Another Unworkable Presidential Energy Policy

I'm not indulging in political sideswiping when I note that the prospects of achieving President Obama's objective of cutting oil imports into the U.S. by a third within the next decade are eminently doable. But I'd also argue that our chances of actually hitting that target fall somewhere between slim and none.

I recognize that Republicans are placing the blame for increasing gasoline prices on the administration's pokey approach to issuing deepwater Gulf of Mexico drilling permits following the year-ago BP (NYSE: BP  ) Gulf of Mexico spill. That snail's pace approach, along with the refusal to open other promising hydrocarbon venues, have the GOP in a lather.

Just the latest in a long line
But Obama was spot-on when he noted this week that he's not the first president to discuss steering the U.S. toward energy independence. Indeed, while I must admit to being a distant cousin of the father and son Bushes -- I'm not in line for a Kennebunkport weekend invitation -- I can't give either a higher grade than Obama for establishing a meaningful and lasting energy policy.

That's especially amazing when you consider that both father and son began their careers in the energy business. Nevertheless, the executive ban on offshore drilling was signed by the first President Bush in 1990, but not removed by the second Bush until the latter days of his second term.

Still, Obama's approach offers far more rhetoric than new initiatives to deal with our being held over an energy barrel. He's called for the establishment of new incentives to increase oil, gas, and biofuels production, along with strengthened efficiency standards for cars and trucks. And he's renewed his call for increased dependence on cleaner energy sources, including nuclear, wind, solar, biofuels, and natural gas. Of course, we've heard those measures advocated before.

The lucky seven
Regarding drilling offshore, this week the president also defended his administration's approach, pointing to the 39 shallow-water permits that have been issued following the implementation of new safety measures in 2010. That compares to seven deepwater permits that have recently been handed out to a diverse group of companies, including Houston-based ATP Oil & Gas (Nasdaq: ATPG  ) and Chevron (NYSE: CVX  ) .

Also as to deepwater drilling, he said, "If you're going to drill in deep water, you've got to prove that you can actually contain an underwater spill. That's just common sense." My response to that careful recitation of the obvious is to note the uniqueness of the BP spill. It's not as if comparable accidents occur each time the swallows touch down in Capistrano.  

Further, I'd point to Marine Well Containment Co., a Big Oil group headed by ExxonMobil (NYSE: XOM  ) and formed following the spill. Its task, which it has largely completed, was to create systems and equipment to deal effectively with other Gulf spills. At the same time, another group headed by Houston's Helix Energy Solutions (NYSE: HLX  ) has developed a competing system. So the available safety measures have been ramped up substantially since last spring.

The fed's fantasies
The Interior Department produced a report this week in which it maintains that in excess of two-thirds of the leases held by companies are not producing or even being explored, despite the likelihood that they contain -- using the department's figures -- at least 11 billion barrels of oil and perhaps 50 trillion cubic feet of natural gas. Obama is proposing incentives to leaseholders for more rapid exploration and development of the properties.

You can bet your bottom dollar that those "incentives" won't take the form of candy or tickets to Disney World. Rather, they'll likely consist of lease forfeitures in the event of drilling delays once a specific time interval has passed. But let's hope that, before they begin putting stopwatches on drilling programs, the feds learn that lots of leases turn out not to be worth even wetting the tip of a drill bit once seismic and other studies have been completed.

Gas: the growing solution
Even confirmed hermits know that the biggest -- and likely the most promising -- change in our energy picture during the past half-decade has been the lightning-fast ascendancy of gas and oil extracted from shale. Indeed, in December the Energy Department doubled its estimate of U.S. shale gas reserves to 827 trillion cubic feet. Expectations are that natural gas from shale will represent as much as 45% of our natural gas supply by 2035, up from about 15% today.

From my perspective, the only significant impediment to that expected growth could be the ability of environmentalists to succeed in their claims that the chemicals used in extracting hydrocarbons from shale really are harmful to water tables. While the Environmental Protection Agency has fracking in its crosshairs, Halliburton (NYSE: HAL  ) and other makers of fracking chemicals are at work on new, safe formulations.

Waiting for Godot
As to the increased dependence on nuclear, for which the president is striving, the horrors in Japan of the past month are, to my mind, surprisingly inconsequential. That wouldn't be the case, however, if the time from initial planning to operation of a new nuclear plant weren't in the range of 20 to 30 years. So, while we can and should think in terms of. building additional safe nuclear power plants -- at least for our children's sake -- in the meantime, we have little choice but to expand the use of other viable substitutes for oil (think gas).

