Friday, July 4, 2008

Are High Energy Prices Shifting Attitudes on Energy Policy?

A Conservative Newspaper's Point of View

The editors of Investor's Business Daily argue in favor of increased domestic energy production in this editorial, "Energy Myths". Excerpts:

Many in Congress seem either disconnected from reality or intentionally disingenuous about our energy crunch. They have well-honed negative responses to common-sense ideas about solving our energy crisis, particularly drilling for more oil.

These responses are based on a number of widely held myths. Sadly, they've become the backbone of the Democrats' energy policy. They include:

• "We can't drill our way out of our energy crisis."

Actually, we can. As we've noted before, conservative estimates put the total amount of recoverable oil in conventional deposits at about 39 billion barrels. Offshore, we have another 89 billion barrels or so. In ANWR, 10 billion barrels.


ANWR alone is expected to yield 1 million barrels of oil a day. Now make the highly conservative assumption that we're able to get a like amount of oil from the other sources — for a total increase of 3 million to 4 million barrels of oil a day.

That's an enormous rise in oil output. Today, we produce just under 8 million barrels of oil a day from domestic sources. So we could, in effect, boost our energy output 50%, and thus our energy independence, by bringing an additional 4 million barrels of oil to thirsty world markets each and every day.

By the way, those calculations don't include the trillions and trillions of cubic feet of natural gas found in the same locations, which, along with nuclear power, could be used to fire our power plants.

Are more Americans coming around to the IBD's point of view?

Apparently yes, according to the results of the Pew Poll released this week. As energy prices have gone up this year, support for domestic energy exploration and production has increased:

More interestingly, support for these policies has apparently more than doubled among self-categorized liberals:

Implications of this Shift in Attitudes

The first question is whether this shift in attitudes will lead to a shift in federal energy policy, and if so, when. I imagine that if energy prices stay high long enough, and support builds among the public for increased domestic energy exploration and production, federal policy will eventually change accordingly. There are a few factors that could delay this process though:

- A cyclical correction in oil prices could reduce the political pressure and keep this issue on the back burner.
- Those who have placed their bets on alternative energy may continue to oppose expanded domestic oil & gas production. Politically-savvy alternative energy entrepreneurs such as Vinod Khosla and Al Gore likely will continue to advocate for increased federal funding for alternative energy instead, as will large companies that have been positioning themselves to benefit from an expected surge in green energy initiatives (e.g., GE).
- Affluent political donors tend to be to the left of the general public on energy issues. See, for example, the Rockefellers' recent proxy challenges against Exxon Mobil.
- The current political environment. Recent polls favor Obama to win the presidency, but even if McCain wins, his views on energy policy don't appear to be radically different than Obama's, notwithstanding McCain's recent flip-flop in favor of offshore drilling. McCain still opposes drilling in ANWR, and McCain styles himself as a 21st Century Teddy Roosevelt, the Conservationist, Progressive president who busted up Standard Oil and created scores of national parks. In either case, Congress is likely to have a stronger Democratic majority next year, and the current Democratic Congressional leadership remains opposed to expanding domestic energy production.

The second question is, assuming the political stars align, and policy changes to expand domestic energy exploration and production, what effect will that have on energy prices? The IBD editorial I excerpted above predicts that this would immediately lower energy prices, since it would raise expectations about future supply. I'm skeptical about this for a couple of reasons. First, once new federal lands and waters are opened to exploration, it might take a couple of years of mapping and exploratory drilling to get a better sense of the probably supply; second, large oil finds in recent years (e.g., the discoveries off the coast of Rio de Janeiro) haven't seemed to put much downward pressure on oil prices.

The upshot of all of this, from my perspective, is that although shifting attitudes on energy policy may bode well for increasing energy supplies in the U.S. over the long-term, it doesn't seem that they will have much impact on supplies or prices over the next five years. So I remain confident that, although we'll probably have a cyclical correction or two along the way, the secular bull market in oil will continue for the next five years.


Daniel said...

I think your conclusion is the right one--and it makes what people in the US think today of lesser importance for me.

I wouldn't be dogmatic about it, but I'd say that it's fair to assume new areas aren't open for exploration any time soon. Even should Congress do the unthinkable environmental groups and local politicians would stall and extort all they can.

And companies, who I hope know the above, plus factor in the chance that their investments could be nullified given another change in political whims, wouldn't rush in.

They'd instead weigh the potential returns with other choices like buying back undervalued shares, and would probably be inclined to go with the lesser risk latter than the former.

Btw: haven't we seen these sort of polls every year or so as oil makes its new highs? A lot of these people remind me of the kids in school that used to pray for God to let them slide by on one test and they'll promise to study hard the next time. But as soon as the test passes, their promise is forgotten (until a new one has to be made).

Your comment on a near term drop in oil prices would have the same effect I think. Everyone would wipe their foreheads and say: "Whew, I almost did something real stupid in supporting that bill to allow more drilling. No reason to do that now.."

DaveinHackensack said...

Looks like we're on the same page here. A cyclical correction in oil could provide a good buying opportunity for E&Ps, and, hopefully, a good selling opportunity for those of us who still own shares of pure-play refiners.