More Oomph for Energy

With the gas crunch, the White House may get closer to the policy it wants

Who would have predicted it? Four months into his term, George W. Bush is earning his spurs in an unlikely role: He is a master of disaster.

When the economy began to weaken, the White House was ready. Bush stoked the public's economic anxiety to build support for a tax cut that had languished at barely 50% support in the polls. The result: House-Senate conferees are now putting the finishing touches on a $1.35 trillion tax bill that gives the President much of what he wanted.

Now, Bush and Vice-President Dick Cheney are repeating the strategy. They're warning of an energy "crisis" to win backing for an ambitious multiyear energy policy. Even the plan's architects concede it does little for short-run dislocations. "This is a long-term problem," says White House economic coordinator Lawrence B. Lindsey. "It is not something we can wave a magic wand and solve."

Still, Bush's approach to the crunch bears a close resemblance to tactics used in the tax fight. Step One: Declare a crisis. Step Two: Blame "eight years of neglect" by the prior Administration. Step Three: Promote a long-term agenda that transcends the immediate problem. Step Four: Brand opponents as naysayers.

Will it work the second time around? While the White House would like to trigger the same kind of stampede it used in the tax battle, the outcome of the energy debate may be less of a clear-cut victory for Bush. Congress stands to be a lot more assertive in shaping a response to the energy mess. And despite the slim GOP majority, Republicans won't rush into a lock-step embrace of Bush's blueprint.

CUSHION. That's because lawmakers view energy through a regional rather than an ideological prism. Northeast Republicans, led by Maine Senator Susan M. Collins, insist the policy must reflect more conservation concerns. Western Republicans think more help is needed to cushion California's sky-high prices. And coastal-state GOP governors--such as Florida's Jeb Bush--vow to fight offshore drilling.

Still, sounding the alarm can't hurt--and many agree with Administration warnings about energy dependence and inadequate infrastructure. Economists say that soaring fuel bills pose big risks for any rebound. Indeed, higher energy costs could wipe out the $300 most people would get over the next two years from a tax cut.

But it's unclear how long the current squeeze will last. Higher prices have already begun to bring supply closer in line with demand, as oil and gas producers boost output. In fact, by mid-May, U.S. crude-oil inventories were at their highest level since August, 1999. Sky-high electric rates have also spurred a wave of power-plant construction, with the North American Electric Reliability Council, a national oversight body, projecting that capacity additions will grow at 2 to 3 times the rate of demand over the next several years.

Surprise: The market works. But if that's the case, what's the rationale for the Administration's energy strategy, unveiled by the President on May 17 with a splashy appearance at a St. Paul (Minn.) alternative-energy plant? Bush hopes to leverage the crunch to shift the policy balance from the GOP'S environmental foes to his pro-development friends.

Indeed, the Bush-Cheney plan is an amalgam of pro-production ideas that Hill Republicans have long advocated. Among them: streamlining environmental reviews to speed plant construction, boosting nuclear and coal-fired power plants, building easier siting of electrical lines and gas pipelines, and opening the door to more oil and gas exploration on federal lands.

Not surprisingly, it's all boffo to industry. Even those who agree that Bush may be playing up energy woes a bit to advance his agenda don't see the harm if he moves the country toward better policies. "He's striking while the iron is hot," says Fadel Gheit, a petroleum analyst at New York's Fahnestock & Co.

Bush's supply-side emphasis "is the right policy," according to John Rowe, co-CEO of Exelon Corp. (EXC ), the nation's largest nuclear utility. Adds John D. Correnti, CEO of Birmingham Steel Corp. (BIR ): "You've got to make a decision between the environmentalists and what's good for the country."

Still, the rising public perception that his team is environmentally insensitive has compelled the President to boost some energy-efficiency measures to his plan. The proposal now includes tax credits for hybrid-powered cars and renewable energy, agency studies of efficiency guidelines for buildings and appliances, cuts in government fuel use, and a directive to the Transportation Dept. to weigh stricter auto fuel-economy standards. But since many of the steps are modest or simply feasibility studies, Green activists aren't mollified. "The energy crisis is being whipped up as an excuse to roll back environmental regulations," says Sandra Schubert, legislative counsel for Earthjustice Legal Defense Fund.

BEYOND BASHING. So how will Hill Democrats respond to the Administration's proposal? Party leaders plan to reprise the populist rhetoric that they used in the tax fight, this time in an attempt to tag Bush and Cheney as tools of Big Oil. On May 15, House Minority Leader Richard A. Gephardt (D-Mo.) preemptively unveiled his own plan. Its key elements included temporary caps on wholesale electricity rates for California, tapping the Strategic Petroleum Reserves to smooth oil-price spikes, stiffer auto mileage rules, loads of tax credits for energy efficiency and alternative sources, and an antitrust probe of oil-company price fixing.

Nevertheless, moderate Democrats believe that to play a constructive role, the party must meet the White House halfway. "I don't think it's enough for us to just bash Bush and Cheney as `bad oilmen,"' says Representative Adam Smith (D-Wash.). Centrists want more money for efficiency tax credits and expanded federal R&D on clean technologies--which could add billions to the tab.

So what's the outlook for the Wildcatter-in-Chief's proposals? The noisiest fight will swirl around proposals to drill in federal wilderness. That could doom plans to open the Arctic National Wildlife Refuge to exploration. But in a compromise, access to other federal lands might be increased. "We are shooting ourselves in the foot" by keeping such reserves off limits, says Robert J. Allison, chairman of Houston's Anadarko Petroleum Corp. (APC ) "We can [extract oil and gas] in an environmentally sensitive way."

When it comes to tax incentives, Congress is likely to see Bush's opening bid--and raise him a ton. With a push from Democrats and conservation-minded GOP moderates on both coasts, a raft of Green tax credits may be added to the White House blueprint. "Energy efficiency has to be a significant part of the equation," says Representative Greg Ganske (R-Iowa). But prospects for tax breaks for oil and gas drillers are dicier. With polls showing a strong current of public concern about oil-company "profiteering," Bush and Cheney opted to steer clear of the issue.

The price could grow even larger if Republicans, led by Senate Energy Committee Chairman Frank H. Murkowski of Alaska, get their way. Murkowski, for one, wants to reduce U.S. dependence on foreign oil by 50% by 2010, mainly through tax incentives for construction of power plants and refineries.

In the end, Congress is likely to give Bush a decent chunk of what he asked for--and lots of things he didn't. The result could be a policy pick-me-up for an energy industry beleaguered for two decades. It could be a nice tonic for the Oil-Patch President, as well. Sure, the Administration must make it past potential crises looming this summer, from a further spike in gas prices or continued turmoil in California's electricity meltdown. But if he can pass a package by fall--when market forces start to drive power bills down, the result could be another case of Bush overcoming an unforeseen challenge--and confounding foes in the process.

By Lee Walczak, with Lorraine Woellert, Rich Miller, and Richard S. Dunham in Washington; Peter Coy in New York; Christopher Palmeri in Los Angeles; and bureau reports

    Before it's here, it's on the Bloomberg Terminal.