Texas Hold 'Em

My hyperbole gets ahead of me so I know what I am about to say will turn out to be wrong, but it's my two cents worth regarding the events of the past week or so.

The question is this: has the current administration and/or the environmentalists pushed the domestic oil industry beyond the point of no return?

My thesis is this: as long as the price of oil was trading in a $60 - $80 range, and the price of gasoline was staying in the $2.50 to $2.75 range, the administration could make political points and the environmentalists could maintain the support of the moderate center.

The administration and/or the environmentalists had to know that at some point their positions would become untenable but they were willing to push to the edge of the envelope. As long as everything was going okay, they could push the price of oil to $80 and the price of gasoline to $2.75, and then back away a bit if necessary.

But things are all of a sudden, perhaps, spiraling out of control for both the administration and the environmentalists.

The moratorium on any more drilling in the Gulf of Mexico clearly pushed the edge of the envelope. Had things stopped there, the position of the administration and the environmentalists was tenable. It would have remained only a local issue (for Louisiana and Texas) and a corporate issue for a handful of companies (such as Noble and BP).

But then the unexpected happened: the interruption of the Alaskan oil pipeline. It will be shut down again this weekend to put in a bypass line. The pipeline is expected to be shut down not longer than 72 hours, but operators say they will take the time necessary to make sure it's done safely.

The price of oil ended the day higher. Every pundit agrees that in the short term, the price of oil is headed for $100/barrel, and with it, gasoline at $4.00/gallon in California.

Following the oil spill, Noble mothballed ten deep water rigs due to "new" regulations. On January 4, 2011 (ten days ago), another Noble rig was to be taken off line because the contractor in the Gulf no longer wanted it. Noble will either mothball that rig (number 11) or will move it off shore elsewhere, probably Africa, bringing the number of deep water rigs that have been moved out of the Gulf to six (6), at least by my count.

When the rigs started moving out of the Gulf, I opined that they would "never" come back. "Never" is a long time, but in this case, I think "never" can be at least until the price of oil hits $150/barrel, or until the price per barrel outweighs the liability associated with another spill along the American coast.

Up to this point, the position of the administration and/or the environmentalists remained tenable, but hanging by a thread. Any more bad news within the domestic oil industry would make $100 oil a certainty, and maybe worse.

At noon today we were still at a tipping point. It could go either way. Perhaps some good news would be announced that would assure consumers that oil might not hit $100. But, and more ominously, just as much of a chance some bad news would be announced that would assure $100 oil or worse.

Less than four hours later, we were no longer on the cusp. We had passed the tipping point.

BP made a momentous announcement.

BP, whose well it was that blew in the Gulf, and whose pipeline in Alaska that leaked, made a deal with a state-owned oil company. It is being said that this is the "first time in the history of [the] industry that there's been a significant cross shareholding between a major international oil company and a major national oil company."

Some have opined that this deal means that BP has turned its back on drilling in Alaska. I don't know. Money is money. It's unlikely BP would risk losing the pipeline. Or would it?

It is said that under the best of circumstances the Alaska pipeline may no longer be viable by 2017. And if a certain amount of oil does not flow down that pipeline, it must be closed. I don't know the amount, but it was said during the week that the 400,000 barrels of oil flowing through the pipeline at the end of this week was not enough to keep the pipeline open on a permanent basis.

In all of the talk about the BP story and the price of oil going to $100 I have not heard any mention of one of the key players. It doesn't take a rocket scientist or an oil engineer or even a political scientist from Harvard to recognize that Vladimir Putin has been becoming more and more open in his anti-America rhetoric. This BP-Russian deal would not have happened without Putin's okay.

The question is this: has BP "blown off" Alaska?

If BP saw the demise of the pipeline within the next three or four years, was it better to cut its losses now and buddy up with a more reliable partner? It takes a few years to begin the development of a new field in the likes of Russia.

I think this BP-Russian deal is so much bigger than most of us can comprehend. To give you an idea of how big this story is:

• It was perhaps the biggest story in the Wall Street Journal today
• It was perhaps the biggest story in the New York Times today
• And at least one congressman, no friend of the oil industry, is now concerned this deal may not be in the best interests of the US. Well, duh.

And that would be the end of the story, except for one thing.

Back to the beginning of this posting in which I asked: has the current administration and/or the environmentalists pushed the domestic oil industry beyond the point of no return?

I think there is evidence that the administration realizes that if it hasn't pushed the domestic oil industry beyond the point of no return, it is very, very close. Here's the evidence. It has to do with the de facto moratorium for any new drilling in the Gulf:

Michael Bromwich, the head of the Bureau of Ocean Energy Management, Regulation and Enforcement, told a Washington audience that he understands the anxiety within industry and its congressional backers about the changing regulatory landscape -- even as he laid out plans for a new agency that will oversee environment and safety.  

Bromwich said he understands the anxiety about new requirements imposed since the Gulf disaster. 

"The implication is that we have other regulatory requirements up our sleeve that we have not yet unveiled," Bromwich said in a speech at the Center for Strategic and International Studies. "That is not the case. Barring significant, unanticipated revelations from investigations into the root causes of the Deepwater Horizon explosion that remain in process, I do not anticipate further emergency rule makings -- period." 

When I read between the lines, I am hearing one of two things: either doublespeak from an administration bureaucrat, or a genuine plea to have the rigs brought back to the Gulf and drilling to begin again. If it's a genuine plea, it's similar to the famous trip George Bush took to Saudi to ask for help in keeping the price of oil down. If it's that, the administration is desperate. As I've opined before, Obama's worst nightmare is $100 oil and 10% unemployment, both of which are here except for slight technicalities.

If the oil companies don't come back to the Gulf and if BP turns its back on Alaska, $100 oil will be an obvious outcome in the minds of any thinking American, and with it, $4.00 gasoline on the West Coast. [It's already $3.59 in Los Angeles.] Once the $4.00 threshold is passed, it's easy to get to $4.50. And $4.50 is the same as $5.00 for anyone who can't afford $4.00 gasoline in the first place.

My hunch is that the administration and/or the environmentalists overplayed their hand with the Gulf of Mexico oil spill. In language any oilman can understand, the spill in the Gulf of Mexico was the flop. The Alaska pipeline was the "turn."

The BP-Russia deal was the "river card."

And Putin won.

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Unrelated to this commentary, but a link I did not want to lose:
Amount of oil spilled into the Gulf of Mexico last summer will be based on political and legal wrangling, not science.