And with global economics and geopolitics changing almost daily, the same argument applies to renewables, e.g., wind, solar, biofuels, etc., of which the president remains enamored. On Thursday, The Wall Street Journal described the weaknesses plaguing the renewable sector. For instance, it said that renewable energy "remains too expensive to compete head-to-head with fossil fuels." And perhaps even more of an obstacle, according to the Journal, is that, "Much of it remains intermittent -- and technical advances that could make it a reliable, full-time power provider remain elusive."

I'd gladly entertain counterarguments to my progressively stronger belief that, while other substitutes to oil may prove to be effective -- eventually -- only natural gas is ready for prime time at a cost that is more than reasonable. As a Foolish investor, I therefore believe that the likes of Exxon and Chesapeake (NYSE: CHK  ) , the nation's two largest natural gas producers, deserve prime watchlist attention. That's especially true since both companies can also find oil.

Click here to add Exxon and Chesapeake to your watchlist.

Chevron is a Motley Fool Income Investor pick. The Fool owns shares of ExxonMobil. Motley Fool Alpha LLC owns shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't have financial interests in any of the companies named above. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (13)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2011, at 5:09 PM, Fam62c wrote:

    The other thing that we can do, even though Americans hate to talk about it, is use less gas. We hate conservation in America but we can (and we will if gas gets expensive enough and stays there) save fuel. We can drive less, use public transportation more, and buy smaller, lighter more fuel efficient vehicles. The auto industry is capable of producing small cars with very high fuel economy (with the obvious tradeoff of smaller size and lower performance) if and when their customers tell them that fuel economy is a big priority. What really holds back a sensible energy policy in the USA and keeps people and companies from really accepting and developing alternatives is the simple fact that oil is too cheap. Alternatives will never be accepted until they are competitive on a cost basis, that's just the way free markets work. At some point, and I don't know if it's $4, $5, $6 or $7 sustained gas prices people will be fighting each other to purchase small, light, lower horsepower vehicles as well as hybrids, plug-in hybrids, scooters, motorcycles and natural gas, internal combustion vehicles as fast as they can be delivered to the market. Huge, sustained gas price increases would be very painful and disruptive but they would force us to use the technology and resources we have available to rapidly pursue alternatives that will become cost competitive if oil prices stay high enough long enough. It's unlikely that we will ever be able to get beyond imported oil completely (no matter how much we drill, drill, drill) but we can sure use less oil than we do now. High oil prices are painful in the short term but, in the end, they could finally force us to make the changes required for a more sustainable, self-sufficient future. I think we will be surprised what we can do as a nation if we are forced to but we won't do it until there is no other choice. America responds wel in crisis but unfortunately it takes crisis to make America respond well.

  • Report this Comment On April 01, 2011, at 6:42 PM, gjsuhr wrote:

    If you really want to reduce oil imports, tax them. Politicians will become addicted to the revenue and industry will realise the taxes will never go away - since taxes never do - and will work feverishly to develope alternatives. We may even get off shore oil like Norway and Brazil....and the US when things used to work.

    Of course, people will still whine about the price of gasoline, but they will whine regardless.

  • Report this Comment On April 01, 2011, at 6:56 PM, hawkfishrmgw wrote:

    And the rationale for taxing them is the same as in any market economy - recovery of externalised costs. Putting carbon in the air (and gas does that too) is causing massive environmental damage. Making users of that form of energy pay for their damage directly is the most effective way to make renewables competitive.

  • Report this Comment On April 02, 2011, at 10:15 AM, murthg1 wrote:

    "chemicals used in extracting hydrocarbons from shale really are harmful to water tables."

    Pesky meddling environmentalists interfering with our Freedom to drink carcinogens! If pregnant women don't like it, they can buy bottled water...

    From Japan to Deepwater to Frakking and Climate Change, our bottomless energy need is destroying us.

    Money needs to be pumped into alternative energy and conservation, including the horrors of public transport instead of always driving.

    But that won't happen, because Japan's multiple nuclear meltdowns aren't that serious (and don't really affect us), Deepwater wasn't that bad, now that you think about it, Frakking dangers are exxagerated, and Climate Change is an evil conspiracy promoted by scientists.

  • Report this Comment On April 02, 2011, at 10:20 AM, Notwage wrote:

    Renewable sources of energy are the dark horse.

    Their costs are diminishing every year while fossil fuels continue to march higher.

    There are a lot of startup companies around the world making big strides in solar, biofuels, and wind.

    Technology and innovation are driving future success of new sources of energy, and I wouldn't bet against them. In the next 10 years, expect a great leap in one of these renewable energies that brings their cost below coal, oil, and gas.

