conducts the following interview:
It’s a big week for energy bulls. Crude (NYSE:USO) is pushing higher on the supply disruption worries from the Trans Alaska Pipeline closure, the floods in Australia are increasing U.S. coal demand, and lower surplus reserves are expected to push natural gas prices higher.
With all these drivers ramping up, I decided to get the outlook of John Hofmeister, Former President and CEO of U.S. Operations for Shell Oil (NYSE:RDS.A) and Founder and CEO of Citizens for Affordable Energy.
LL: The President’s National Commission on the BP (NYSE:BP) Deepwater Horizon Oil Spill and Offshore Drilling is set to conclude today. One item on the agenda is to eliminate the current $75 million cap on spill liability.
This measure passed in the House of Representatives last summer, but failed in the Senate. With the GOP lead House, do you think this matter will finally be put to rest and eliminate this uncertainty?
JH: It might be plausible to adjust the liability cap for inflation from its original amount. Beyond that amount a higher cap would dramatically increase risk to smaller operators and decrease competition for leases, which could increase costs overall.
From a political standpoint Congress should focus on what it takes to produce more domestic energy for consumers, not how best to disable or handicap future energy production by companies.
LL: The Commission is also expected to recommend a safety institute be established that would audit the companies’ safety practices and cultures.
The Department of the Interior’s (DOI), Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) does this for the outer continental shelf. Should the BOEMRE be expanded or have another safety created? Could we have two competing agencies when it comes to safety? Will this be another layer of bureaucracy?
JH: Adding additional government resources on top of BOEMRE is little more than having more checkers checking checkers. Government is not the source of technology and best practice when it comes to deepwater or onshore production, anymore than government provides best mining practices or flight safety practices.
The sources of safety and best practice are industry practitioners who work in these areas and who disseminate their learning through industry associations.
To require best standards and enforce a level playing field is a proper role for government, operating in the interests of all concerned. Such enforcement capacity already exists. Duplication and redundancy is unwarranted cost to taxpayers and/or consumers.
LL: We have had lots of commissions on various topics recently but in the end, all decisions need the approval of Congress. What do you expect out of this Congress when it comes to energy safety and reform?
JH: Congress has a responsibility to the American people to enable economic growth and affordable energy to support such growth. We live in a world totally dependent upon electrons and liquid fuels. Governments around the world are working overtime to promote energy solutions for their economies.
The U.S. Government for the past two years has been fixated on strangling the future development of traditional energy sources for its own partisan, political reasons. This has to stop or the U.S. will price itself out of global competitiveness because of high cost energy. Congress can help stop the Executive branch from doing more damage to the future sources of traditional energy security in the next two years.
LL: The Trans-Alaska Pipeline is anticipated to restart Friday, given BP’s track record on the oil spill, should we believe that target date? What are you hearing?
JH: Let’s hope it is a correct prediction. More importantly let’s make sure that the problem is fully fixed so we don’t see a patchwork fix that doesn’t endure.
LL: Has your target price for oil changed or are the fundamentals still there?
JH: The supply and demand fundamentals continue to point to upside price pressure from my perspective. As long as the U.S. fails to contribute more production to global supply due to government prohibition, demand will stress availability.
The most important issue regarding price, in addition to other products, remains the limited availability of middle distillates, primarily diesel and jet fuel, where the only solution to increased demand is more barrels of supply, since there are limited gallons in every barrel of oil.
We’re hearing of diesel shortages in China (NYSE:FXI), which is not surprising, and middle distillate demand versus a ceiling on crude oil supply was the primary cause of the $147 per barrel price in 2008. We could be heading right back where we came from, with the U.S. even more disadvantageously positioned today than it was in the prior period.
LL: You say we could be heading right back to where we came from. Does that mean in 2011 we could see $147 a barrel or higher?
JH: Back to where we came from includes a progressive run up in prices over the course of the next two to three years, depending on global and US economic recovery, getting us to the global $150 range by late 2012 if we stay on our present course in the US and require more imports instead of self-producing more domestic production.
My prediction of $5.00 per gallon gasoline is predicated on the US not addressing it’s own needs and global demand for middle distillates exceeding global production of crude barrels that can supply the demand.
LL: BP is fragile right now, what kind of impact could this closure have if the shutdown is longer?
JH: BP needs sustained, incremental success, followed by more of the same, to rebuild confidence and capacity, especially at operating levels.
The big challenge is have the patience and tenacity to keep hitting singles, not home runs, to use a baseball analogy. As boring as it may sound, BP (NYSE:BP) could use a sustained period of being out of the news because they are simply operating according to plans. That’s a cure for the maladies they’ve faced in recent years.
LL: The floods in Australia is boosting coal demand here in the U.S. How much of a rise in exports do you anticipate? Will this demand increase prices and by how much?
JH: The floods could cause a welcome demand uplift to U.S. coal producers, which demonstrates a couple of important reminders: coal remains a global mainstay of energy supply, despite its critics here in the U.S. Second, the energy world is interdependent and will remain so.
The politically popular but empty calls for energy independence should be seen for what they are: shilling for votes by populist, but impractical, politicians.
LL: What is the untold story right now in energy?
JH: The U.S. companies in the traditional energy industry today can’t tell the untold story in energy for fear of individualized increased punitive treatment by an anti-hydrocarbon, anti-nuclear administration.
They are instead waiting out this period of time, expecting the worst but hoping for the best, i.e. that time goes quickly.
The Yucca Mountain decision effectively slams the door on expansion of nuclear indefinitely. The prohibitions on mining and drilling permits, plus increased regulations on emissions by EPA on refineries and power plants, effectively strangles today’s companies from doing what they have been asked to do for most of the last 100 years, and that is to power America’s economy.
The effect on consumers has yet to be felt because the momentum from the past has yet to yield future inevitable shortages and much higher costs of electricity and liquid fuel. Instead of creating jobs in the nation’s largest industry, where the multiplier is well known, the administration is destroying jobs and pulling the wool over consumers eyes by promoting an incremental number of so-called “green” jobs.
The so-called “progressives” running energy in the executive branch today are effectively destroying America’s competitiveness tomorrow. My 50 year road map in Why We Hate the Oil Companies: Straight Talk from an Energy Insider (Palgrave Macmillan 2010) is the kind of energy plan we need for now and then.
Lori Ann LoRocco is a Senior Talent Producer at CNBC, and author of “Thriving in the New Economy:Lessons from Today’s Top Business Minds.” This post originally appeared on Wall St. Cheat Sheet.
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