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Schork Oil Outlook: Obama Reversal On Energy? Not Really

Washington D.C. - President Obama and Secretary [of the Interior] Salazar announced that the Administration will expand oil and gas development and exploration on the U.S. Outer Continental Shelf (OCS)…

“I want to emphasize that this announcement is part of a broader strategy that will move us from an economy that runs on fossil fuels and foreign oil to one that relies on homegrown fuels and clean energy. And the only way this transition will succeed is if it strengthens our economy in the short term and the long term. To fail to recognize this reality would be a mistake,” said President Obama.

- Office of the White House Press Secretary
March 31, 2010

First things first: The President’s alleged reality check was highly recognizable a year ago. Be that as it may, we will put politics aside and cheer the White House’s rather abrupt 180° about-face; although, one does acquire a sense that the Administration’s heart is not going to be fully invested in this one.

On its surface, the press release reads great: “By responsibly expanding conventional energy development and exploration here at home we can strengthen our energy security, create jobs and help rebuild our economy,” said Salazar.

That is a great sentence, because it is true: domestic development and exploration of “conventional energy” (Is that now the new politically correct synonym for fossil fuels?) along with ancillary services will indeed help create jobs, rebuild the economy and strengthen our energy security — just ask the +2,000 employees laid off before Xmas at Valero’s Delaware City refinery.

The next couple of sentences from Mr. Salazar were not so great.

In fact, when we parse through them, they are scary, i.e., laced with a kind of utopian drivel that might earn you a good grade in a humanities elective at Swarthmore, but not much else. Thus, here at The Schork Report, we are highly skeptical of the Administration’s sincerity on this topic.

To wit … “Our strategy calls for developing new areas offshore, exploring frontier areas, and protecting places that are too special to drill. By providing order and certainty to offshore exploration and development and ensuring we are drilling in the right ways and the right places, we are opening a new chapter for balanced and responsible oil and gas development here at home.”

Let’s address that first sentence, “… exploring frontier areas…” Merriam-Webster’s defines a “frontier” as a region that forms the margin of settled or developed territory. In other words, why is the industry being forced to the margins… which can only add to the cost of bringing product to market?

Why not explore in our backyard or at least closer to shore? And the answer to our question obviously is because some government wonk (i.e., special interest group) will deem “… places that are too special to drill…” verboten to drillers, regardless of the quantity of recoverable oil and gas. Following on this logic, does this mean that if Washington deems a place special, but not too special, will it then be okay to drill there?

The second sentence is downright comical… “By providing order and certainty to offshore exploration and development and ensuring we are drilling in the right ways and the right places, we are opening a new chapter for balanced and responsible oil and gas development here at home.”

For starters, that is insulting, as if domestic E&P companies were irresponsible prior to this Administration. More importantly, there are only two things we can be certain of: death and taxes. Therefore, “… certainty in offshore exploration and development…” is specious. Drillers can improve their odds, but we are certain they cannot ensure their odds.

For crying out loud, only in the ivory towers of academia and the Mafia can outcomes be certain. However, we applaud this initial step by the White House, but as we said, we remain skeptical. Also included in yesterday’s announcement were new car and truck fuel standards, efforts by the Department of Defense to enhance energy security, and an effort to green the federal vehicle fleet.

That’s all good stuff from a conservation/demand point of view. However, this was a press release about domestic supply. In that regard, we do not think the Administration is really serious. And, that is a shame. After all, while the Administration cracked the door open on East Coast drilling, it closed the door on drilling in Bristol Bay, Alaska — thereby politicking the coast of Alaska for the coast of Virginia. Therefore, how serious can the White House really be?

According to the U.S. Minerals Management Service (MMS) at $80 a barrel there could be upwards of 86 billion barrels (i.e., around 250 years of Venezuelan imports — take that, Hugo), of undiscovered technically recoverable resources (UTRR) in the underlying offshore waters on the Outer Continental Shelf (OCS), as illustrated in the Chart of the Day in today’s issue of The Schork Report.

Now, the MMS cannot ensure those barrels are there, but we would like to see a real effort (or at the very least, verbiage with a backbone) to get these barrels out of the ground. Instead, all we will probably get out of this exercise is a new Cabinet position created for the Department of Special Places to Drill.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.