Publications

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As crude oil and gasoline prices soar and the summer road trip season begins, both parties in Congress are trying to demonstrate to the American public that they are taking action to lower petroleum prices.

For several months now Congress has been considering the reauthorization of the Farm Bill – which includes a controversial tax title with several biofuel provisions – as well as various energy-related measures. A number of Congressional proposals are now pending; some have been considered before, and several have met with great opposition.

Farm Bill

The House and Senate recently voted by wide margins in favor of a new five-year Farm Bill. The bill was sent to President George Bush, who vetoed it. The President raised concerns about the cost of the bill and explained that large subsidies should not be given to farmers at a time of record crop prices. The House voted to override the veto by a vote of 316 to 108, and the Senate took similar action. However, because of a clerical error, the bill sent to the President did not contain the Trade Title; hence, only 14 of the 15 Titles in the Farm Bill will likely become law. It is not yet clear how Congress will treat the Trade Title. The provisions in the final bill relating to biofuels are as follows:

Cellulosic Biofuels Credit - The bill includes a new, temporary cellulosic biofuels production tax credit for up to $1.01 per gallon, available through December 31, 2012.

Modification of Incentives Relating to Alcohol Fuels - The bill reduces the 51 cents per gallon incentive for ethanol to 45 cents per gallon for 2009 and thereafter. If, in consultation with the Environmental Protection Agency, the Department of the Treasury determines that 7.5 billion gallons of ethanol were not produced in or imported into the U.S. in 2008, the reduction in the credit will be delayed. A similar delay is provided for 2010 if the threshold of 7.5 billion gallons is not reached in 2009.

Calculations of Volume of Alcohol for Fuel Credit - Current law provides a per-gallon credit for the volume of alcohol used as a fuel or blended into a “qualified mixture.” For purposes of determining the number of gallons of alcohol for which the credit is allowable, the volume includes any denaturant, including gasoline. The denaturant cannot exceed 5 percent of the volume of such alcohol (including the denaturants). The new provision reduces the amount of allowable denaturant to 2 percent of the volume.

Extension of Tariff on Ethanol - Current law imposes a 54 cents per gallon tariff on ethanol imported from most countries. The provision extends the tariff for two years – through December 31, 2010. (While the tariff was originally imposed to offset the alcohol fuel credit on imported product, the new provision does not reduce the tariff in a manner similar to the tax credit discussed above – from 51 cents per gallon to 45 cents per gallon if certain production or importation thresholds are met.)

Duty Drawback on Imported Ethanol - A duty drawback is a refund of duties paid on a product or on a commercially interchangeable product that is exported. Under current law, if duties are paid on imported ethanol, and the ethanol is blended into gasoline, a drawback or refund could be obtained on the export of the gasoline or other transportation fuel, such as jet fuel, even if the exported product did not contain ethanol. The new provision prohibits this type of drawback effective October 1, 2008 and permits claims based on earlier import/export transactions to be filed no later than October 1, 2010.

Filling of Strategic Petroleum Reserve Temporarily Halted

On May 13, both chambers voted for a temporary halt in the filling of the Strategic Petroleum Reserve (SPR). Under the legislation, deliveries would be suspended through December 2008 unless the price of crude oil fails below $75 per barrel. Both houses adopted their respective measures by wide, veto-proof margins.

President Bush maintains that the amount of oil purchased to fill the SPR is relatively small, 70,000 barrels a day, and the measure would have no effect on rising crude oil prices. Despite his objection, the President bowed to the overwhelming majorities in both chambers, and he signed the legislation into law on May 20.

House Extenders Package Addresses Numerous Energy Matters

On May 15, the House Committee on Ways and Means introduced an “extenders package” – a bill which extends many energy tax credits and addresses other energy matters, such as energy efficiency and conservation. The Committee adopted the package by a vote of 25 to 12. On May 21, the House adopted the legislation by a vote of 263 to 160. The bill provides nearly $20 billion in tax incentives for renewable energy. Specifically, it provides:

