S. assistance to these nations; [2] a
presidential determination of whether an OPEC member nation is engaging in price-
fixing; and [3] the President to undertake what the bill’s sponsor described as “a
concerted bilateral and multilateral diplomatic campaign to bring about the end of
international oil price-fixing arrangements.” 5
Short-Term Policy Responses
Diplomacy and “U.S. Intrusion” with OPEC Producers
In the weeks prior to the OPEC meeting scheduled for March 27, 2000, the
Administration vigorously pursued a diplomatic course to persuade the OPEC nations
that the sharp runup in prices and volatility in world oil markets threatens the
generally upbeat international economic climate. On March 22, 2000, Secretary of
Energy Richardson indicated that “most” OPEC producers agreed that a boost in
5 U.S. Congress. Congressional Record. Wednesday, March 22, 2000, Vol. 146, No. 33: p.
H1219.
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production was warranted, and suggested that “quiet diplomacy” had been effective.6
On March 28, 2000, OPEC and other producers agreed to raise production. Prices
had already begun to soften out of anticipation that production would be increased,
and declined to roughly $25-26/bbl by the end of the first week of April.
When OPEC adjusted production quotas of member nations in March 1999,
crude supply was reduced by roughly 2 mbd from prior levels of production.7 OPEC
may well have underestimated global demand for the remainder of 1999. By early
2000, the resulting supply balance from the production cuts was one contributing
factor to a rise in crude prices as high as $32/bbl–significantly above the level targeted
at the March 1999 meeting. In the United States, concerns about both the reliability
of supply and the high price of oil fuels escalated all winter. By late winter, inventories
were so low that the adequacy of gasoline supply to avoid further price increases and
possible spot shortages for the rest of 2000 appeared in jeopardy.
With OPEC scheduled to meet on March 27, 2000, Secretary of Energy
Richardson embarked on several diplomatic missions in the preceding weeks, meeting
with energy ministers and key leaders in Saudi Arabia, Kuwait, Venezuela, Norway
and Mexico. (The latter two nations are not OPEC members but participated in the
coordinated production cut-back.) Secretary Richardson’s announced intent was to
convince the nations he visited – which, combined, had surplus production capacity
of about 4 mbd – that artificial supply restrictions could hurt the United States and
global economies. He expressed fears about the possibility of global economic
slowdown, increased inflation and a bad investment environment.
Upon his return from this trip, testifying before the House International Relations
Committee on March 1, 2000, and suggesting that this trip was successful, the
Secretary noted: “Before our mission, many energy producing nations believed there
was no problem in the oil markets–that stock levels were adequate, prices were fine,
the world’s economy was not suffering.”8 He suggested that the visits resulted in an
understanding among these producers and holders of the bulk of the world’s spare
output capability that volatility in oil markets was not desirable. He reported that he
believed that they would reevaluate data on current market conditions and take steps
to help stabilize markets and preserve economic growth.
Representatives from Saudi Arabia, Venezuela and Mexico meeting in London
on March 2 indicated after their talks that some sort of increase was warranted, but
would not speculate either on the extent of the increase or the timing in advance of
the meeting on March 27. They emphasized the importance of maintaining the
“coherence” of the group, indicating the amount and timing of any increases would
be determined by all quota participants at the upcoming meeting. OPEC members
6 “Most Oil Producers Agree on Increase: US,” appearing in
Platt’s Oilgram News, Vol. 78,
No. 57, Thursday, March 23, 2000: p. 3.
7 See CRS Report RS20487, “OPEC Oil Production – Facts and Figures.”
8 Prepared Statement of U.S. Energy Secretary Bill Richardson before the House Committee
on International Relations, March 1, 2000.
[http://www.doe.gov/news/testimon/030100.htm]
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were no doubt mindful of past attempts at boosting prices which were not sustained
because of subsequent overproduction. The implied message was that the cartel
members wanted to act together only after careful deliberation in order to avoid
sending prices back to previous levels. A subsequent meeting on March 8 between the
oil ministers from Saudi Arabia and Iran led to some indications of an increase in the
range of 700,000 b/d beginning April 1, with an additional 700,000 b/d added to
production in the third quarter if prices have not moderated to $25/bbl.9
At a Senate hearing, on March 2, Senator Frank Murkowski challenged why
OPEC would not advance the timetable for a decision. “They could hold that meeting
[whenever] they want,” he reportedly remarked to Richardson, suggesting that
“OPEC is poking you right in the eye, Mr. Secretary.”10 Frustration to this point-of-
time with the absence of a more explicit response from OPEC has prompted some
Members to recall the assistance which the United States rendered to some of the
producing nations following Iraq’s invasion of Kuwait in late 1990, and the Persian
Gulf War which ensued, and to suggest an absence of reciprocity.
