The Gulf oil spill is so bad that maybe, just maybe, energy legislation is alive again

06/04/2010 8:30 am EST


Jim Jubak

Founder and Editor,

You knew this was coming once BP (BP) admitted that the top kill effort to stop the flow of oil in the Gulf of Mexico had failed.

On Tuesday June 1 U.S. Attorney General announced that the Justice Department has opened a civil and criminal investigation into BP and other companies involved in the Deepwater Horizon disaster. Holder’s announcement came just hours after President Barack Obama promised in a 10-minute White House address to prosecute any parties found to have broken the law.

What comes next? More politicians who can tell which way the wind is blowing and feel that they need to do something before the storm blows them away. I think the need to be seen doing something might even result in action in Washington to move the country away, even if only so slightly, from its dependence on oil.

Stranger things have happened when politicians are running scared.

There’s no quick end in sight to the flow into the Gulf. BP doesn’t have a real solution—the oil company is next going to try a new version of the containment dome that failed to work before the top kill failed to work. And the truth is that the federal government is completely dependent on the oil company and its service and drilling contractors for any equipment that might stop the flow.

But that hasn’t stopped the buildup of political pressure on the Obama administration and other elected officials in Washington to do something—or at least to sound like it is doing something. So an angry President Obama, sounding like a prosecutor himself, said “My solemn pledge is that we will bring those responsible to justice.”

The potential consequences for BP are huge.

There’s talk in Washington of seizing the company’s U.S. assets. BP’s stock plunged another 15% on the news of the Justice Department investigation and the company is now cheap enough that somebody in the oil industry could take a run at acquiring it. (Although it’s unlikely that anyone wants to acquire the Deepwater Horizon catastrophe.)

The Justice Department investigation will look for violations of the Clean Water Act, the Oil Pollution Act of 1990, the Migratory Bird Treaty Act, the Endangered Species Act, and the Refuse Act, which covers discharges into waterways.

In the 1989 Exxon Valdez disaster ExxonMobil (XOM) pled guilty to criminal violations of the Clean Water Act, Migratory Bird Treaty Act, and Refuse Act.

But more is at stake here than just the share price or indeed the future of BP, Transocean, and Halliburton. The larger question is whether or not the current line of defense for the entire oil industry will hold.

The proposals I’ve heard so far--for a 6-month moratorium on new leases for off-shore drilling, for delays in Royal Dutch Shell’s (RDS) plans for drilling off Alaska’s northern coast, for breaking up and reforming the Minerals Management Service—don’t constitute major changes in the way that the oil industry does business.  If that’s the sum of changes after the worst oil spill disaster in U.S. history, then the oil and gas industry should consider the $900,000 it gave to the Obama campaign in the 2008 election cycle, according to the Center for Responsive Politics (John McCain’s campaign got $2.4 million) and the $12.7 million the industry has given to Congressional campaigns in the 2010 election cycle (again according to the Center for Responsive Politics) quite a bargain.

So far, so good, from the oil industry’s point of view There’s been remarkably little rhetoric—and even less action—in Washington about changing the rules in the energy sector. The oil industry has so far successfully kept any talk about crash programs to reduce U.S. dependence on oil or about an effort to push ahead aggressively on developing alternatives to oil off the table. This is indeed a terrible disaster, the industry argument goes, but we have to drill in the Gulf to keep the U.S. supplied with energy.

But it’s a very small and very logical step from the Obama/Holder tough talk of June 1 to legislation that would punish the oil industry—and play to absolutely justified public anger—by promoting conservation, nuclear, solar, wind, ethanol, and bio fuels.

It’s never wise to underestimate the power of campaign contributions to keep politicians in line, but it looks like politicians are finally starting to realize that anger is running so high that they can’t simply vote their self-interest in this crisis. There are more votes right now up for the taking for politicians who go after the oil industry than there are dollars in the industry’s campaign and lobbying budgets. President Obama has just demonstrated that he gets the new political math. Other politicians are doing the same calculations and coming to the same conclusion.

It’s probably not very clear to politicians what voters want because voters themselves don’t seem to know. In a poll conducted by CBS last week 70% of Americans disapproved of the BP’s efforts to stop the flow of oil. (What about the other 30%? What exactly are they waiting for before they make up their minds?)

But 46% of Americans still favor expanded offshore drilling. That is down from 64% in favor in 2008. I suspect the number will be even lower by August if the oil is, as now projected, still flowing.

In the short run I think that means we can expect a lot of flailing about by politicians looking for some way to score points. So Alaska Senator Lisa Murkowski, the senior Republican on the Senate Energy and Natural Resources Committee, opened a recent committee hearing with a statement saying that she planned to make sure BP paid everything it was obligated to pay. Murkowski is one of the top five senators in contributions from the oil and gas industry in the 2010 election cycle. She recently blocked legislation that would have increased oil industry liability in the event of a spill.

And in the long run?

Just about three weeks ago I thought that the Deepwater Horizon disaster had killed all chance of any legislation on global climate change and seriously reduced the chances for any kind of national energy legislation at all. (For more on that thinking and a list of energy winners and losers if Congress does nothing, see my post My thinking then was that since the only way to bring oil-state Democrats and maybe a Republican or two on board was to offer expanded offshore drilling, and that since the Gulf oil disaster had killed that possibility, then energy legislation was dead too.

The disaster is so much worse than I thought on May 14 and the odds that it will run for another two or three months so much greater that I’d revise my calculation of the odds against a national energy bill. I still wouldn’t call its chances good but I now think there is a chance. The rising tide of public anger seems to have convinced the Democratic leadership in Congress that bringing a bill to the floor for a vote is a politically viable idea since it would force Republicans either to vote for the legislation or cast a vote that Democrats will rush to portray as for big oil.

Senate majority leader Harry Reid (D-NV) held a special meeting of the Democratic caucus to plan strategy right after the Memorial Day recess.

So if I’ve changed my thinking on the chances for a bill, have I also changed my thoughts on the winners and losers in the energy sector?

I think it’s way too early to go out on a limb on any stock in the sector. The odds are still unfavorable on a bill and the shape of any legislation is anyone’s guess. Add in the current downward bias in the stock market and I’d certainly wait rather than buy.

But while I’m waiting, I’d put some time into researching stocks in the solar sector. They’ve been heavily beaten up by the euro debt crisis and delays in any big expansion of solar credits in the United States. Debt strapped European governments—and here Spain is the key—look like they will cut their budgets for supporting the purchase of solar panels and the production of electricity from solar installations. The industry had been hoping that expanded U.S. support would pick up the slack, but so far that support has been less than hoped.

Which makes solar a sector where a relatively small change in U.S. policy could make a huge difference to individual stocks. I’d focus my research on these three solar companies: First Solar (FSLR), a leading maker of thin film solar panels, SunPower (SPWRA), a U.S. solar cell maker with its roots in Silicon Valley’s chip industry, and Suntech Power Holdings (STP), a Chinese solar producer that’s moving strongly into manufacturing and selling in the United States.

I’m going to add all three of these stocks to my watch list with this post.

Full disclosure: I own shares of Suntech Power Holdings in my personal account.
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