After the BP Gulf Oil Spill, What Next For US Energy?

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Environment, Green, Macroeconomics

Whatever the outcome of this Thursday’s congressional committee grilling of BP executives and from the point of view of resolving the crisis likely nothing will come of it the fact is this disaster will change US priorities, costs and supply sources for decades to come. At the very least when the well head is closed and the clean up complete as some day it will be and the finger pointing and politically inspired corporate crucifixions have been completed the fact will remain the US needs energy and it needs the energy locked deep under the Gulf of Mexico. One day drilling will resume but the costs and oversight will rightly be higher. How oil firms (and BP is far from alone in this respect) have been allowed to largely self police is in hindsight incredible but for sure this will not be the case in the future. As Exxon Valdez ushered in double hull oil tankers so the BP Gulf spill will usher in a much tighter regulatory regime, that much is clear but what else will change?

Well as this Reuters article explains the US will likely be more open to diversifying energy sources is one development. In spite of huge environmental objections to oil sands, development investment has continued to flow into that industry as this Reuters graph shows.

Supporters say the environmental impact of oil sands is marginal compared to what has happened in the Gulf and anyway the risks are much lower because the technology is established and controllable. How true that is will no doubt be the subject of much more debate and stringent regulatory control in the future but judging by the impact oil sands extraction has had in the last decade, greater environmental control would be no bad thing, even if it did add to costs.

The great success story over the last few years is shale gas extraction. Natural gas from shale is a relatively clean fuel, domestically secure and so extensive are reserves some claim the US could be self sufficient for a hundred years. Indeed the industry has been a victim of its own success; supply has expanded so rapidly the price has plummeted making further exploration and development uneconomical, for the time being at least. The issue going forward is more environmental than technical as opposition to further exploration grows until the industry can prove shale bed “fracking does not risk contaminating water supplies.

More profound may be the ammunition the Gulf oil spill gives legislators to push through carbon taxes and further subsidies for green energy sources like wind, solar and so on. This week’s Oval Office address by the President may well lay the groundwork for pushing through carbon cap and trade legislation that has stalled in the Senate. The President could appeal to the public that a new direction is needed away from reliance on energy sources like oil and coal, and towards less risky, more environmentally friendly technologies, with the one caveat they have to be supported by a tax on carbon use. An FT article suggests this has already been discussed as a positive outcome for the president from a situation that has so far caused considerable damage to his popularity. It would be just like a politician to use the wave of revulsion for the damage done to the Gulf coast environment and sympathy for the local inhabitants for distinctly separate political ends but that may be the most enduring outcome of this catastrophe.

–Stuart Burns

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