Deepwater horizon.

• Author: Morse, Edward L.
• Position: Company overview

The Macondo oil well blowout in he Gulf of Mexico last April has consequences far beyond BP's balance sheet--or even the potential rate of growth of offshore oil and gas production in U.S. territorial waters. It almost certainly marked the end of any possible legislation to bolster energy and environmental policy, perhaps for the rest of Barack Obama's first term, and probably well into a second (should there be one). Above all, it may have stymied America's first chance in forty years to approach energy independence.

We are a far cry from the president's inaugural address, which promised to "harness the sun and the winds and the soil." America was to be weaned from its internal-combustion-engine addiction, and power generation was to be revolutionized via renewables--radically reducing carbon emissions and oil imports.

Obama stressed the need to drastically change transportation technologies as well as power generation and distribution, forming the case for a new technological revolution that would enable the United States to reduce dependence on petroleum and harness the entrepreneurial forces of American society. He earmarked $105 billion out of the fiscal-stimulus program for renewable-energy incentives and projects designed to accelerate the digitizing of the national power grid. These were followed by initiatives to underwrite hybrid and electric cars and the controversial $2.8 billion cash-for-clunkers program. The administration proposed that some of the measures be paid for by $30 billion in new taxes on the oil and gas industry. Yet notably absent from this long list of programs were policies dealing with coal, shale gas, nuclear energy and offshore drilling.

To create a more environmentally friendly and more self-sufficient future, hydrocarbons must be used (some of them a good deal cleaner than others), and some of these hydrocarbons need to be produced domestically. It was in this context that soon after passage of the health-care bill, the president made a surprise announcement that he was looking at the potential expansion of oil and gas exploration into the Eastern Seaboard, the eastern Gulf of Mexico and waters offshore northern Alaska, areas that had been off-limits due to various federal moratoria that expired in 2008.

As Obama said of his energy-security plan in which bans on drilling could be lifted, "[it is] part of a broader strategy that will move us from an economy that runs on fossil fuels and foreign oil to one that relies on homegrown fuels." And to tie the drilling to a greener economy, the president added that the Interior Department could spend up to a year "studying and protecting sensitive areas in the Arctic," implying that if Congress didn't pass an energy bill, the moratoria might not be lifted. All of these potential places of exploration were thought to be more gas-prone than oil-prone; and thus in this decision we can see the administration's clear preference for natural gas as a transition fuel to a lower-carbon economy. Yet even with all these measures, an important fact of life was ignored: to get to this future, oil will be needed in the interim. And deepwater oil is the critical short-to-medium-term mechanism for reducing dependence on foreign supplies.

Twenty days after Obama's announcement, the Macondo well erupted, and even current drilling was suspended.

[ILLUSTRATION OMITTED]

The policy reactions to the Macondo blowout are hampering development of this, the most critical area of both U.S. and global crude-oil production--which had, up until last April, promised to provide significant worldwide growth in non-OPEC countries for the next decade and beyond. The Gulf of Mexico, offshore Brazil and most of West Africa, pockets of the Mediterranean and East Africa, the Indian Ocean, off the coast of Australia, Indonesia and China can all yield oil. The policy setback may guarantee that markets tighten again sometime soon--that is, unless Iraqi output grows enough to offset declining production in Iran and Venezuela, key OPEC countries.

But all this is not necessarily bad news. In many respects, changes in the U.S. energy sector are likely to come not from government intervention but from the inevitable innovation brought about by market forces. Oil and natural-gas production are improving, demand for gasoline has declined, and already-in-place controls over emissions and hazardous pollutants are bringing about dramatic, stunning and transformational changes both within the country and in the global energy sector more broadly. If we can get our energy house in order, the future may look far better than the past.

Thanks to high oil and natural-gas prices in the middle part of the last decade, the ingenuity of independent natural-gas producers led to the development of means to tap into the vast resources of in-place hydrocarbons trapped in shale rock, essentially sedimentary rocks that have within them highly concentrated quantities of natural gas and oil. With astonishing speed, the United States was transformed from a country with declining production of natural gas to one which might just end up with growing surpluses. At the beginning of the 1990s, proved and probable American gas reserves covered between 25 and 30 years of consumption. Now, natural-gas reserves are estimated to be able to provide for 100-125 years of U.S. needs. What's more, natural gas has even become cheaper than coal, and not just at present, where "spot" gas is priced at $4 or less and coal is $5 or more for an...