The US drilling boom seems to be taking a breather. The Baker Hughes rig count, at 1,837 the week of Oct. 5, was down 11 units from the previous week and down 175 units from the same week of 2011. Orders are down in many parts of the service and supply industry. While drilling for natural gas has been suppressed for months by moribund prices of the commodity, oil drilling is sagging now, although the crude oil price remains high enough to sustain activity in the shale and other resource plays now brightening prospects for US oil supply. So why the breather?
Much of the answer relates to the approach of a pivotal general election.
Radical differences
For the oil and gas industry, President Barack Obama and former Massachusetts Gov. Mitt Romney promise radically different conditions of investment. Obama's administration approach to oil and gas is persistent and clear: heavy regulation, guarded leasing of federal acreage, and tax increases designed to suppress the production and use of oil and gas in favor of costlier alternatives. Romney would regulate less aggressively, which doesn't mean his administration wouldn't regulate oil and gas activity, and let markets make energy choices.
Will this matter? It matters now.
Oil and gas operators have powerful incentive to delay drilling investments until after the election. An Obama win would mean regulation of hydraulic fracturing by the Environmental Protection Agency and Department of the Interior. Experience with both agencies during the Obama presidency provides no reason to expect the new and unnecessary oversight to be light-handed. New regulation would raise costs and in other ways discourage drilling.
Other regulations loom. The EPA has deferred action on an unnecessary toughening of ozone regulation and is late on other important measures, including parts of its program to control emissions of greenhouse gases.
A second Obama term also would repeat the attempts to raise oil and gas industry taxation that have been part of every budget proposal the president has made. Obama has recommitted himself to his foundering campaign for green energy and needs oil and gas money to fund the adventure. And his administration won't be any more eager to make federal land available for oil and gas leasing in a second term than it has been in the first.
Romney has said nothing to indicate he'd try to swing the Executive Branch all the way from regulatory activism to the other extreme. Indeed, he has spoken in support of regulation as essential to the efficient working of markets. But he also says he wants states to handle regulation where they do so best—as with hydraulic fracturing. A Romney presidency almost certainly would focus regulation on problems that need to be prevented or solved, not on foreclosing activity in response to the alarmist propaganda of environmental pressure groups. Of the latter approach, the US has had far too much these past 4 years.
Hostility or appreciation?
In his Oct. 3 debate with Obama, Romney said he'd consider eliminating oil and gas tax preferences within a broader framework of generally lower corporate tax rates. While the prospect is troubling, the context of rate-lowering is better for all businesses, including oil and gas companies, than green-energy futility is for anyone except green-energy opportunists. Romney showed in the debate that he understands that many of the tax measures routinely mischaracterized as oil and gas "subsidies" really are accounting adaptations to industry peculiarities. Overall, he is less inclined than Obama to want to eradicate anything in the tax code that benefits oil and gas.
The Nov. 6 election will determine whether the oil and gas industry faces hostility or appreciation from the federal government. It thus will shape the investment climate for oil and gas projects, upstream and downstream, over at least the next 4 years. To a great but immeasurable extent, the drilling lull means operators are waiting to see what happens. Who can blame them?