The major tail risk event last April changed the course of U.S. and global energy policies, the commodity research chief for Credit Suisse said last week.
Tail risk events, which refer to the probability that a rare event will significantly and adversely affect the value of an asset or portfolio, was applicable to the Deepwater Horizon disaster — or “Macondolypse” — as Edward L. Morse said recently. Morse, who helms commodity research for Credit Suisse, spoke in late September at the Baker Institute Energy Forum held at Rice University in Houston.
“After achieving success with the health care bill, President Obama turned to energy, with a gesture to open deepwater,” Morse noted. “It was preparation for a realistic energy policy of a bridge to the future, based on more production and cleaner carbon…At that time ‘new energy’ compromises looked feasible.” But the oil spill changed all of that.
“In our opinion, what may be construed as the combination of administration criticism, increasingly acerbic, and divisive U.S. policies point to few energy policy initiatives at home or abroad,” he told the audience. “That’s not necessarily bad. In many respects ‘business as usual’ provides a better basis for transition to a post carbon-intensive world than many policy initiatives.”
Still, reactions to the offshore tragedy “are setting back business as usual in one of the critical areas of both U.S. and global production growth: the deepwater.” The United States had become a leader in deepwater production and was providing an estimated 35% of global deepwater output, the Credit Suisse analyst noted.
“U.S. deepwater was poised to double later this decade, along with global deepwater, where the constraint was not access to acreage but access to rigs. Like shale hydrocarbons, deepwater production has been a critical bridging fuel to a lower carbon future.”
The Macondo well explosion also came in the midst of significant upheaval at the former Minerals Management Service (MMS), Morse said. That upheaval didn’t surprise the Credit Suisse analyst.
“In our view U.S. management of deepwater was akin to a Third World country — riddled by corruption scandals and conflicts of interest.” Reform of the MMS should have been on the Obama agenda, he said, because ahead of the presidential election in November 2008 the Department of Interior inspector general had reported that MMS had internal problems.
“The good news about Macondo is the new Bureau of Ocean Energy Management, Regulation and Enforcement. The bad news is the delay in deepwater drilling and the impact on global supplies.”
For now domestic energy “is in the hands of the regulators,” said Morse. “New energy legislation is in gridlock and it will remain so after November [elections]…” The Environmental Protection Agency (EPA) now holds the cards that are “critical to gasoline demand, shale development, coal burn and the future mix of power generation fuels.”
Whatever regulations are proposed by EPA “will likely be subject to lawsuits. In a society split by major energy issues, environmentalists and industry will likely turn to the courts to press their interests…” Environmentalists, he noted, were successful in upending EPA’s plans for the Clean Air Interstate Rule to set an emissions trading system for nitrogen oxide and sulfur dioxide released by coal-fired plants (see Daily GPI, Dec. 24, 2008).
Meanwhile, the U.S. government appears to have abandoned any international strategy for energy, said Morse.
The “one clear policy stance” has been sanctions on Iran, but “China and Russia pose major challenges to the rules of the game. Both of those countries view energy as critical national interest issues and they see the use of energy as instruments of foreign policy.”
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