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U.S. politicians battle in an oil policy tug of war

The BP PLC Carson refinery in Carson, Calif. The debate is heating up in the United States about whether more oil drilling should be on the agenda for America's energy policy.


For U.S. President Barack Obama, it's the perennial challenge that is once again claiming centre stage but is, to his frustration, still mired in partisan bickering.

"We've been having this conversation for nearly four decades now," he said Friday of the U.S. vulnerability to oil price shocks. "Every few years, gas prices go up; politicians pull out the same old political playbook and then nothing changes. And when prices go back down, we slip back into a trance."

Mr. Obama was highlighting a deeply-entrenched problem that has dogged presidents going back to Richard Nixon and the first oil crisis, and has defied solutions ever since. Despite political handwringing and promised action, the U.S. economy remains far too exposed to high oil prices and dependent on insecure oil sources in the Middle East.

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Popular uprisings in North Africa and the Middle East have driven crude prices above $100 (U.S.) a barrel, bringing the partisan deadlock over U.S. energy policy into sharp focus.

The crisis has lent a new urgency to the issue of how to achieve long-term energy security at an affordable price, while reducing greenhouse gas emissions (GHG) that could cause catastrophic climate change.

A smart approach, experts argue, would follow two tracks: encourage greater domestic production while aggressively pursuing a variety of strategies to reduce consumption over time. But there is little confidence that Mr. Obama will succeed where his predecessors failed.

Given the runup in prices, "you have a lot of ratcheted-up interest," said David Pumphrey, a fellow with the Washington-based Center for Strategic and International Studies.

"But I don't think it is enough to result in concrete action given the competing visions," he added.

Mr. Obama pleaded Friday for such a two-track approach - but critics doubt his sincerity about increasing supply and Republicans remain adamantly opposed to much of his off-oil agenda. And so energy policy is held hostage to an increasingly divisive and dysfunctional U.S. political system.

Security v. dependency

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At the heart of the debate, there is a fundamental disagreement about the nature of the problem: Republicans focus on the "security" issue and would replace Middle East imports with U.S. and Canadian production. For Democrats, the goal is to reduce dependency on oil - for both economic and environmental reasons - and as a result, they place far greater emphasis on cutting consumption.

And so development of promising new sources of supply are stalled by environmentally-conscious Democrats, while the effort to drive down U.S. consumption of petroleum is being undermined by the free-market Republicans.

The U.S. response to its oil dilemma matters greatly to Canada, though there are only the faintest hints of a similar energy debate in Ottawa.

At stake for the Canadian oil industry is greater pipeline access to the American market - and how much competition it will face there from U.S. production from the Gulf of Mexico, offshore Alaska and even federal lands in the West.

On the demand side, Ottawa has been moving in lockstep with the Obama administration on efforts to boost mileage standards - and reduce GHGs - in the transportation sector. Both U.S. and Canadian energy consumers - individual and commercial - would be less vulnerable to geopolitical price shocks if they could reduce their dependence on gasoline and diesel.

As rebellion in Libya drove oil prices well above $100 (U.S.) a barrel, the Republican-led U.S. House of Representatives passed a bill that would block the Environment Protection Agency from implementing already-announced fuel efficiency standards in vehicles.

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Mr. Obama, for his part, professes to support new exploration and development so long as it is done responsibly, but activity has ground to a halt in key areas.

His administration has imposed a de facto moratorium on drilling in the U.S. Gulf of Mexico and in the Arctic offshore - forcing companies to shelve projects that could deliver more than one million barrels a day of crude to U.S. markets. And it has delayed a decision on a proposed pipeline from Canada, which would bring an added 500,000 barrels a day of oil sands imports.

Neither a renewed commitment to offshore drilling, nor approval of TransCanada's Corp.'s Keystone XL pipeline would affect the price of oil today. Both strategies would, however, over time increase the country's access to secure supplies of crude oil, and would recycle petro-dollars through the U.S. economy rather than overseas.

Energy issues figure prominently in Washington's looming budget battle, which could shut down the U.S. federal government.

Mr. Obama wants to remove $4-billion a year in industry tax incentives and use the money to fund off-oil strategies like advanced batteries and electric cars. The Republicans adamantly oppose both the tax increase and virtually all funding for clean energy development; they are also looking to handcuff the EPA by slashing its operating budget and barring it from implementing climate policy

The Obama administration talked about boosting domestic supplies of crude and even took some tentative steps to open up more offshore acreage to drilling - but that was before BP PLC's disastrous accident in the Gulf of Mexico 11 months ago.

Since then, exploration and development in the deep waters of the Gulf - and off Alaska - has halted while the administration works to ensure that the oil companies have improved their safety practices and are better able to deal with a major blowout.

Republicans and oil-state Democrats accused the administration of being overly cautious, and even of wanting to shut off supply to drive up prices in order to encourage off-oil policies. Republican leaders in Congress have highlighted a statement from 2008 made by Energy Secretary Steven Chu - before he assumed the post - when he mused about the need for European-level pump prices to reduce oil demand.

"The administration is sticking with its anything-but-oil philosophy and its down-with-hydrocarbons mindset, at a time when within the next three to five years the entire world will be short of oil," said John Hofmeister, a former senior executive at Royal Dutch Shell PLC and industry advocate.

He said economic growth in China and India alone will add nine million barrels a day of crude to global demand, and predicted sharply higher prices. The U.S. could create domestic jobs, reduce its oil imports and add three million barrels a day to the global marketplace if it aggressively pursued production, Mr. Hofmeister said.

With an all-out effort, the U.S. could boost its production from roughly seven million barrels a day currently to 10-million, the former oil industry executive said.

Domestic supply

In fact, the U.S. has seen an increase in domestic supply over the past two years as huge new production in the Gulf of Mexico and North Dakota's Bakken play came on stream.

The Energy Information Administration reported this week that U.S. crude production rose by 150,000 barrels a day last year, following an increase of 370,000 - the first significant upturn in a long-term downward trend.

Mr. Obama took some credit for that increase on Friday, but Erik Milito, of the American Petroleum Institute, noted that the increases of the past two years resulted from decisions made several years earlier, before Mr. Obama came to office.

The EIA also forecast domestic production to fall by 240,000 barrels a day in the next two years - as Gulf of Mexico output drops by more than 440,000.

While the administration ended the formal moratorium on deepwater drilling in October, the Interior Department's Bureau of Ocean Energy Management, Regulation and Enforcement has issued only one drilling permit since the blowout 11 months ago. The inactivity could cost the country several thousand barrels a day of lost production in the coming years, a loss that compounds the natural decline rate in the offshore region.

At the same time, Shell has been forced to delay its planned to drilling in the Beaufort and Chukchi Seas as regulators revise environmental studies to include the impacts of and the ability to respond to a large spill.

Along with Republicans in Congress, the industry's Washington-based lobby group, the American Petroleum Institute, has slammed the Obama administration's oil policies and urged quick approvals for exploration and development efforts. the API has also launched an advertising campaign in support of TransCanada's Keystone XL pipeline.

While he insisted he is supportive of higher production, Mr. Obama said the long-term answer lies on the demand side - reducing consumption of oil through greater fuel efficiency, more use of biofuels, deploying electric vehicles and encouraging mass transit. He noted that the U.S. consumes 25 per cent of the world's oil but has only 2 per cent of global reserves.

"This is one emergency we can't drill our way out of," he said. "We can't place our long-term bets on a finite resource that we only control 2 per cent of, especially a resource that is vulnerable to hurricanes, war and political turmoil."

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