Oil Spill Trashes Energy Policy, Too

05/14/2010 9:19 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Blame politics: The devastation from the Deepwater Horizon well makes a blanket US energy policy even less likely. Here's who wins and loses in the new energy reality.

The waves of problems created by the deadly explosion at Transocean's (NYSE: RIG) Deepwater Horizon oil well continue to wash over the economy.

The reputations of BP (NYSE: BP), the owner of the oil, Transocean, the owner and operator of the rig, and Halliburton (NYSE: HAL), the company that at the time of the explosion was pouring the concrete that was supposed to seal the well, are in ruins. Also devastated are the wetland ecologies of the Gulf Coast, the fishermen and shrimpers who make a living from these waters, and the communities that depend on the Gulf of Mexico for their economic lifeblood.

And somewhere in that list of casualties you should add national energy policy. Certainly, any national energy policy that's built on cap and trade or a carbon tax or any other mechanism for fighting global climate change is now dead. And maybe even the kind of smaller, focused energy bill that Senate Majority Leader Harry Reid, D-Nev., started to talk up last weekend.

One of the strange consequences of the Deepwater Horizon disaster is that it has reduced the chances for any kind of comprehensive energy plan in the near future to between slim and none.

It's not because the United States doesn't need a national energy policy. It does, desperately. The disaster in the Gulf of Mexico just makes that clearer.

Blame the politics of energy in Washington. The disaster makes it politically impossible to open new areas of the US continental shelf for oil drilling, which had been proposed by the Obama administration and Republicans in Congress before the explosion. And without increased drilling as a bargaining chip to offer, there's no way to build the coalition necessary to pass an energy bill that focuses on fighting global climate change like the American Power Act, introduced by Senators John Kerry, a Massachusetts Democrat, and Joe Lieberman, an independent from Connecticut.

The 987-page plan once included provisions for expanding offshore oil exploration and production, but those were stripped out of the version introduced May 12 and replaced with a provision that would give states the right to veto any drilling plans. That would have the effect of limiting drilling off the Atlantic and Pacific coasts.

It's hard to see how Kerry and Lieberman can bring oil-state Democrats and any Republicans at all on board with that language.

I can see a chance for a bill that creates something like a scaled-down version of a national energy policy, but not the version that Reid highlighted over the weekend as his alternative to the Kerry-Lieberman plan. Reid seemed to indicate that he'd like to move forward on a reduced plan modeled on the legislation that the Senate Energy and Natural Resources Committee approved last June with four Republican votes.

But I don't see how even that bill flies in the current post-disaster environment. The smaller plan would include a national mandate that utilities generated a percentage of their electricity from renewable sources, stepped up energy-efficiency standards, incentives to build out the power supply grid, and subsidies and loans for energy production from such low-carbon sources as solar and wind.

Yet it also includes provisions that would expand oil and gas drilling in the Gulf of Mexico. That was a critical feature in gaining the bill the votes it needed in committee. With those drilling provisions stripped out, as is likely in today's post-Gulf-disaster environment, I think this bill, too, goes nowhere.

Smart politicians could cobble together a new coalition that used support for policies to encourage the use of natural gas as the new bargaining chip to replace the drilling bargaining chip. And I think smart politicians could recast an energy bill to harness some of the anger the oil spill has generated. An effort that appealed directly to our national interest in increasing domestic security by reducing dependence on foreign oil and on increasing US competitiveness and employment could help sell such a proposal.

Smart politicians are always in short supply, however, and I think the odds against this effort are formidable. They're not impossible, but they remain unlikely as long as politicians stay focused on using the emotions of the moment to bash some target.

Here's how to handicap the likely winners and losers in the post-Gulf-disaster environment.

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Winner - Nuclear Power: The industry has $18.5 billion in loan guarantees from the federal government in place and $36 billion in guarantees in the administration's proposed 2011 budget, so the industry really doesn't need comprehensive energy legislation to move from planning to construction. A favorable regulatory environment is about all the additional support the industry needs to push ahead, and that is pretty much guaranteed. The stocks to look for in this sector are those of companies building the reactors, such as Shaw Group (NYSE: SHAW), Fluor (NYSE: FLR), and Flowserve (NYSE: FLS).