1. A $1.01 tax credit for cellulosic biofuels production through December 31, 2015. (This is similar to the Farm Bill provision);
2. Expansion of property allowance to produce cellulosic ethanol;
3. One-year extension of the $1 per gallon biodiesel tax credit;
4. Imported biodiesel (B-100), blended with conventional diesel and exported, would not be eligible for the credit if claims for this blending activity were filed on or after May 15, 2008;
5. One-year extension of the small biodiesel producer credit;
6. One-year extension of the $1 per gallon production tax credit for diesel fuel created from biomass;
7. Elimination of the requirement that renewable diesel must be produced using a thermal depolymerization process;
8. Diesel fuel produced by co-processing biomass with petroleum would only qualify for a 50 cents per gallon credit – not the $1 credit. This provision overrules an IRS ruling that granted the $1 credit to renewable fuel that was so co-processed;
9. An increase in the alternative refueling property credit from 30 percent to 50 percent for businesses that install pumps dispensing alternative fuels. The credit is extended until 2010; and
10. Extension of tax credits for the production of electricity from wind facilities placed in service through 2009 and certain other facilities, including hydropower and geothermal, placed in service through 2011.

The Senate is expected to take up the bill in June, but disputes over how the credits will be “paid for” could delay enactment until after the November election.

Senate Energy Proposals Reflect Ire at Record Oil Company Profits

Democrats in the Senate want to take strong action against major integrated oil companies that have earned record profits during the past year while consumers are paying higher prices at the pump. Their proposals include:

• Elimination of certain tax deductions for income attributable to domestic oil production and less favorable treatment for income earned on foreign oil and gas extraction. (This provision was originally included in the tax title of the Energy Independence and Security Act of 2007 but was strongly opposed by Republicans in the Senate. Ultimately, it was dropped from the final version of the measure adopted);
• Transfer of the estimated $17 billion derived from removing the tax benefits described above into an “Energy Independence and Security Trust Fund” to support renewable energy;
• Imposition of a windfall profits tax on major integrated companies. Companies subject to the tax would pay 25 percent of the profit above an established threshold. The revenues derived from this provision would also be used to support renewable energy. (Major oil companies recently testifying before Congress strongly opposed this proposal);
• Authorization for the President to declare an energy emergency during a shortage or disruption in the petroleum market. During such a period, it would be unlawful for a company to sell crude oil, refined petroleum products and biofuels at “unconscionably excessive” prices.
• Authorization for the Department of Justice (DOJ) to bring an antitrust action against any country, entity (e.g., OPEC) or company colluding to set the price of petroleum. (This provision was originally considered as part of the 2007 Energy Bill. President Bush threatened to veto the measure if it were included; and it was eliminated from the final measure); and
• Prohibition on petroleum traders of crude oil futures, designed to limit market speculation; the goal would be to prevent traders from moving transactions to offshore markets and increase margin requirements for oil futures trades.

Republicans have their own proposals to help alleviate the pressures imposed by high oil prices, including:

• Drilling in the Arctic National Wildlife Refuge;
• Expanding offshore drilling;
• Promoting the development of coal-to-liquid fuels; and
• Facilitating the permitting process for refinery expansion.

Leaders of both parties in the Senate have tried to move all these energy measures forward. However, in an election-year setting, none of these measures may garner sufficient support to be adopted.

House Energy Measures Aim at OPEC

On May 20, the House approved, by a vote of 324 to 84, legislation designed to outlaw supply and price manipulation by OPEC. The measure, referred to as NOPEC (No Oil Producing and Exporting Cartels Act of 2008) authorizes the DOJ to bring an antitrust action against any foreign country or company for manipulating petroleum supplies and/or price-fixing. The legislation would also establish a DOJ petroleum industry antitrust task force to handle these issues. It is unclear if the Senate will consider the measure.

House Republicans have also unveiled a legislative package similar to that introduced by their Senate counterparts. Among other provisions, the measure would allow for drilling in Alaska’s Arctic National Wildlife Refuge and increase offshore oil and natural gas drilling. Such provisions are unlikely to gain approval in the House (and have failed previously in Republican-controlled Congresses).

Congress Believes It Must Act

As energy prices continue to increase, legislators believe it is important to hold hearings, investigate and take legislative action to address the problem. Any measure that is ultimately adopted would be unlikely to have an immediate and significant impact on consumer prices. Members of Congress may recognize that some of the provisions now under consideration are too controversial for adoption, or would be ineffective once in place, but nonetheless they will continue to offer and debate them.