Obama Calls for Incentives to Spur U.S. Oil, Gas Production

President Barack Obama said there are no “quick fixes” for higher energy costs and the U.S. must embark on a long-term plan to tap domestic resources, cut usage and develop alternatives to fossil fuels.

The turmoil in the Middle East and North Africa that has driven up oil prices, the earthquake in Japan that triggered a nuclear emergency, and increasing competition for resources from the rapidly growing economies of China and India underline the challenges the U.S. faces, Obama said in a speech today.

He called for new incentives to boost production of oil, natural gas and biofuels, tougher fuel-efficiency standards for vehicles and greater reliance on cleaner sources of energy, including nuclear power. The goal, Obama said, is to cut oil imports by a third in a decade.

“We cannot keep going from shock when gas prices are up to trance when they go back down,” Obama said at Georgetown University in Washington. “The United States of America cannot afford to bet our long-term prosperity and our long-term security on a resource that will eventually run out.”

Obama’s energy policies have come under fire from congressional Republicans as the cost of gasoline rises. Prices are up more than 20 percent this year and are 33 percent higher than a year ago. The national average price of regular gasoline at the pump was $3.587 a gallon yesterday, AAA said on its website. That’s the highest since Oct. 2, 2008.

‘Down This Road’

“We have been down this road before,” Obama said. Cutting by one-third the 11 million barrels of oil imported daily by the U.S. in 2008 is a goal that is “reasonable, achievable and necessary.”

Increased domestic production and reduced imports may help U.S. national security, Michael Greenstone, a professor of economics at the Massachusetts Institute of Technology, said in a statement.

“However, this plan is unlikely to affect the price that families pay at the pump because, even with enhanced production, the U.S. will account for a small share of what is a world market for petroleum,” Greenstone said.

Obama’s address follows release of a report yesterday by the U.S. Interior Department that said the Gulf of Mexico alone may have as much as 11.6 billion barrels of untapped crude -- enough to meet U.S. demand for almost two years -- and 59.2 trillion cubic feet of natural gas. Fewer than half the leases on federal land are active, it said.

Shorter Leases

The specific incentives for drilling are still being developed by the Interior Department, according to a White House fact sheet. Some, including shortening lease terms and requiring drilling to begin before an extension is granted, are already being employed for offshore leases. The department is evaluating using a graduated royalty structure to encourage more rapid production, as is done in Texas, the largest oil-producing state in the U.S.

Obama said he wants to boost offshore oil exploration and production “as long as it’s safe and responsible.”

“If you’re going to drill in deep water, you’ve got to prove that you can actually contain an underwater spill,” he said. “That’s just common sense.”

Obama’s address comes almost a year after he announced he would allow expanded oil and natural-gas drilling off the East Coast as part of a plan to increase domestic production while also encouraging conservation and developing alternatives.

Expanded Drilling

The administration dropped its plan for expanded drilling after the oil spill at BP Plc (BP)’s Macondo well in the Gulf of Mexico, the worst in U.S. history. A moratorium on deep-water drilling was lifted in October, with tougher safety, inspection and environmental-protection rules required for permits.

Since tougher standards were put in effect, the administration has approved 39 new shallow water permits and an additional seven deep water permits.

“Any claim that my administration is responsible for gas prices because we’ve, quote unquote, shut down oil production, any claim like that is untrue,” Obama said.

Industry representatives and congressional Republicans accused the White House of stalling on drilling permits. Erik Milito, upstream director at the American Petroleum Institute, said in an e-mail yesterday that the administration “has been delaying, deferring or denying access to our oil and natural gas resources here at home.”

Expand Production

Obama also suggested the administration may review plans to expand production areas offshore.

“We’re also exploring and assessing new frontiers for oil and gas development from Alaska to the Mid- and South Atlantic,” he said.

Obama reaffirmed his support for nuclear power in the wake of the crisis in Japan, where authorities are struggling to deal with a crippled atomic plant and radioactive contamination following an earthquake and tsunami. Nuclear plants provide about 20 percent of U.S. electrical power.

“It has important potential for increasing our electricity without adding carbon dioxide to the atmosphere,” he said. “But I’m determined to ensure that it’s safe.”

The U.S. also must exploit its reserves of natural gas in shale, he said.

Obama said he directed Energy Secretary Steven Chu to oversee work by the federal government, industry, environmental groups and states to develop recommendations on the use of fracking chemicals for shale extraction “without polluting our water supply.”

Hydraulic Fracturing

In hydraulic fracturing, or fracking, millions of gallons of chemically treated water are forced underground to break up rock and allow gas trapped in shale formations to flow. Shale gas in states such as Wyoming, Texas, Louisiana and Pennsylvania, once thought too expensive to tap, is now being drilled by hydraulic fracking.

In December, the Energy Department more than doubled its estimate of U.S. shale gas reserves to 827 trillion cubic feet. Shale gas, 14 percent of U.S. supply in 2009, is expected to account for 45 percent in 2035. The U.S. has enough natural gas to heat homes, run power stations and supply manufacturers for 110 years.

Environmental groups say fracking has contaminated groundwater and should be regulated by the Environmental Protection Agency. Obama said he wants more information on the chemicals used in fracking and will seek recommendations from experts on best practices to protect public health and the environment.

Broader Plan

As part of the broader plan to cut energy use, Obama is directing all government agencies by 2015 to purchase only vehicles that use alternative fuel or run by hybrid or electric power.

“The federal government is going to lead by example,” he said.

In the face of calls in Congress to cut federal spending, Obama defended a 12 percent increase, to $29.5 billion, in the budget for the Energy Department in fiscal 2012. He said government support has helped advances in alternative energy, including batteries and wind turbines.

Spending cuts in such critical areas “would eliminate thousands of private sector jobs, terminate scientists and engineers” and leave unfunded the “talent we desperately need for the 21st century.”

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Nicholas Johnston in Washington at njohnston3@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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