One of the U.S. government’s largest sources of non-tax revenue comes from the land it leases to oil, gas and coal companies. Last fiscal year, the federal government generated more than $13 billion from drilling and mining activities on its land – but it should have made hundreds of millions of dollars more. Antiquated pricing rules have given these energy companies access to federal lands at prices that ignore decades of inflation, as well as many environmental and health costs of fossil fuel production.
Even as the average annual price for oil produced in the United States tripled in a decade, the minimum price the federal government charged for leases remained stagnant. In fact, for decades, the minimum bid to lease public land for fossil fuel production has been just $2 an acre. Annual rental fees, which companies pay to hold and explore federal lands before production, are just as low. And the royalty rate for oil and gas produced onshore has remained at just 12.5 percent since 1920. Those bargain prices give private companies a windfall while depriving American taxpayers of a fair return from energy production. Instead, the public has been left to pay for many of the social and environmental costs of fossil fuel operations, from road damage to respiratory problems.
The public’s share of the revenue from domestic energy production is held down by an outdated fiscal system managed by the Interior Department, which oversees oil and gas development on federal land. The department does not regularly evaluate or update the fiscal terms for its oil, gas and coal leases. This longstanding issue has become more pronounced as hydraulic fracturing, commonly known as “fracking,” has caused domestic energy production to soar, increasing its potential to become an even larger source of revenue for federal and state governments. Although fossil fuel production on federal lands has declined in recent years, oil, gas and coal from public lands – including offshore leases – still account for 25 percent of total U.S. fossil fuel production. Coal production on federal lands, alone, accounts for 40 percent of the U.S. total.
While the $2 minimum bid for federally auctioned oil and gas leases is only the starting price, about 40 percent of existing leases were sold at that level. Further, annual rental fees for onshore oil and gas leases – $1.50 per acre during the first five years and $2 per acre each year thereafter – allow drilling companies to hold and explore mineral leases for the price of a cup of coffee.
These low rental rates also fail to account for many of the external costs associated with exploratory drilling and mining, including local air pollution, damage to ecosystems, and truck traffic. In some cases, former hiking and scenic areas are converted into production sites and access roads. Since these effects must be disclosed in environmental impact statements before lease sales, the federal government can estimate the cost of the damage and raise rental rates to cover them.
Equally pressing, the U.S. government charges a lower royalty rate for onshore oil and gas leases – 12.5 percent – than many U.S. states and foreign countries. California, New Mexico and North Dakota charge between 16.67 and 18.75 percent. Texas rates are as high as 25 percent. The Interior Department’s Bureau of Ocean and Energy Management even increased offshore royalty rates in 2007, from 12.5 percent to 18.75 percent.
But the department’s Bureau of Land Management, which oversees onshore federal lands, has never increased the royalty rate. Further, the financial costs of local air pollution, damaged roads and wildlife habitat disruption were not factored into the royalty rate set in 1920. In addition, methane emissions from oil and gas production contribute to climate change and waste natural gas that can provide more revenue to the public.
As a starting point, the federal government should update the minimum bid to account for inflation; that alone would raise it to $24. Second, renting public land to some of the wealthiest corporations in the world for as little as $1.50 per year is irrational; that rate also should increase annually with inflation and account for foreseeable environmental costs. And as we learn more about the cost of pollution that contributes to public health problems and climate change, the Interior Department should annually evaluate royalty rates for both onshore and offshore energy production to ensure a fair return to the public. The “social cost of carbon” – an official estimate of the monetary damage associated with carbon dioxide emission – is one tool the Department of Interior could use to put a value on some of these environmental impacts. Continued advances in technology that make it cheaper for companies to produce oil and gas, and increases in market rates for fossil fuels, also would justify increasing royalty rates. These policies would be in line with the Interior Department’s mandate to both preserve natural lands and resources and to support energy production.
Many presidential candidates have announced that, if elected, they would lift the nation’s 40-year-old ban on exporting crude oil to foreign countries, a move that likely would boost U.S. oil production and corporate profits. Ted Cruz, Mike Huckabee, Rick Perry and Scott Walker all have criticized the federal ban, which dates back to the 1973 oil crisis.
Opening a new door for U.S. oil sales without first ensuring that the American public is getting its due would be unwise. Lifting the export ban before making these commonsense fiscal changes risks saddling taxpayers with a raw deal: private companies would benefit from an expanded international market, while the public would continue to earn less than its fair share.