On March 1, 2000, Representative Benjamin Gilman introduced H.R. 3822, the
Oil Price Reduction Act of 2000, which would “reduce, suspend or terminate any
assistance under the Foreign Assistance Act of 1961 and the Arms Export Control
Act to each country determined by the President to be engaged in oil price fixing to
the detriment of the United States economy.” At the same time, the legislation
includes provisions expressing the sense of the Congress that the United States should
continue its diplomatic efforts to persuade producer nations of the risks to the global
economy from sustained high prices.11 As reported from committee, amended, on
March 15, 2000, the bill would have required the Administration to report to the
Congress within 30 days of enactment on whether oil exporting nations were
engaging in price fixing. If so, the bill would have further required the Administration
to initiate steps to reduce, suspend or terminate assistance or arms sales to those
nations. However, this sanctions language was dropped by the House Rules
Committee on March 21, in response to arguments that many of these nations were
important clients of the U.S. aerospace, electronic, and defense industries, and that
sanctions would be ill-advised. It was also argued that the Administration already had
the authority to impose sanctions under the International Emergency Economic
Powers Act. The bill also included language requiring the Administration to
undertake a diplomatic initiative to end price-fixing. The legislation passed the House
(382-38) on March 22, 2000. A resolution supporting U.S. diplomatic efforts (S.Res.
263) was also approved, amended, by the Senate Committee on Foreign Relations on
March 8, 2000, and ordered to be reported favorably.
9 “Saudis, Iranians Agree on Small Output Hike,” appearing in:
Oil Daily, Vol. 50, No. 47,
March 9, 2000, p. 1-2.
10 “Producer Trio Meets; Global Demand Rises,” appearing in
Oil Daily, Vol. 50, No. 43,
March 3, 2000: p. 1-2.
11 Legislation is viewable at the website of the House Committee on International Relations:
see [http://www.house.gov/international_relations/GILMAN_255.PDF]
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The OPEC ministers had some difficulty arriving at an agreement, in part
because Iran took exception to U.S. "intrusion." On March 28, 2000, OPEC
indicated that production would be boosted roughly 1.45 mbd. Iran took exception
to what it experienced as American intrusion into OPEC’s deliberations, and initially
refused to be a party to the agreement, but subsequently said that it would not
sacrifice market share and would boost its production.12 Commitments from Mexico
and Norway for an additional 150,000 b/d and 100,000 b/d, respectively, suggest that
total announced additions to production will approach 2 mbd. OPEC indicated that
its objective is to keep prices within a band of $22-$28/bbl. If prices should fall below
$22/bbl, production would be cut by 500,000 b/d; if prices rise about $28/bbl,
production will be comparably increased.
Judgments about the success of the Administration’s “intrusion” and diplomatic
initiatives have varied. While the OPEC meeting was still in progress, Representative
DeLay characterized the anticipated boost in production as a disappointment, and was
sharply critical of the Administration energy policy.13 Secretary Richardson declared
OPEC’s action to be “responsible.”14
Drawdown of the Strategic Petroleum Reserve (SPR)
This option has been vigorously advocated by some, though pressure for an
immediate drawdown has diminished since crude prices began to soften after the
OPEC producers met. The SPR was authorized in 1975 to create a below-ground
reserve of crude oil that could be tapped in the event of an interruption in supply,
comparable to the experiences of 1973-74 and 1979-1980, when oil supplies were
interrupted or declined due to international developments. The drawdown authority
has been expanded in recent years to provide for a drawdown if a supply shortage led
to price increases that appeared to threaten “adverse” economic consequences. The
Clinton Administration has opposed a drawdown of SPR oil, arguing that the present
situation does not fit the sort of supply problem for which the SPR is intended.
One legislative proposal would, in effect, compel the President to weigh an SPR
drawdown under certain circumstances, and to justify a decision not to tap the SPR.
Senator Schumer, with Senator Collins, introduced the Oil Price Safeguard Act (S.
