By John W. Schoen Senior producer
updated 6/23/2007 12:50:01 PM ET 2007-06-23T16:50:01

This week’s Senate approval of a bill to reshuffle billions in subsidies and tax breaks for the oil, corn, coal, power and auto industries marked an important milestone in a sweeping overhaul of energy policy. But with the House preparing its own bill, and final details yet to be hammered out in a joint committee, the battle over how to carve up the energy pie is still well underway.

With Democrats now controlling Congress, the new legislation largely reverses the priorities set forth in the Energy Policy Act of 2005, which gave tax breaks to the oil industry to help spur production of oil and natural gas

Now, Democrats are leading a move to take back tax breaks from Big Oil, spend more on alternative energy and provide tougher conservation measures — including higher mileage standards for new cars, the first increase in nearly 20 years. That provision — calling for a 40 percent increase in average fleet mileage by 2020 — could yet be watered down in any final bill.

Diverting tax breaks from oil companies became easier after a string of record industry profits coincided with rising prices at the pump. But critics say the effect will likely be similar to a move to raise oil taxes in the 1970s.

“What it did was drive down domestic production and increase our dependence on foreign oil,” said John Berthoud, president of the National Taxpayers Association. “The same thing is going to happen again.”

That argument helped the oil industry defend some of its tax breaks. Senate Democrats failed to win support for tax package that would shift roughly $30 billion away from subsidies and tax breaks for oil and natural gas production and use the money to subsidize renewable fuels and conservation measures. The final bill scaled that package back to $15 billion, after independent oil companies from around the country pressured their home state senators to shoot down a measure that would have raised their taxes.

"No matter how you slice it, there's a lot local politics behind national energy policy," said Kevin Book, who follows energy policy as an analyst at Friedman Billing and Ramsey.

With a pared-down tax package, Congress now faces choices among a long list of industries lining up for money. Ethanol subsidies have enjoyed wide support from virtually any state where you can grow corn; the Senate bill calls for a fivefold increase in output by 2022, including measures to promote so-called “cellulosic” ethanol made from wood chips, grasses and other plants.

Coal-producing states are pushing for increased spending on new plants to produce gasoline using established “coal-to-liquids” technology. Producers of wind and solar power want tax breaks and laws to promote greater reliance on renewable energy; Senate Democrats failed to win approval for a requirement that utilities get 15 percent of their power from renewable sources by 2020. Transportation companies are looking for grants and loan guarantees to promote research on fuel-efficient technologies like hybrids, including development of better batteries. Utilities are also looking for federal funding for a new generation of cleaner coal technology.

The Senate energy bill also included provisions that will play well with voters, but will likely have little impact on energy prices. A federal price gouging law — similar to laws already on the books of most states — would make it illegal to charge an "unconscionably excessive" price for gasoline. But the measure could only be invoked during a declared “supply emergency” — which have historically been invoked at the state level only to cover short-term supply shocks like those caused by a hurricane. The bill also allows the Justice Department to sue OPEC producers for price manipulation, a move that would have no impact on the cartel’s quotas. In any case, the White House has threatened to veto both provisions.

The energy brawl now moves to the House, where Democrats enjoy a wider majority. House Speaker Nancy Pelosi, D-Calif., has said auto fuel efficiency will remain a priority. But Michigan Democrat John Dingell, who heads the House Energy and Commerce Committee, has said mileage standards won’t be considered until the panel takes up the issue of global warming in the fall. And any House bill will have to go back to a House and Senate committee before it can be sent to the White House.

“It’s really hard to say how long it will take because these energy bills typically drag on a lot longer than people originally think," said Ben Lieberman, a senior policy analyst at The Heritage Foundation.

Last time Congress passed a comprehensive energy bill, it took five years and three attempts before reaching an agreement. But along the way, key provisions made it into other pieces of legislation, a pattern that may be repeated this time around.

“There are a lot of provisions in this week’s Senate debate that got left on the cutting room floor,” said energy analyst Book. “And they’re going to come back.”

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