  • Report this Comment On April 02, 2011, at 6:48 PM, buffalonate wrote:

    Domestic oil production is estimated to increase 40% over the next 10 years due to oil shale drilling in North Dakota, Colorado,Texas and California. That is your 40% oil import reduction right there without even doing anything legislatively. Corporate and government fleets are also rapidly switching to natural gas as a transportation fuel. The economics of natural gas are so good that I don't think the government needs to do anything to incentivize it. 25% of oil demand comes from fleets so by the end of the decade I expect almost all of that will be switched to natural gas. Current car and truck models are much more fuel efficient due to lightweighting and new engine technologies so people buying new cars over the next decade will go a long way towards reducing oil consumption. Also electric cars are quickly becoming more economical as battery manufacturers use new technologies and ramp up battery production. I don't think energy legislation is needed for this process to take hold but it will speed things up.

  • Report this Comment On April 02, 2011, at 11:37 PM, Alfredodos wrote:

    Both Republicans and Democrats have failed to implement an energy policy. It's bad enough the gas is so damn expensive but E-10 crap it's horrible for your car and boat. As far as energy, what about natural gas, hydrogen, battery, solar, nuclear(make it safe) etc? Let's stop the stalling and make America energy independent! Now!

  • Report this Comment On April 03, 2011, at 8:29 AM, BBRAF wrote:

    I agree with you.it is incredible that poeple elect to live in the totally unrealistic dream of renuables as a solution to our problems.We need fossil fuel for the rest of our lives and the lives of our children.We need to look for alternatives but it will not be the solution for the forseable future.It is amazing that common sense should be so uncommon.

  • Report this Comment On April 03, 2011, at 2:43 PM, MegaEurope wrote:

    "Also as to deepwater drilling, he said, "If you're going to drill in deep water, you've got to prove that you can actually contain an underwater spill. That's just common sense." My response to that careful recitation of the obvious is to note the uniqueness of the BP spill. It's not as if comparable accidents occur each time the swallows touch down in Capistrano."

    http://en.wikipedia.org/wiki/List_of_oil_spills

  • Report this Comment On April 04, 2011, at 12:58 PM, ETFsRule wrote:

    "From my perspective, the only significant impediment to that expected growth could be the ability of environmentalists to succeed in their claims that the chemicals used in extracting hydrocarbons from shale really are harmful to water tables."

    http://en.wikipedia.org/wiki/Fracking#Identified_by_the_stat...

    Another list of frac chemicals:

    http://www.riverreporter.com/issues/08-12-18/frac.pdf

    Hazard info for 2,2-dibromo-3-nitrilopropionamide:

    2. HAZARDS IDENTIFICATION

    Emergency Overview

    OSHA Hazards

    Skin sensitiser, Corrosive

    Other hazards which do not result in classification

    Lachrymator.

    GHS Label elements, including precautionary statements

    Pictogram

    Signal word Danger

    Hazard statement(s)

    H314 Causes severe skin burns and eye damage.

    H317 May cause an allergic skin reaction.

    H400 Very toxic to aquatic life.

    Precautionary statement(s)

    P273 Avoid release to the environment.

    P280 Wear protective gloves/protective clothing/eye protection/face protection.

    P305 + P351 + P338 IF IN EYES: Rinse cautiously with water for several minutes. Remove contact lenses, if

    present and easy to do. Continue rinsing.

    P310 Immediately call a POISON CENTER or doctor/physician.

    HMIS Classification

    Health hazard: 3

    Flammability: 0

    Physical hazards: 0

    NFPA Rating

    Health hazard: 3

    Fire: 0

    Reactivity Hazard: 0

    Potential Health Effects

    Inhalation May be harmful if inhaled. Material is extremely destructive to the tissue of the mucous

    membranes and upper respiratory tract.

    Skin May be harmful if absorbed through skin. Causes skin burns.

    Aldrich - 540978 Page 2 of 6

    Eyes Causes eye burns.

    Ingestion May be harmful if swallowed. Causes burns.

    Boy, I hope those environmentalists don't convince anyone that this stuff is bad for our drinking water!

  • Report this Comment On April 04, 2011, at 8:47 PM, mlrinc10 wrote:

    You can gripe about carbon emissions all you want, but natural gas is THE only answer for 18-wheelers and large transport vehicles. Those vehicles can't be run by batteries at any fathom of efficiency and they are the biggest polluters. So, how about making the first major step instead of sitting around expecting overnight perfect solutions. There aren't any!

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