Oil Slickonomics – 7A

A few quick notes in response to the many emails about Oil Slickonomics – Part7. We thank readers for them.
First, we had an error in Sunday’s Oil Slickonomics – Part 7. We typed 20 billion and meant to type 2 billion. I missed it on three edits, as did our copyeditor Charley S. I will not reveal his last name. But I implore him to help protect me from myself. $2 billion a month is the expected additional cost to the US from the deepwater drilling halt if the moratorium is extended from 6 months to 2-4 years. We thank the readers who called it to our attention.

Next, the employment multiplier in the Gulf of Mexico is not an easy item to measure. My friend and LSU professor Loren Scott uses 4.7. So he guesstimates that each drilling-rig job ends up creating 4.7 jobs of various types. Some of these are high-paying and in the oil business and others are more removed from the oil industry and part of the regional economy. Loren would guess that each rig is responsible for about 1100 jobs. This is consistent with the midpoint of the FT estimate of 800 to 1400 jobs at risk for each rig being idled by the moratorium.

We have had a lot of email responses about our suggestion that this is a Three Mile Island-type event. We do not mean to compare nuclear power to oil. We are talking politics. Three Mile Island changed the political landscape in the US. There is no question about that. We believe the Gulf oil spill is going to do something similar to the deepwater drilling business.

Evidence is mounting daily in support of our view. My friend Jim Lucier, whose praises we have sung, penned a great piece this morning. He has given me permission to share it. Enjoy.

“Oil Spill Politics: The Blob That Ate DC” by Jim Lucier, Capital Alpha Partners, www.capalphadc.com
“Oil spill politics have en-Gulfed Washington. The packed agenda of seemingly long overdue bills that left little time for energy legislation until late in July has disappeared. Immigration? The Kagan confirmation? From now on, it is going to be all oil spill all the time. But don’t expect a higher decibel level to mean higher productivity. As far as we can tell, the oil spill has done nothing to move votes in favor of a comprehensive climate and clean energy bill. But we are not sure the administration really plans to move a comprehensive bill. A clean energy bill with big oil industry payfors is also a possibility. But it also seems that energy is devolving into a wedge issue and campaign issue; the Administration will cast Republican reluctance to support a climate bill as allegiance to Big Oil. The populist script against oil companies will be similar to the script against Wall Street that drove the financial services bill far to the left. Still, members who voted to crack down on prop trading and derivatives aren’t yet ready to vote in favor of higher energy prices for their constituents.

Oil Spill Liability: Good News and Bad News
“There is good news and bad news on oil spill liability under the Oil Pollution Act. The good news is that nearly all Members of Congress understand perfectly well that random tinkering with liability limits could have extremely negative impacts on smaller oil and gas producers as well as energy production in the Gulf generally. The bad news is that some members would rather play politics than find a reasonable solution. Sen. Bob Menendez is Chair of the Democratic Senate Campaign Committee. His goal, apparently, is to find a spill liability bill so politically toxic that no Republican and probably no Gulf state senator will vote for it. He may succeed.

Offshore Drilling: Six Month Moratorium Could Last Two Years
“On May 29, President Obama announced a six-month moratorium on new drilling permits for wells in more than 500 feet of water. We are hopeful the moratorium will last only six months. But the length may depend on whether the Obama administration decides to wait for the recommendations of a study commission that are also due in six months. President Obama will have to make a political call on whether to allow new permits to move forward before the commission’s recommendations can be implemented. He will also have to decide on whether to immediately implement regulatory decisions that normally take at least 18 months through the normal practice. The political uncertainty makes us fear that a supposedly six-month moratorium could last a lot longer.”

We thank Jim Lucier for permission to share his morning note with our readers. Jim will be with us at the GIC events in Prague and Paris next week and has agreed to add an energy/Washington update to his private briefing. See www.interdependence.org for details.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com