WASHINGTON IN 2002

Action stalled by partisanship

John McCaughey, Contributing Editor, Washington

It was by any measurement an extraordinary year – 2001 – and a year for which most Americans were glad to see the backside. Two themes predominated: war and recession. Then, in energy (to put the icing on the cake) came the astonishing bankruptcy of Enron, the largest bankruptcy in U.S. commercial history.

To start with Enron, what was most curious about the failure was the inability or unwillingness of most everyone to see it coming. This was in spite of rumors and complaints that had been circulating for years in energy circles about the company’s impenetrable accounting.

Yet, nobody blew the whistle – not Wall Street, not the bond-rating agencies, not the investment bankers, not the SEC or FASB, not the accountants (notably Arthur Andersen, the Enron auditors) and certainly not the major business media (with the elliptical exception of the London Economist).

In U.S. (even global) energy terms, the new year will be dominated by the Enron story, which is far from over. In a massive wave of finger pointing, all the parties involved are rushing to shut the stable door after the horse has bolted, so to speak. No less than five congressional committees have seized upon the affair, and Enron’s close ties to the White House (even though the administration probably did nothing to help the struggling company in its final days) gives the Democrats a useful cudgel with which to beat the Republicans. The big Enron question for 2002 is whether somebody is going to end up in jail.

In broader, stock market terms, the Enron affair has already set off a tidal wave of rumors on Wall Street, that a lot of other big companies have similar accounting problems, such as minimizing or hiding losses and exaggerating profits. Most likely, the rumors are being propagated by short-sellers (it was a small short-selling firm that first drew public attention to Enron’s dodgy accounting). Nonetheless, on Wall Street as in Washington, the mere existence of a rumor can have an impact. The Enron-related rumors will probably lead to at least a diminution of investor confidence, especially in the energy sector.

Very little energy policy action is likely to occur on Capitol Hill this year, particularly as regards the plan submitted by President Bush and Vice President Cheney. (Photo by Managing / International Editor Kurt Abraham)

In broader terms, 2001 was a curious, rather unhappy year for OPEC. This was spurred by the U.S. recession that was already in play but greatly augmented by the terrorist attacks of September 11. The latter prompted a collapse in oil prices, forcing members to face the unhappy choice of cutting output or abandoning a target price range of $22-to-$28/bbl for a benchmark basket of crudes.

OPEC is a curious animal. In collegiate Economics 101 they teach you that "all cartels carry within themselves the seeds of their own destruction" – meaning that the existence of the cartel encourages competition from other suppliers.

Yet, OPEC has managed to continue fairly well as a cartel for 30 years or more. This is because of what they don’t teach you in Economics 101: politics. OPEC has survived because of its skillful handling of global politics. But in 2001, it was possible to detect a certain nervousness – notably in OPEC’s pleas to Russia to limit crude oil output. Russia is not quite yet a big player on the world oil markets, but OPEC’s jittery reaction suggests that the old cartel is not nearly as self-confident as it was in the 1970s.

Then, too, there is the question of Saudi Arabia, where the royal house maintains a tenuous hold on power. What would happen if militant Islamics topple the kingdom? It is beyond doubt, unfortunately, that America could not long survive without Saudi oil, short of going back to pony-traps and buggy whips.

Already, there are rumblings from the hawkish politicians in Washington that – should the House of Saud fall – the Americans would have no option but to militarily secure the Saudi oil fields and their production. It seems a bizarre suggestion but it is doing the rounds in policy circles. Corporately, however, the global oil companies did well, with continuing consolidation and (at least for the first half of the year) record profits.

Last year also brought us Vice President Dick Cheney’s much- anticipated Energy Plan. This enormously top-heavy document amounted to very little in the end, despite the consumption of much labor and lobbying during its construction. It did include everything up to the proverbial kitchen sink (truly, there is a paragraph in there about water usage in kitchen sinks).

A cynical Washington crowd dismissed it, so little legislatively is likely to occur in 2002. Even the Administration has dragged its feet – of the 105 recommendations, just 20 require congressional action. The others can be activated by the White House, itself, or by government agencies. Yet, 2001 ended with only one in four of these discretionary items being put into force.

Indeed, despite politicians’ perennial hopes to the contrary, history teaches that "national energy plans" rarely matter a damn. Instead, the best energy strategy may be no energy strategy at all.