1951) on November 17, 1999, which would provide for drawdown of the SPR upon
a presidential finding that "anticompetitive conduct" had fostered a price increase
"likely to cause a significant adverse impact on the national economy." An increase
in price sustained above $25/barrel (bbl) would compel the President to submit a
report to Congress within 30 days. The report would: [1] detail the causes and
consequences of the price increase; [2] estimate its duration; [3] analyze the effect of
the increase on home heating oil prices; and [4] provide a rationale for the President’s
12 “Intervention was beyond expectation” was what one Iranian delegate was reported to have
said. “OPEC Bases New Production Strategy on Price Band,”
Oil Daily, March 30, 2000:
p. 2.
13 “DeLay Slams ‘Clinton-Gore Crisis.’” appearing in
Oil Daily, March 29, 2000: p. 7.
14 “NYMEX Crude Range-Bound Post-OPEC, Products Mixed Late,” Reuters, Thursday,
March 30, 2000.
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position, whether the President has decided to authorize a sale, or whether he declines
to do so.
The Administration had indicated that the SPR was an option it might turn to if
OPEC did not agree to boost production adequately. Following OPEC’s commitment
on March 28, 2000, to boost production, crude prices began to decline to the mid-
twenties per barrel. A number of factors will govern the course of gasoline prices in
the late spring and summer of 2000, and it is difficult to predict the extent to which
the price per gallon will decline, but the clamor for an SPR drawdown had subsided
by the first week of April 2000. (For additional detail, see CRS Issue Brief IB87050,
The Strategic Petroleum Reserve.)
A “Swap” of Oil From the SPR
A proposal began to take shape in late January for a “swap” of oil from the SPR.
Under the plan, companies could “borrow” SPR oil with the stipulation that it would
be replaced within a prescribed period of time. Refiners would be required to replace
the oil on a dollar-for-dollar basis. On the assumption that oil prices will be lower
when the supply is replaced, a greater volume of new oil would be redeposited into
the SPR than the amount originally drawn from it. Once complete, these transactions
would add to the net volume of oil in the SPR when the operation is complete. No
money would be involved in the transaction.
The use of SPR oil in this fashion might satisfy the Administration’s objections
to holding a sale under the present circumstances. The Administration has implied
that it would make this sort of use of the SPR in preference to a conventional
drawdown. On March 2, 2000, the President met with Secretary of Energy
Richardson and several Members of Congress at the White House. Senator Schumer
reportedly remarked afterwards that the Administration sounded “more serious” than
in the recent past about moving forward with an SPR swap.15 In the wake of the
OPEC commitment to boost production, there has been no indication that this option
is being given any further short-term consideration.
Moratorium on Motor Fuel Excise Taxes
After the meeting of the OPEC producers on March 27, 2000, policymakers
focused on possible tax options to address the recent spike in petroleum prices,
including a moratorium on the payment of gasoline and diesel fuel excise taxes.
Prospects for a reduction in gasoline taxes dimmed on April 6, 2000, when the Senate
passed, 65-35, an amendment to the FY2001 budget resolution (S.Con.Res. 101)
expressing the sense of the Senate that fuel tax revenues should continue to be used
for highway construction and rehabilitation. On April 12, a cloture motion to
proceed to debate S. 2285 was defeated (43-56). Legislation to reduce or lift gasoline
taxes was also introduced in the House in late March (H.R. 4111), but this particular
initiative, for the moment, appears unlikely to receive further attention unless crude
prices spike sharply once again.
15 “Producer Trio Meets; Global Demand Rises,” appearing in
Oil Daily, Friday, March 3,
2000: p. 1.
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Virtually all transportation fuels are taxed under a complicated structure of tax
rates and exemptions that vary by mode and type of fuel. Gasoline used in highway
transportation — the fuel used more than any other — is taxed at a rate of 18.4¢ per
gallon, composed of: an 18.3¢ Highway Trust Fund rate, which goes into the federal
highway trust fund (HTF); and a 0.1¢ rate that is earmarked for the Leaking
Underground Storage Tank Trust Fund (LUST).16 The HTF component of the
gasoline tax, the single largest source of revenue for the HTF, is projected to yield
$22.3 billion for FY2001 (i.e., motorists will pay $22.3 billion in fuel costs for the
HTF). Most of that revenue goes into the “highway account” to be used for highway
construction and maintenance (precisely 15.44¢/gal. of the 18.3¢ tax goes into the
highway account); revenues from 2.86¢ are allocated to the “mass transit account,”
to be used for capital expenditures on mass transit systems.
