The Flawed US Energy Policy Discussion

on September 12, 2012 at 3:45 PM

Are the energy industry and the business of politics incompatible?

It could be the simplest explanation for why the US does not have a comprehensive, efficient or constructive energy policy set. On the most basic level, two-year and four-year election cycles are problematic for an industry that needs to make decisions and investments over twenty- to thirty-year time horizons.

If it takes as much as 30 years to explore, discover, evaluate, produce, refine and transport oil or natural gas from a reservoir to a market in a profitable manner, that means more than seven presidential administration and 15 congressional reshuffles will occur during the project’s lifetime. The likelihood that the regulatory landscape at the project’s outset will resemble anything like the political topography at project completion is virtually nil.

Nevertheless, companies understand this is a fact of life when doing business in the US – which is a great place to operate, given a well-established rule of law, a strong resource base, liquid markets, access to capital, etc. – and have found ways to deal with the political and regulatory uncertainty for well over 100 years.

While this may be the case looking forward, the disconnect between election cycles and energy investment time horizons is even more difficult to reconcile when looking backward, as some industry observers have recently pointed out.

The current domestic oil and gas production renaissance that is garnering so much attention today has roots extending back decades. Substantial increases in oil and natural gas output from tight geologic formations began around the mid-2000’s when companies started ramping up horizontal drilling and hydraulic fracturing operations in a big way, though the groundwork for these production increases was literally being laid for many years prior. Look at this Energy Information Administration animation depicting Barnett Shale drilling growth from 1997 to 2010 as one example.

But few are talking about that now, during the run-up to the elections this November. The rhetoric often focuses on what the current administration did over the past four years to accelerate or throttle back domestic oil and gas development, a trend that began in a (politically) distant era when regulations, policies, commodity prices, GDP growth, internal combustion engines and the environmental discussion were completely different, if not unrecognizable.

Now this may be a difficult concept to convey in a 30 second soundbite to a voting population that often has an incomplete picture of where their energy comes from. But oversimplification at best and misinformation at worst is not an optimal solution to the complicated challenge of balancing energy demand, environmental issues, employment needs and economic requirements within constantly shifting regulatory regimes. Energy project development moves at a different pace than government and is too complex to be evaluated in two or four year segments.