By the look of it, I could swear that the apparent next Speaker of the U.S. House of Representatives is an avid reader of Oil & Energy Investor.
Kevin McCarthy, California Republican and current Majority Leader in the House, recently announced his candidacy for the Speaker’s chair, which will become vacant at the end of October following John Boehner’s surprise resignation from both the position and the chamber.
McCarthy already understands that dealing with this Congressional majority is akin to herding cats – and feral ones at that. But his speeches over the past two days are certainly an attempt to forge enough support from both the hard right and what is left of the center to win the job.
From our perspective, here is where it gets interesting:
Aside from the knee-jerk attacks on Obama and the support of the private sector (he is, after all, both a politician and a conservative Republican), McCarthy has expressed specific energy policy recommendations. Three in particular mirror positions we have discussed here in Oil & Energy Investor on several occasions.
Here’s how my positions and McCarthy’s policies match up…
Strong Support for Exporting U.S. Crude
First up, the heir apparent to the Speaker’s gavel is in strong support of exporting U.S. crude oil.
“If there was ever a time to lift the oil export ban, it’s now,” McCarthy said in a recent speech. “Lifting the oil export ban will not only help our economy, it will also bolster our geopolitical standing.”
Now, being from California, where the market attractiveness of heavier oil from the Monterrey Basin has been an issue for years, exporting to expand a market for American producers is an obvious choice
However, as we have discussed here in the past (“U.S. Crude Exports May Be Coming to an End,” April 8, 2013; “Here Are the Biggest Winners As the 40-year Ban on U.S. Oil Exports Ends,” June 26, 2014), the issues surrounding those exports are now much broader and both politically and economically more pressing.
This is all about saving American jobs and local tax bases during a time of oil price declines.
The rationale for the ban is also no longer relevant. It was introduced in 1974 following an Arab oil embargo of the U.S. market. The nation established the Strategic Petroleum Reserve at the same time. There will never be an embargo again and, in any event, we now have plenty of domestic shale and tight oil reserves to blunt the effect.
However, it has been this very largess that has resulted in pricing problems as supply (both actual and potential) weighs on the market.
Exports allow moving that excess production to higher-priced markets abroad, taking the “fight” to the Saudis, where they are more vulnerable. Given the excess capacity available, exports would have no impact on prices inside the U.S.
There seems no downside, and there is emerging bipartisan support for the phase in.
In Favor of Renewables, But Not More Government Subsidies
Second, McCarthy is in favor of renewables such as wind power, but not heavy government subsidies to support them. I believe that the move to renewables is shaping up as one of the major investment opportunities moving forward. As for the subsidies, they have largely done their job.
While there may be some justification for subsidies to end users (tax breaks for putting solar panels on your roof, for example), there is little reason to continue them for the industry. Those supports were necessary to complete infrastructure and bring wind, solar, biomass, and geothermal to grid parity.
“Parity” refers to the cost of generating electricity becoming level with the cost from other traditional sources (coal and natural gas). That has largely been accomplished, as I have noted in earlier issues of Oil & Energy Investor – for example, “Why Alternative Energy Isn’t Taking It on the Chin (Despite Low Oil Prices),” April 21, 2015; and “Why This Surprising Partnership Is Leading the Way for Renewables,” September 22, 2015.
A more balanced approach is now the politically expedient path to take.
Gazprom Must Be Targeted
The third position popped up yesterday as McCarthy responded to the administration’s foreign policy. The congressman came out in favor of targeting Russian natural gas giant (and arm of the Kremlin’s foreign policy) Gazprom (OTC:OGZPY) as a more effective response to Russian external moves.
A direct attack would create problems for European allies who are still dependent on Gazprom for much of the natural gas required. It would also bring into question the validity of contracts already in force.
However, as I have previously explained – “The West Has Gazprom in its Crosshairs (Part I),” June 10, 2014; “The Attack on Gazprom (Part II),” June 12, 2014; and “It’s Time to Play the ‘Gazprom Card,‘” August 29, 2014 – there is another way.
As I wrote in August of last year:
The plan calls for an initial round of sanctions against Gazprom Marketing & Trading (GM&T), Gazprom’s main avenue for financing exports. These sanctions would limit GM&T’s access to financing only existing contracts, not new ones.
This could be applied immediately against the GM&T office in Houston. The main location is in London (20 Triton Street), a location I’ve been to several times in the past. Others are in Manchester, Paris, Singapore, and Zug (Switzerland).
In this case, both the U.K. and France would support the move, since it does not impair existing delivery contracts. Those contracts are multi-year, usually spanning two decades, and require the pre-financing of each monthly delivery. Under this plan, those would continue.
But direct pressure could now be directed toward Russia’s Achilles heel – Gazprom – or what I have previously referred to as “the 800 pound gorilla in the room.”
The intent of these sanctions is to hurt Moscow financially, not destroy Gazprom. But the inability of its international trading arm (GM&T) to access working capital puts several major projects in jeopardy – including the building of the ground breaking new Chinese pipeline.
Such an approach has been the subject of discussion on several occasions since the Russian move on Crimea. We may now just be able to bring this onto the front burner.
An Interesting Addition to the Staff
I have one final observation on energy as a main interest for the likely next Speaker: The influential blog The Hill reported yesterday that Matt Kellogg, general counsel for the Independent Petroleum Association of America (IPAA) since 2011, has joined McCarthy’s staff to work on energy issues.
Kellogg previously served as a legislative assistant for Rep. Tom Reed (R-N.Y.), a member of the House Ways and Means Committee, and specialized in tax policy in general and energy tax in particular.
Political gridlock may soon give way to interesting new ways to make money in energy.
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