Utterance vs. experience

Jan. 18, 2016
In his farewell state-of-the-union speech Jan. 12, US President Barack Obama used the word "oil" four times-two of them ominously for the petroleum industry.

In his farewell state-of-the-union speech Jan. 12, US President Barack Obama used the word "oil" four times-two of them ominously for the petroleum industry. His benign uses of the term related to imports-for the decline of which he of course claimed credit-and the fight against terrorism, in which he of course claimed victory.

As so often is the case when Obama addresses oil, high-level utterance in the other two, more-portentous instances conflicted with ground-level experience.

Shrinking 'big oil'

"After years of record corporate profits, working families won't get more opportunity or bigger paychecks by letting big banks or big oil or hedge funds make their own rules at the expense of everyone else," the president said. Here, of course, he was co-opting the runaway populism that envelops the Democratic Party's presidential campaign. "Big oil" is every populist's favorite villain.

While still big, though, the industry is shrinking fast as oil prices collapse. This month, Moody's Investors Service predicted capital spending in exploration and production, the industry's largest segment, will fall 20-25% this year after a 50% decline last year. Oil companies and service firms are shedding workers by the thousands. On the day Obama spoke, BP announced 4,000 layoffs in its upstream business. Has news of this not reached the White House?

And the suggestion that the oil business makes its own rules is laughable. In the Obama administration, environmental activists write rules affecting fossil energy. The president's other mention of oil promises they'll be busy this year.

"Now we've got to accelerate the transition away from dirty energy," Obama said. "Rather than subsidize the past, we should invest in the future-especially in communities that rely on fossil fuels. That's why I'm going to push to change the way we manage our oil and coal resources, so that they better reflect the costs they impose on taxpayers and our planet. That way, we put money back into those communities and put tens of thousands of Americans to work building a 21st Century transportation system."

From the rhetorical tricks-"dirty energy," "subsidize the past"-to the juxtaposition of oil and coal, this is a battle cry. The oil and gas industry must prepare for a tough political year.

The president's words suggest a resurgent attempt to discard tax preferences such as current-year expensing of intangible drilling costs as though they really were "subsidies." They promise an Executive Branch effort to regulate emissions of greenhouse gases associated with refining. They assert an expanded role for government in the management of oil and gas resources and in decision-making about transportation. And they imply that the economic disruptions of state-centered energy transformation can be offset by subsidized development of the supposedly clean fuels central to Obama's idealistic future.

To borrow a phrase from the speech, Obama is "peddling fiction." On energy, he does that often. Repeating an activist mistake, he thinks energy politics can prevail over economics and physics. Such a circumstance would defy nature and cannot happen. Politicians don't know how much energy people should use or of what form. They can only set targets, which inevitably reflect political choices rather than unpredictable realities of markets and nature-and inevitably prove to be wrong. The misshapen Renewable Fuel Standards program is just the latest mess affirming conclusions easily drawn from history.

Backlash awaits

Even if a like-minded Democrat succeeds Obama, the energy transformation will sputter and fail. It requires foreswearing the profitable development of economic resources in deference to the mandated use of energy requiring heavy subsidization. This won't happen. It would cost way too much. Between the present and "the 21st Century transportation system" of Obama's fantasies awaits a political backlash such as the one hobbling European aggressive campaigns for renewable energy in power generation.

In the meantime, however, a grandiose administration in its final year can make a lot of expensive mistakes. Obama's speech foreshadowed a siege of costly bloopers affecting oil.