Diesel fuel for highway use — the second most commonly used highway fuel,
used mostly by trucks — and kerosene to the extent that it also used as a highway
fuel, are taxed at 24.4¢ per gallon, 6¢/gallon more than gasoline.17. The tax on
kerosene used on the highways was added as part of the Taxpayer Relief Act of 1997,
in order to reduce tax evasion. Kerosene and diesel (also called distillates) used as
heating oil get a full refund or tax credit. The highway tax on diesel (and kerosene)
fuel also comprises two components: a 24.3¢ rate that is allocated into the HTF, and
0.1¢ that goes into the LUST fund. Unlike gasoline, however, which is largely
consumed for personal use, diesel fuel is used primarily in trucks that transport goods,
i.e, it is primarily used by businesses. Gross revenues from the diesel tax are
estimated to be about $7.5 billion in FY2001. However, as this tax is a cost of doing
business for truckers, it is deductible against income taxes so that the net revenue
yield to the federal government — i.e., the net cost to truckers — is smaller by about
25%, according to the Joint Committee on Taxation, the official scorer on such
matters. Thus, net revenues in FY2001, including offsets, are estimated at about $5.6
billion. Revenues from 2.86¢ of the tax are also allocated for mass transit; revenues
from the remaining 24.3¢ HTF component (21.44¢) go into the highway account.18
Truckers also pay three other federal excise taxes, whose revenues also go to the
HTF.
However, as high crude oil costs persisted, the increases that first surfaced with
home heating oil became increasingly generalized to all fuels. Some Senate
Republicans proposed to suspend until the end of 2000 the 4.3¢ increment of the
federal excise tax on gasoline that was added in 1993. The additional revenues were
originally designated for deficit reduction, but were later redirected by the Taxpayer
Relief Act of 1997 (P.L. 105-34) to a transportation trust fund. S. 2285, introduced
16 The LUST fund finances the cost of cleaning up spills from underground fuel storage tanks.
17 In addition to gasoline and diesel fuel, special motor fuels (gasoline substitutes), jet fuel,
railway diesel fuel, motorboat fuel, and virtually every other transportation motor fuel that is
not specifically exempt are also subject to tax. Compressed natural gas (CNG) has, since
1993, been subject to an excise tax of 48.54¢ per MCF (thousand cubic feet) — marking the
onset of the taxation of gaseous transportation fuels.
18 A variety of off-highway fuel uses (e.g., farming), business uses (e.g., construction
equipment), and government uses (e.g., police departments and school districts) are tax
exempt.
CRS-9
by Senator Lott on March 23, would repeal from April 16-December 31, 2000, the
4.3 cents per gallon (ct/gal) increase that was enacted in 1993 in the Omnibus Budget
Reconciliation Act. If the national average price for regular unleaded gasoline
exceeds $2 per gallon, the full excise tax of 18.4 ct/gal would be lifted on gasoline,
as would the 24.4 ct/gal excise tax on diesel fuel, and 4.3 ct/gal tax on aviation fuel.
The HTF would be reimbursed from the budget surplus for the lost revenue. As
already noted, a cloture motion to bring this measure to the floor of the Senate failed
(43-56) on April 12, 2000.
Legislation in the House, H.R. 3749, proposes to reduce the tax on gasoline,
diesel, and kerosene by 10.0¢/gallon (the tax on gasoline would be 8.4¢ and the tax
on diesel and kerosene would be 14.4¢). The estimated revenue loss would be made
up from general revenues so the HTF would not lose money. S. 2161 would require
the Secretary of the Treasury to transfer amounts from the General Fund to the HTF
to cover funds not received as a result of any moratorium and reduction and tax
collections. As of the end of March, House leaders seemed unlikely to take up such
legislation unless the Senate passed such a measure.
Congressional attention had initially focused upon enacting some form of tax
relief for truckers hard hit by diesel fuel increases. One proposal, S. 2090, would
provide for a one-year moratorium on the 24.3¢ HTF component of the 24.4¢ tax on
diesel, and a permanent reduction in the tax to 4.3¢ beginning on October 1, 2005.
