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 https://jubakpicks.com/2010/05/14/the-disaster-in-the-gulf-has-killed-the-chance-for-a-national-energy-policy-here-are-the-winners-and-losers-if-im-right/) 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 https://jubakpicks.com/watch-list/ with this post.
Full disclosure: I own shares of Suntech Power Holdings in my personal account.
Jim,
I was worried bout SPWR because of the inaccuracies of accounting in the phillippines operation. According to SPWR’s investigation, it was just an isolated mistake (see http://investors.sunpowercorp.com/releasedetail.cfm?ReleaseID=453338) .
So do you think it is safe to say that overall the books are not overly cooked? This security is high on my watch list.
The problem is that oil and gas are coming out of the well pipe at very high velocity and pressure. The pressure is so great that they could not force drilling ‘mud’ and concrete all the way from the ocean surface down the open pipe. There was a big “head” of pressure in that 5000 ft column of mud to the surface, but the oil and gas pressure was too great and blew it back out the pipe.
The oil and gas have been down there from dinosaur time. The reservoir is sealed by something like 13000 feet or rock which is why the oil and gas are still there.
The well pipe went down thru 5000 ft water and 13000 of feet of rock into the reservoir, which is why it takes months to drill a new well and intercept the blown one.
Exploding something next to the pipe in rock would not magically seal the pipe. It would just fracture it into many pieces, and make a complete leaking mess. The pressure is too great to seal it with a pile of loose rock – concrete did not work.
If the well were above ground, they could cap the well by putting a new spool of pipe over the leaking well pipe with an open valve on top. They would then seal the new pipe over the old one with a huge clamp. Then they would shut in the well by closing the valve. Apparently they cannot clamp something to this stub of pipe sticking out of the BOP.
Not a driller but I know a few and have been in the oil biz for 25 years.
FrozenFoot,
You say explosives won’t work, but none of your points address WHY they won’t work.
1. The presence of fire is irrelevant.
2. Certainly the water pressure at that depth will have to be considered in determining the amount and placement of the explosives, but doesn’t render them moot.
3. The presence of humans is irrelevant. We’ve used predator drones in Afghanistan and Pakistan with much success. Machines can be easily programmed to place explosives.
4. The pressure of oil and gas coming out is another factor to be considered. See #2.
5. If you can’t seal the pipes manually, then the use of explosives becomes an even better idea.
Thank you, Jim. Something good has got to come out of this . . .
Jim, when you stated, “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” and link that to campaign contributions, that is buying votes to keep big oil gushing, it is so sad but so true — in America, money talks everybody else walks (the recent Supreme Court ruling on corporate campaign contributions solidly etches that concept in stone.)
But, based on my brief history here (since 1961), long-range “policy” of any type has always been anathema to both parties, particularly the Republicans. After all, when clear policy objectives are known, the opportunity for corporate lobbying ($$$) for its interests are, as a result, limited. No, that won’t fly, not here in the good old USA.
As for your hope that the solar industry will now take off, I doubt it. Europe has been subsidizing (oh my god, socialism!) solar for decades but with their fiscal problems, this support will greatly diminish.
As for the MMS, they are, like the BLM, nothing more than a conduit to make life easier for big oil — they waived an EIS for Deepwater Horizon, their regulation of drilling (oh my god, governmental intrusion in the free markets!!) and requirements for emergency response pale against those required in similar deep-sea drilling operations in the North Sea. BP, RIG, HAL to blame for this disaster (er, “natural disaster”, Obama’s Katrina – are you f**king kidding?) Nah, must be Obama’s fault – duh.
Nothing will happen on “alternative energy” unless and until big oil – i.e., “big money” – controls where the profits go.
I like Ed’s idea of sealing the well with exlosives. Not nukes, and not the resevour itself. The drilling starts at the seafloor & continues for 2 miles to the resevour. So, a couple 10,000 pound bunker busters somehow planted 500 feet below the seabed, very close to the “hole” just might seal it off. Then do an angled drill to the resevour to empty it. Might not work either, but what other options have we?
FrozenFoot
Thanks for nipping that one- “blow it up”- in the bud, and shedding a little real insight and logic on this disaster.
time to stop digging Ed
if a well is on fire (above ground where oxygen is needed for combustion) they will use an explosion to snuff out the flame – like blowing out a candle. They also have to cool down everything with water so it does not reignite.
Under 5000 feet of seawater it’s a different problem. 1st there is no fire. 2nd the water pressure is tremendous 3rd no humans – only remote operated vehicles 4th the pressure of the oil and gas coming out is even higher. 5th apparently there is no easy way to seal a pipe or valve on the riser – can’t weld down there and a snug pressure fit is not good enough.
BP was not prepared for this, it has never been done before, so BP is making it up as they go. Trying whatever can be constructed/engineered first.
BP is a second rate outfit with a cheerleader for a CEO. They have a miserable safety and environmental record and they deserve every fine and lawsuit they get.
ichy_b,
I don’t claim to be an expert on capping oil wells. But considering the poor track record of the so-called experts at BP, I figured I’d throw in my two cents.
P.S. All explosions do NOT create craters. In fact, explosions can be created where most or all of the force is directed, in order to achieve a specific result.
Jim,
I agree with your assessment.
One great leading economic indicator I use is anecdotal evidence. In conversations recently, several people have suggested that now is the time to announce a national renewable energy strategy. There is a large amount of political support for solar and wind energy.
In my response to your May 14th column, I predicted that renewables would be strengthened from this disaster. I stand by that predication. In that response, I suggested FSLR. With your discerning eye, I’m not surprised you added this stock to your watch list.
In my opinion, FSLR is by far the best pick in the solar sector. This company has a great management team. Take a look at the earnings – it’s almost as if the recession never happened. The same is not true of STP and SPWRA, which are also good companies.
I own FSLR shares. As I have said before, it is a great buy below $115.
ok well I got to step on some toes! I’d like to know what screwball is still saying drill baby drill! 46% ouch come on people wake up! Well I guess that’s how Bush got reelected come on people wake up!!
Ed, I like the natural gas but as Jim has said there will be a large supply in 15 so where is gas going?
solar is coming, trust me it will be the 2020 boom. rare earth mines now I don’t know
this economy is screwed until end of 2011
And don’t forget batteries!!! think cars, people to lazy to clean solar panels on cars, 2012 large supply of batteries thanks Jim
As for my investing well 7% on teva and payed off car 22 months early save 5%. If I was 35 and had 100k I may take some risk but? I mite just pay off that mortgage in this market.
In other words thanks Jim I know we have a long ways to go to get back to normal in this market. Come on 2012
Folks
What follows the oil-bashing and before we get to the clean energy everland is the spike in price at the pump! Last time we reached $4 a gal. Don’t be surprised if it’s $5 or more.
“EdMcGon on 4 June 2010
There is a simple solution folks: blow up the well. True, no one will be able to drill there again, but it solves the problem of leaking oil. Unfortunately, our politicians are clueless, and it’s for sure BP won’t suggest this idea to them. ”
Ed, you sometimes have very insightful posts. In this case you are so far from even the remotest shred of understanding of the issue at hand that it is almost scary. It would literally be impossible to “blow up” the well. all you would end up with would be an uncontainable crater of mud on the floor of the GOM that would flow until the well was exhausted.
Put some learn on before you present astoundingly wrong statements as if they were known fact.
Try here to begin with: http://www.theoildrum.com/
CallOfDutyFan,
Bravo..u hit all the nails on the head. I think it’s crazy when people say that Obama is leading us to Socialism. We aren’t headed toward Socialism, we’re already there and have been for many decades now.