Big Oil's Headache Is Getting Worse

06/04/2010 10:11 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

As the Gulf spill worsens, public anger is starting to convince politicians that it could pay to vote against the oil industry and in favor of a new national energy policy.

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

On Tuesday, US Attorney General Eric Holder announced that the Justice Department had 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 ten-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 in 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 and “junk shot” efforts 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 they are doing something. So an angry Obama, sounding like a prosecutor, said, "My solemn pledge is that we will bring those responsible to justice."

The Drill and the Damage Done

The potential consequences for BP are huge. There's talk in Washington of seizing the company's US assets. BP's stock plunged an additional 15% on the news, 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.

After the 1989 Exxon Valdez disaster, Exxon Mobil (NYSE: XOM) pleaded 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 and of Transocean (NYSE: RIG) and Halliburton (NYSE: HAL), two of the other companies involved. The larger question is whether the current line of defense for the entire oil industry will hold.

The news I've heard so far—a just-announced moratorium on new offshore drilling in the Gulf, plus proposals to delay Royal Dutch Shell's (NYSE: RDS.A) drilling off Alaska's northern coast and to break up and re-form the federal Minerals Management Service—wouldn't constitute major changes in the way the oil industry does business. If that's the sum of changes after the worst oil spill disaster in US history, then the oil and gas industry should consider the $900,000 it gave to the Obama campaign in the 2008 election cycle (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 quite a bargain. (The figures are according to the Center for Responsive Politics.)

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 US 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 US supplied with energy.

But it's a very small and very logical step from the Obama-Holder tough talk of Tuesday to legislation that would punish the oil industry—and play to absolutely justified public anger—by promoting conservation, nuclear, solar, wind, ethanol, and biofuels.

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. Obama has just demonstrated that he gets it. Other politicians are doing the same calculations and coming to the same conclusion.

NEXT: As Toll Rises, So Do Odds of Action

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As Toll Rises, So Do Odds of Action

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

And 46% of Americans still favored expanded offshore drilling. That was 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 threatened a filibuster to kill legislation that would have increased industry liability in the event of a spill.

And in the long run?

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. (For more on that and a list of energy winners and losers if Congress does nothing, see the May 14 edition of Jubak's Journal.) 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 had thought then, and the odds that it will run for two or three more months so much greater, that I've revised 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, because it would force Republicans to vote for the legislation or to cast votes that Democrats will rush to portray as for Big Oil.

Senate Majority Leader Harry Reid, D-Nev., 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. 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 US support would pick up the slack, but so far, that support has been less than hoped.

That makes solar a leveraged sector in which a relatively small change in US policy could make a huge difference to individual stocks. I'd focus my research on these three solar companies: First Solar (Nasdaq: FSLR), a leading maker of thin-film solar panels; SunPower (Nasdaq: SPWRA), a US solar-cell-maker with its roots in Silicon Valley's chip industry; and Suntech Power (NYSE: 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 column.

At the time of publication, Jim Jubak owned shares of the following company mentioned in this column: Suntech Power.

See the complete Jubak’s Picks Portfolio here

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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