However, as the debate continued, it appears to have become more apparent that the
singling out of one fuel for tax relief might introduce into the market a fresh distortion
affecting the relative prices of home heating oil and diesel fuel. Whether it might lead
to a smaller or larger price differential between the two fuels, or whether some
increment of the tax reduction might be netted from home heating oil prices rather
than exclusively applied to diesel is difficult to predict. The effect of a tax
moratorium on prices might also be affected by seasonality of demand for home
heating oil.
States might at some point compensate for lost revenues from the HTF by raising
the state tax on fuel. However, it does not seem likely that they would, in the short-
term, compromise or defeat the objectives of the federal legislation.19
Another issue is equity. The various motor fuels excise taxes act as a quasi-user
fee, a charge for the benefits received by taxpayers from their use of the interstate
highways and highway infrastructure, and the revenues are used to build and maintain
that infrastructure. To the extent that charges approximate individual benefits
received, relieving the tax burden for truckers may be viewed by some as inefficient
and unequitable vis-a-vis gasoline consumers who would not be granted this, or
comparable relief. (For additional background on the taxing of transportation fuels,
see CRS Report
RL30497: Suspending the Gas Tax: Analysis of S. 2285; CRS Issue
Brief IB10054,
Energy Tax Policy; CRS Report RS 20521,
Transportation Fuel
19 Most states impose excise taxes that average about 20¢/gallon, making the total federal and
state excise taxes a significant fraction of the market price of gasoline and diesel fuel. See.
U.S. Department of Transportation. Federal Highway Administration.
Highway Statistics:
1998. Publication # FHWA-PL-99-017. October, 1999. P. IV-46.
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Taxes: Impacts of a Repeal or Moratorium, March 27, 2000; and CRS Report
RS20281,
Transportation Fuel Taxes and Legislative Issues, October 6, 1999.)
Reimposition of the Ban on Alaskan Oil Exports
Two bill were introduced on March 16, 2000, which would suspend or prohibit
the export of Alaskan oil. The presumption is that this supply, roughly 74,000 b/d in
1999, would be directed to the West Coast market where tight supplies have
contributed to price increases. The bills are H.R.4007, which would suspend exports
until the President determines that shortages and related price impacts are no longer
a concern, and H.R. 4017, which would reimpose the export ban on Alaskan crude.
In the Senate, S. 2275, the Oil Supply Improvement Act, would provide that no crude
oil transported over the Alaskan pipeline right-of-way would be exported.
The Trans-Alaska Pipeline Act of 1973 (PL. 93-153) prohibited the export of
North Slope oil transiting the pipeline right-of-way. Crafted during the Arab Oil
Embargo, the export ban was a reaction to supply problems of the day and concerns
that Alaskan crude delivered to a Pacific port might easily be exported.
Alaskan production ramped-up during the early 1980s, reaching a high of 2.0
mbd in 1988. This was more crude than West Coast oil markets could absorb; some
of the surplus was shipped via Panama or Cape Horn to the U.S. Gulf Coast at
additional expense. As a result, oil producers in Alaska and California began to lobby
for lifting the export ban.
In 1995, against a backdrop of low oil prices and plentiful global supply, P.L.
104-58 was enacted, permitting North Slope crude exports. This law did not inhibit
the President’s authority contained in other law to suspend these exports in the event
of a national emergency. Exports began and continued without expression of concern
or market disruption until the current round of price and supply difficulties developed.
Between 1995 and 1999, Alaskan oil output declined from 1.50 mbd to 1.05
mbd, greatly diminishing any West Coast production surplus that might have once
existed. Exports during 1999 averaged 74,000 barrels per day, or about 7% of
Alaskan production. Half those exports were to Korea, 35% to Japan and 12% to
China. The total amount exported represents less than 3% of regional consumption,
but could currently be contributing to price disparities on the West Coast. Highly
inelastic oil markets can experience large price swings in response to small changes
in supply. (For additional background, see CRS Report
RS20540, Alaska Oil
Exports.)
Low Income Home Energy Assistance Program (LIHEAP)
The Low-Income Home Energy Assistance program (LIHEAP), originally
established in 1981 by Title XXVI of P.L. 97-35 and reauthorized several times, is a
block grant program under which the federal government gives states, the District of
Columbia, U.S. territories and commonwealths, and Indian tribal organizations annual
grants to operate multi-component home energy assistance programs for needy
households. In recent years, LIHEAP has been funded at $1.1 billion, plus $300
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million for weather emergencies. President Clinton has released the entire $300
million in LIHEAP emergency funding that was appropriated for FY2000. The
President sent Congress an emergency supplemental request for $600 million which
would provide additional emergency funds for LIHEAP through the end of this fiscal
year. Action has become stalled on the measure. (For additional information, see CRS
Report 94-211, “The Low-Income Home Energy Assistance Program (LIHEAP).")