Senate Majority Leader Tom Daschle (Democrat- South Dakota) and his party’s one- vote control hold the key to moving any energy legislation. (Photo courtesy of office of Sen. Tom Daschle)

"Many of us have been pushing for a national energy policy for decades," said a despairing Sen. Don Nickles (Republican-Oklahoma) recently. "The administration has proposed one, the House has passed one, but so far we have been unable to get the attention of the Senate Majority Leader."

The dogged refusal by Senate Majority Leader Senator Tom Daschle (Democrat-South Dakota) to let an energy bill go ahead is nominally rooted in his opposition to drilling in the Arctic National Wildlife Refuge. However, more sophisticated minds in Washington believe that Daschle harbors presidential ambitions. Thus, his opposition to ANWR is rooted less in principle than in a desire not to damage his reputation with environmentalist groups and voters.

In any case, Daschle has succeeded in seriously annoying Sen. Frank Murkowski (Republican-Alaska), the longtime champion of opening ANWR to drilling. Letting off steam recently, Murkowski declared, "Senator Daschle criticizes the President’s energy plan for focusing mainly on oil drilling. I would challenge him to read the plan, which includes many provisions, such as alternative fuel sources, improved energy efficiencies and increased conservation. Conservation and domestic energy production must go hand-in-hand. Neither can solve the energy dilemma this country faces alone."

Sen. Frank Murkowski (Republican- Alaska) is the ranking minority member of the Senate Energy and Natural Resources Committee, and is perhaps the E&P industry’s greatest proponent on Capitol Hill. (Photo courtesy of office of Sen. Frank Murkowski)

An obviously bitter Murkowski continued his attack, insinuating that Daschle is a consensus-breaker, not a dealmaker. "Unlike the President’s plan, which is balanced and comprehensive, the Democratic plan introduced by Senator Daschle is a narrow, partisan measure that will do almost nothing to lessen our dependence on foreign sources of energy. Senator Daschle is right to conclude that the energy debate should be included as an important part of a stimulus to move the country forward. This, however, is not a new issue. We have been working to pass a comprehensive energy plan since the beginning of 2001, and we were on track until Sen. Daschle shut down the Senate Energy Committee in October of last year. Every step of the way, the Republicans and many Democrats have not been allowed to share their ideas."

Daschle, along with Sen. Jeff Bingaman (Democrat-New Mexico), has proposed a rival energy bill, but he seems to be in no hurry to push it forward. Calling the bill "both sensible and responsible," Bingaman spoke late last year of the need for "the thoughtful debate and consideration that a comprehensive energy bill merits. Americans want and deserve a national energy policy that is done right, not just quickly. I’m pleased that we’re moving forward this way."

Speaking in his usual gnomic fashion, Federal Reserve chairman Alan Greenspan delivered a November speech that also seemed skeptical of the Cheney energy plan. He seemed to believe that both it, and the energy bill passed by the House of Representatives, paid far less attention to the importance of market forces than is needed.

"To be sure," said Greenspan, "energy issues present policymakers and citizens with difficult decisions and tradeoffs to make outside the market process; as always, national security and environmental concerns need to be addressed in setting policy. But those concerns should be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets.

"We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion. Moreover, they stimulate the research and development that will unlock new approaches to energy production and use that we can now only scarcely envision." Such remarks make Greenspan one of the few persons inside the Beltway who believe that market forces are important when addressing energy policy.

Of course, all this may change dramatically in the November 2002 elections. The Democrats control the Senate with a razor-thin 50 votes to the Republicans’ 49 (and one independent). One-third of the Senate (34 seats) will be on the ballot in November, of which 14 seats are held by Democrats and 20 by Republicans. The GOP must net only one seat to regain Senate control.

A few hot-ticket issues aside (notably ANWR and the proposed Yucca Mountain nuclear waste repository), there do not seem to be many contentious differences on Capitol Hill between the two parties, apart from localized squabbles over pork barrel items. Recession and the Sept. 11 attacks have driven energy from the minds or radar screens of most voters, and thus, from the agenda of politicians.

Otherwise, 2001 was a fairly normal year in Washington, with everyone trying to get their porcine snouts into the tax credit trough (and, preferably, their front trotters, too). Financed far better than is generally realized, the environmental groups are particularly good at this. Just behind the American Association of Retired Persons and the Israeli lobby, environmentalists are probably Capitol Hill’s most effective advocates. For all their wealth, oil and gas companies come in a poor fifth. One need only witness the complete failure to push through drilling in the ANWR. This is despite the fact that the reserve is topographically a wasteland and a place where modern technology could give access to billions of barrels of oil with virtually zero impact on the environment.

