What’s the issue?
Recent press reports indicate that the Biden administration is concerned about the high prices of both oil and natural gas and may be seeking ways to lower those prices going into this winter.
Why does it matter?
Energy Secretary Granholm has stated in interviews that the administration is keeping all of its tools on the table to lower energy prices, including ordering releases from the Strategic Petroleum Reserve, and some think that includes exercising the president’s authority under the Defense Production Act.
What’s our view?
If this winter ends up being a cold one and there are supply shortages or price spikes around the country, the administration could feel pressure to act and the Defense Production Act has been interpreted by past administrations to provide the authority to take action even when there is no actual shortage in supplies.
Recent press reports indicate that the Biden administration is concerned about the high prices of both oil and natural gas and may be seeking ways to lower those prices going into this winter. Energy Secretary Granholm has stated in interviews that the administration is keeping all of its tools on the table to lower energy prices, including ordering releases from the Strategic Petroleum Reserve, and some think that includes exercising the president’s authority under the Defense Production Act (DPA). As we discuss today, past administrations, both Clinton and George W. Bush, held an expansive view of the president’s authority under the DPA. If this winter ends up being a cold one and there are supply shortages or price spikes around the country, the administration could feel pressure to act and the DPA appears to be the most widely applicable power that could be used.
The DPA was first enacted in 1950 and was designed to give the president some broad authority to enable the prosecution of the Korean War. The purpose of the Act is to enable the federal government to shape the domestic industrial base so that, when called upon, it is capable of providing essential materials and goods needed for the national defense. The DPA has always had a sunset provision in it that requires reauthorization by Congress. But it has been regularly extended over fifty times since its enactment.
As seen above, the three most recent extensions are some of the longest in history, and the most recent one in 2018 extended the Act for its longest period ever, out for an additional six years through 2025.
Over time, Congress has expanded the term “national defense” as defined in the DPA. Based on this definition, the scope of DPA authorities now extends way beyond shaping U.S. military preparedness and capabilities, as the authorities may also be used to enhance and support domestic preparedness, response, and recovery from natural hazards, terrorist attacks, and other national emergencies. Most importantly for our consideration, in 1980 Congress expressly added a provision to the DPA that specified that “‘energy’ shall be designated as a ‘strategic and critical material’ after June 30, 1980.”
Congress has also repealed a number of the authorities originally contained in the DPA, but the three primary ones that have stood the test of time are:
If the press reports are true that the president is meeting with the oil and gas industry to determine if there are voluntary measures that can be taken to boost production in an effort to reduce prices, those efforts may be taking place under this last authority granted in the DPA. But the truly worrisome authority probably lies in the first authority granted under the DPA and that is the ability to allocate and prioritize resources.
The allocations authority can be used to control the general distribution of a material, which includes all forms of energy, in the civilian market. However, according to annual reports filed with Congress under the DPA, this authority has not been used since the end of the Cold War. Conversely, the Department of Defense indicates that it has used the prioritization authority under the DPA “continuously and extensively” and estimates that it places approximately 300,000 orders with private companies that require those companies to give priority to the government contracts over any and all private orders for similar supplies.
The definition of “national defense” under the DPA is very broad and includes programs for military and energy production, homeland security, emergency preparedness and critical infrastructure protection and restoration. Using that authority, the Department of Homeland Security estimated that in the most recent year reported, which was 2019, it placed fewer than 400 orders that exercised the authority to place its orders in front of all private orders. Most of those orders were placed in support of hurricane and other disaster preparedness, response, and recovery activities. That report does not indicate whether the Department of Energy used this authority at all, but it appears that it did not.
However, there is one key example of the use of the DPA for an energy “emergency” that is instructive for how an administration might use the DPA to respond to a crisis, even when there is no actual shortage of the commodity in question, in this example, natural gas.
In January 2001, just as the Clinton administration was giving way to the George W. Bush administration, the state of California was going through a self-inflicted energy crisis involving the service territory for Pacific Gas and Electric (PG&E). As explained in testimony to Congress, under a poorly designed electricity market in California, the electric utilities in that state were forced to sell electricity at a fixed rate, but to buy it on the markets at a variable rate. On January 4, 2001, the California Public Utilities Commission granted a small increase in the price the utilities could charge, but otherwise denied any further relief, which led to a general downgrade in PG&E’s debt ratings to “low junk” status. This resulted in a number of its gas suppliers refusing to sell any more gas to PG&E without adequate assurance of payment, which PG&E could not provide. Without sufficient gas supplies, PG&E argued to the president that it would soon be unable to serve its core gas customers, and before that it would need to redirect all gas on its system away from natural gas-fired power plants to such core customers, which could result in a shortage of electricity. PG&E and the governor of California appealed to President Clinton for help in averting this self-made crisis and thus began a series of meetings to determine whether the president had any power to intervene to ameliorate the crisis.
As recounted in Congressional testimony by the Acting General Counsel for the Department of Energy, the administration first considered using the president’s powers under the Natural Gas Act that we discussed in Should Bad Business Decisions Create a National LNG Export Crisis?. According to that testimony, PG&E’s lawyers were arguing that the Natural Gas Act authorized the president to mandate sales of gas to PG&E, but attorneys for both the Department of Energy and the Federal Energy Regulatory Commission disagreed and so they turned next to the Defense Production Act.
In that Act, they found a perfect fit for an order that would require any entities that had recently been selling natural gas to PG&E to continue doing so. Under the priorities provision of the DPA, the reasoning was that the president may require performance on a priority basis of contracts or orders that he deems “necessary or appropriate to promote the national defense,” and that under that standard the president could consider the potential impact of shortages of energy supplies, especially since Congress had in 1980 specified that energy was a “strategic and critical material” within the meaning of the DPA.
Thus, on January 19, 2001, just one day prior to his leaving office, President Clinton issued an order directed to the group of suppliers that had provided PG&E natural gas on commercial terms during the 30-day period prior to issuance of the order to continue doing so. According to the Acting General Counsel, this approach was chosen as the least intrusive means that would achieve the public health and safety and defense preparedness objectives of continuing, for the near-term, natural gas supplies into PG&E's service area. The view was that the DPA was “broad enough to embrace mandates for priority performance of new orders to vendors, as well as priority performance of existing contracts.” Interestingly enough, President George W. Bush continued that order following his inauguration.
The current crisis is mostly one of price and not supply. But the situation in California was not really a supply crisis either — there was plenty of gas to meet California’s needs, the suppliers just were unwilling to sell to a company that appeared headed for bankruptcy. As prices for both oil and gas fluctuate this year, we could see pressure being placed on the Biden administration to take action even if a crisis is self-inflicted like California’s was in 2001.
We do not think that the government would need to exercise its authority under the allocation rules, which have been largely dormant since the end of the Cold War, as that was also not necessary in California in 2001. Instead, we could see the president exercising his authority to prioritize energy contracts for local distribution companies like Presidents Clinton and Bush did. The same could be done for crude with respect to refineries to make sure those contracts are given priority. Whether either of these actions will directly impact prices is unclear, but the pressure to seem “protective” of American consumers may be the most important aspect of any such action and the price impacts may be secondary.