Long-Term Policy Responses
Establishment of a Regional Home Heating Oil Reserve
Legislation was introduced in both the House and Senate (S. 2047, H.R. 3608)
to establish a regional reserve, and the President supported the concept in a radio
address given March 18, 2000. The Energy Policy and Conservation Act (P.L. 94-
163), which established the SPR, also included a section authorizing the establishment
of regional petroleum reserves. Though the Clinton Administration could initiate
development of a regional reserve by executive order, the Administration’s preference
was that Congress should pass legislation that would demonstrate support for
establishing a regional reserve. On April 12, the House included in its reauthorization
of the SPR authorities (H.R. 2855) a provision for a 2 million barrel home heating oil
reserve to be sited in the Northeast.
It has been various Administrations’ and DOE’s position that the potential
benefit of regional reserves is not justified by their cost. Their position has been that
the storage of crude in a centralized location – specifically, the Gulf Coast – was the
best alternative and would meet the needs of all regions in the event of a disruption.
A study of regional reserves released in 1998 concluded that a regional reserve might
be beneficial under what DOE characterized as “a very narrow set of conditions.”20
The proposed legislation adopts one possible configuration examined in the study,
requiring that the Secretary of Energy lease storage for 2.0 million barrels of heating
oil in the New York Harbor area, with another 4.7 million barrels of product stored
in the Gulf Coast in an SPR cavern. The reserve would be filled by trading crude
from the SPR for heating oil. Drawdown could be authorized by the President in the
event of a shortage of fuel oil, severe weather, or if prices rise “sharply” due to
anticompetitive activity.
The configuration described above may be appealing to lawmakers in the
Northeast because the study concluded that the “hybrid” configuration could be the
most responsive. It was also found to be the most expensive, and the report
concluded its costs would exceed its benefits unless the government adopted “an
aggressive drawdown policy.” Opponents of establishing a regional reserve may
suspect that designing a regional reserve whose benefits are captured only through its
“aggressive” use will likely encourage its use at times that some will consider
20 U.S. Department of Energy. “Report to Congress on the Feasibility of Establishing a
Heating Oil Component to the Strategic Petroleum Reserve.” June 1998. #DOE/FE-0376-1.
[http://www.fe.doe.gov/techpub/pdf/98sprppr.pdf]
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inappropriate, and would possibly be a disincentive for the private sector to maintain
inventories as aggressively as it would absent the regional reserve. One critic of the
proposal, the Petroleum Industry Research Foundation, observing the sharp increase
in product imports that quickly resulted from high prices, predicted that “aggressive
use of a government reserve to hold down prices would hold down the supply
response as well.”21
However, advocates of the regional reserve point out that this past winter’s
experience demonstrated how the problems experienced in the Northeast can quickly
generalize into associated increases in the price of other petroleum fuels. They argue
that the benefits from measures that prevent the sort of price increases experienced
in home heating oil ultimately are shared by consumers of diesel fuel and gasoline,
too.
Initial indications were that the Senate is not well disposed to the inclusion by
the House of the regional reserve in H.R. 2884. A hold has been placed on the
legislation in the Senate, which means that it will require 60 votes to bring the
measure up for debate.22
Requiring Oil Product Importers, Refiners and Distributors to
Maintain Specified Inventories
In lieu of establishing a separate federally managed home heating oil reserve,
legislation has been introduced in the Senate (S. 2094), the Stable Oil Supply (SOS)
Home Heating Act which would ensure that “minimally adequate” heating oil stocks
would be accumulated to meet “reasonably foreseeable demand during each winter
while protecting consumers from sudden increases in the price of home heating oil.”
Under the bill, importers, wholesales and refiners can act in concert or individually to
develop voluntary plans that would be submitted to the Secretary of Energy
describing the actions they were taking to “mitigate the risk of severe price increases.”
If the Secretary did not certify a plan as acceptable, the Department of Energy would
impose a plan and could require the principals to hold specific levels of inventory.