A rig drills for natural gas in California’s Sacramento basin on behalf of operator Venoco, Inc. Whether U.S. gas production can keep up with the demands posed by new electrical generating plants in California remains to be seen. (Photo by Mike Edwards, Venoco Inc.)

In electricity (pivotal to the economy), the deregulation experiment flopped badly, thanks largely to the hapless intervention of Californian politicians who attempted, with disastrous results, to buy votes by turning the laws of market supply and demand upside down. In effect, the California experiment, complete with price caps and other ornaments, wasn’t deregulation at all. It also put a temporary damper on domestic natural gas demand. For a while, the debacle looked as if it would severely damage California’s economy (by itself the fifth largest in the world), but the state seems now to have weathered the storm.

Yet, the bills for the California debacle will continue to come due during 2002, and it is likely that natural gas producers will end up with the short end of the stick. Indeed, it is uncertain whether U.S. natural gas production can keep up with new electricity generating plants, almost all of which are fueled by gas. Then again, the gas price may spike to unaffordable levels.

And questions are already being raised as to whether Canada (conventionally relied upon by Americans to fill in any shortfalls in natural gas supply) will, itself, be able to meet these needs. A newly released report by the Interstate Natural Gas Association of America (INGAA) foresees U.S. demand growing to 30 Tcf/year. However, it cautions that there is "significant volatility" in natural gas markets, and there are questions about whether the new pipeline and storage capacity required will be available to fulfill this demand.

Mutual fund tracking reports at year-end echo this skepticism. Oil prices fell throughout 2001, and the average natural resources (oil and gas) mutual fund declined 10.1% in value.

Old, solid, reliable King Coal, though, had a good year in 2001. Coal provides 52% of the electricity for which the U.S. (boosted by the ever-growing use of computers and the Internet) has an almost insatiable appetite. It is cheap, plentiful and reliable, as Michael Eastman, a senior Department of Energy scientist, pointed out in a recent meeting in Pittsburgh.

In 1999, coal provided 22% of total U.S. energy usage. By 2020, that figure is projected to be almost unchanged at 21%. Eastman also emphasized the Bush administration’s commitment to clean coal research (around $500 million a year). Pollution is a traditional vulnerability for the fuel (coal-powered electricity was once memorably stigmatized as "dirt by wire").

In the end, the year 2001 taught us, said the Rand Corp.’s Bob Hirsch in testimony to the Senate Environment and Public Works Committee, that the U.S. is facing a new kind of energy crisis. "The crisis has only begun and we need to take decisive action," Hirsch declared. "There is no silver bullet to solve our problems. The fundamental challenge that we face is balance, balance and balance."

Hirsch went on to explain that today’s problems are more complicated than an oil embargo or a Gulf War and that today’s energy problems will take up to a decade to fix. Why so long? "Because," he said, "the problems are large in number, scale and cost, and because we are simultaneously working to reduce some of the remaining environmental health and safety risks associated with our energy system."

Hirsch, who is also chairman of the Board on Energy and Environmental Systems at the National Academy of Science, had harsh words about national energy policy. "There is," he complained, "no one in the federal government responsible for the well-being of the U.S. energy system. . . . The Department of Energy is responsible for nuclear weapons, environmental clean-up and, almost incidentally, energy. . . . The energy goose has been laying golden eggs for so long that energy is off the radar screens of most people, until we have the occasional trauma. Right now, we are seeing a number of traumas simultaneously, and there is reason to believe that there are more to come."

What does Hirsch’s hymn on balance, balance, balance mean? "To me," he told the Senate committee, "we need a better-balanced approach. We need a diversity of energy sources and energy efficiency, if we are to minimize our costs and vulnerabilities. However, that would likely require federal intervention, which would not be universally welcomed."

It will be interesting to see, as the new year progresses, how prophetic his words prove to be.

The author
	John McCaughey edits and publishes Energy Perspective, a Washington-based, fortnightly publication that features in-depth coverage of major energy topics. Mr. McCaughey has been a journalist during all his working life. He has written and edited for Irish newspapers, an international news agency, the London-based Financial Times and the U.S.-based Energy Daily newsletter, and contributed to many other newspapers. As a profession, he says, he took up journalism by accident and practices it with misgivings.