Winners - Hybrid Carmakers and Battery Producers Serving That Market: The incentives here, as with nuclear power, are already in place, in the form of scheduled increases in fuel-efficiency standards. One of the easiest and most profitable ways for a carmaker to increase miles-per-gallon averages across its fleet is to increase sales of hybrids. Companies to watch here include Johnson Controls (NYSE: JCI) and A123 Systems (Nasdaq: AONE). A123 shares have recently been hammered and then hammered some more. (For the reasons the stock might be nearing a turnaround, see this post on my Web site.)

Winner - Natural Gas: At current low prices of less than $5 per million British thermal units, natural gas doesn't need subsidies to encourage utilities to switch from coal or oil to gas for generating power. If subsidies to encourage the use of natural gas in the transportation sector were part of any new energy plan, that would be another plus. I'd look at low-cost producers such as Ultra Petroleum (NYSE: UPL) and pipeline companies such as Energy Transfer Partners (NYSE: ETP) as picks in this sector.

Winners – Ethanol Makers: If the US government isn't going to invest in the infrastructure necessary to increase use of natural gas in transportation or to improve the national electricity grid so that electric cars become a key source of storage during nighttime periods of low demand, then ethanol becomes an increasingly attractive alternative. (For how that would work, see the Rocky Mountain Institute's Smart Garage plan.)

Why? Because ethanol is domestic: It replaces oil, and the farm lobby is powerful. The drawbacks of corn-based ethanol would make any extension or increase in support to the US farm industry politically contentious, though. My guess is that approval would require horse-trading that would include provisions to increase access of Brazilian sugar-cane-based ethanol to the US market and increased support for pilot projects to produce biofuels from non-food crops. I'd keep an eye on Cosan (NYSE: CZZ), one of Brazil's biggest producers of ethanol. (For more on Cosan, see the section on Brazil in this column.)
 
Modest Loser - Land-Based Wind Power: I think the costs of land-based wind power have come down enough so that, with modest support from states mandating that utilities buy green power, the sector will keep growing in the United States. However, the fastest growth isn't coming from the US, but from overseas. It would certainly help if US demand picked up enough to offset declines in the Spanish market, but I think growth in countries such as China and India is robust enough to keep the sector humming.

Because a lack of US incentives will hurt domestic wind turbine players such as General Electric (NYSE: GE), I'd look overseas in this sector to Vestas Wind Systems (OTC: VWDRY). The weak euro has made the company's products significantly cheaper, and with that advantage, the company has signed new orders in China. (For more on other European stocks that benefit from the weak euro, see my post "Looking for euro stock bargains?")

Big Loser - Ocean-Based Wind Power: The costs of offshore wind power are significantly higher than those of land-based systems. Without federal subsidies, I don't think utility ratepayers will be willing to see their electric bills increase enough to make offshore projects competitive.

Big Loser – Solar: The global solar industry is facing a drop in demand later this year when the German government cuts its subsidies for solar power. With prices already headed lower because of a surge of new producers entering the market, the sector could use a boost from a pickup in US demand. A stable, long-term schedule of financial incentives for solar power from the federal government would do the trick. But in the absence of that kind of domestic demand incentive, I think US and European solar cell-producers will struggle as they lose share to Chinese and other Asian producers able—or at least willing—to sell at lower prices.

Quite frankly, I hope my cynicism about Washington politics is excessive. I think a failure to produce a national energy policy is a mistake that costs the United States jobs and reduces our national security. So I sure hope my handicapping of energy sectors is wrong.

But I fear that just as you can't be too rich or too thin, you can't be too cynical about Washington.

At the time of publication, Jim Jubak owned shares of the following companies mentioned in this column: A123 Systems, Cosan, Energy Transfer Partners, Flowserve, Johnson Controls, Transocean, and Ultra Petroleum.

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.

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