Opponents of the bill contend that this would impose a costly burden on oil marketers
and interfere with market efficiency. Proponents argue that vesting this responsibility
in the private sector has the least costs administratively. Additionally, they argue that
any slight upward pressure on prices that results from advance purchases to meet
inventory goals should be seen as analogous to an insurance premium, a prudent
investment in preventing any repetition of the volatilities experienced during the
winter of 1999-2000.
21 “SPR Provisions Could Create New Problems,”
Oil Daily, April 18. 2000: p. 1-2.
22 Ibid. The objections in the Senate are not limited to the provision for a regional reserve.
Some Senators have voiced objection to another amendment intended to deal with the opposite
problem of low oil prices by authorizing the Secretary of Energy to buy oil from domestic
stripper wells if the price of oil fell below $15/bbl. Some argue that stripper well production
is often remotely located from SPR facilities. It would be costly to transport this oil to SPR
facilities, and inconvenient to have the government purchase it and swap it for other oil to
solve the first problem, they contend.
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Raising or Broadening the Corporate Average Fuel Economy
(CAFÉ) Standards
The Energy Policy and Conservation Act of 1975 (P.L. 94-163) established
corporate average fuel economy (CAFÉ) standards for new passenger cars and light
trucks. The current standard is 27.5 mpg for passenger automobiles and 20.7 mpg
for light trucks, a classification that also includes sports utility vehicles (SUVs). The
proportion of the vehicle fleet that is made up of light trucks has grown from roughly
20% in 1980 to more than 47% in 1998. Light trucks, which tend generally to
achieve less fuel economy than typical passenger cars, are putting additional pressure
on gasoline demand and increasing U.S. vulnerability to price increases when supplies
are tight. However, since FY1996, Congress has included language in the
Department of Transportation Appropriations legislation to prohibit expenditures for
any rulemaking that would make any adjustment to the CAFÉ standards.
It remains to be seen whether the sharp increase in fuel prices will affect
congressional decisions on this matter in the FY2001 spending bill. Representative
Boehlert has been gathering signatures on a letter calling for an end to the freeze. On
April 13, 2000, legislation was introduced in the House (H.R. 4270) to offer
alternatives supported by the automotive industry in lieu of boosting CAFE. The
legislation would provide tax credits for efficient, advanced-technology vehicles,
extend CAFE credits for flexible-fuel vehicles, and initiate a study to assess “the
relative effectiveness of current and potential methods to further encourage the
development of the most fuel efficient vehicles.”23 (For additional information, see
CRS Issue Brief IB90122, “Automobile and Light Truck Fuel Economy: Is CAFÉ Up
to Standards?”and CRS Report RS20298, “Sport Utility Vehicles, Mini-Vans and
Light Trucks: An Overview of Fuel Economy and Emissions Standards.”)
Policies to Boost Domestic Oil Production
Some have suggested that developments this winter are a reminder of the
vulnerabilities to which the United States is exposed owing to the extent of its roughly
50% dependence upon imported petroleum. If anything, high prices, it can be argued,
will encourage additional domestic production. The sharp price increases have
prompted some calls for the United States to explore the productive potential of the
Arctic National Wildlife Refuge (ANWR), a perennially controversial issue. On
March 8, 2000, Sen. Frank Murkowski, Chairman of the Senate Energy Committee,
introduced legislation to allow drilling on the ANWR coastal plain (S. 2214); hearings
were held on April 5. The FY20001 budget resolution reported from the Senate
Budget Committee (S.Con.Res. 101) included $1.2 billion in offsets from leasing in
ANWR. An attempt by Senator Barbara Boxer to delete the language in committee
failed. On April 6, 2000, the Senate, by a vote of 51-49, tabled an amendment that
would also have dropped the language. However, the language was dropped by the
conferees before final passage.
23 “Carmakers Offer CAFE Plan,”
Automotive News, April 17, 2000: p. 1, 51.
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During the first session, the 106th Congress enacted a guaranteed loan program
to assist domestic producers (P.L. 106-51). Other policies that have been debated in
the past to encourage domestic production have included a range of tax incentives,
and acquisition of domestic oil for the SPR, either in direct purchase or as royalty-in-
kind. (For further discussion and analysis of such options, see CRS Report RL30290,
“Domestic Oil and Gas Producers: Public Policy When Oil Prices Are Volatile.” For
a review of past debates over ANWR, see CRS Report 93-774 ENR, “The Arctic
National Wildlife Refuge," August 30, 1993.)