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Next Up: Oil Regulations

|Includes: BP, NE, Pride International, Inc. (PDE), RIG

Now that Obamacare and Financial Reform have been checked off the to-do list, there is a new target for the government to put in its sights – oil industry regulatory reform.  This is a touchy subject for the right, many of whom reap the rewards of large donations from big oil.  For example, Republicans have received 71% of the $12.8 million donated in 2010, and in the most recent presidential campaign, McCain received $2.4 million to President Obama’s $898,000. 

From here on out, conservatives must shake their mantle as handmaidens to big oil if they wish to reclaim the majority in the fall.  Simultaneously, they cannot be seen as lackeys to the current administration for fear of alienating the mid to far right.  So, how will this bill progress through the legislative branches?  On June 15th, a bill to repeal almost all of the $35 billion in tax breaks for big oil floundered miserably, with only 35 senators voting in favor.  I believe that some form of oil reform will be passed in the coming weeks, and now it is time to see how hard the hammer will fall.  Here are a few things about the bill to keep an eye on.

Mob mentality – The democrats are attempting to take the momentum and public outrage over the BP spill and use it as political capital in reversing decades of tax breaks and preferential treatment for big oil.  The question is, will they have enough muscle to the offset the millions of dollars that big oil pours into political candidates every year?  The numbers are astounding: public outrage over more than 180 million gallons of oil spilled in the gulf vs. $238 million in political capital bought by big oil over the last twenty years.  This is definitely a heavyweight fight.

Deep water drilling restrictions – The implications of this are far reaching.  If Congress decides, as expected, to expand restrictions on deep water drilling permanently, it could change the way that companies that operate in this arena project revenues and growth.  In fact, it could change the way some companies operate altogether.  If a company that was previously poised to take advantage of deep waters in the gulf finds restrictive measures in place, it may suddenly be cost prohibitive.  This is not good for American consumers, who rely on the gulf for a large part of our oil.  Furthermore, companies that operate solely in deep water may become attractive takeover candidates, as they find themselves unable to shoulder the risk of an environmental disaster.  Which brings me to my next point…

Unlimited cap for environmental damages – Smaller companies will be unable to operate in deep water if the cap for environmental damages is lifted.  A company like Pride (NYSE:PDE) would find itself in dire straits if found at fault for a major deep water spill.  Larger companies like Transocean (NYSE:RIG) and Seadrill (NYSE:SDRL) could potentially be licking their chops for a takeover; RIG takes in ten times PDE’s net income, while SDRL takes in four times as much annually.  Something worth noting: SDRL has had a 9% stake in PDE since 2008.

Roll up into a larger environmental bill – Seeing as how the financial reform bill topped 2,300 pages, it is likely if not predestined that reform for the oil industry will be rolled up into another monstrosity of legislative inefficiency.  The time restraints on this bill (trying to push it out before the August recess) are frightening, as Congress seldom has the gumption to move that quickly on anything.  Furthermore, there are international implications.  Abroad, Obama has pledged to pass through a significant climate act in 2010 while Hilary Clinton pledged to help mobilize a $100 billion fund for poor countries ravaged by the effects of climate change ($20 billion of which is assumed to be US funded).  Both of these pledges subtly refer to the other elephant in the room as a revenue source: carbon caps.  This is an issue that is likely to shake the very foundations of the Senate and House.

Just as the Oil Pollution Act of 1990 was a response to Valdez, the most recent push for oil reform is a response to another environmental disaster induced by human error.  Reactive regulation cannot prevent future disasters; it is always the unforeseen that blindsides you.  Hopefully, whatever the government pushes through will lie somewhere in between the regulatory extremes that so often seem to get us in a bind.  They have until August recess to get this thing written… keep your fingers crossed.

Disclosure: No Positions