By Kevin Meyer
Regular readers know that a pet peeve of mine is the lack of true root cause analysis and long-term perspective by presumably well-intended but short-sighted regulators. I liken it to poking a balloon - there will always be a reaction somewhere. And as we found out last year sometimes the regulatory patchwork house of cards causes the balloon to pop. A few news stories over the past few days... uh months... have pushed me a bit past the edge. It's the weekend, so pardon me while I let loose with a little rant.
First let's go to Arizona, where you'd think the push for alternative energy sources (as long as it's not that evil but incredibly clean and efficient nuclear option...) would create a boon in that sun-rich state. Sort of...
Harry Reid has decided that Senate Democrats will put off their cap-and-tax energy ambitions for now, focusing on smaller-scale subsidies and mandates. Anyone who thinks this counts as a "compromise" might visit Arizona, where the green campaign for renewable energy is forcing the state to confront the limits of a nonrenewable resource—water. With more than 10 months of sun a year and vast tracts of desert, Arizona is seemingly ideal for solar power, aside from the fact that solar isn't cost-competitive with conventional fuels.
One hitch: The hot, arid regions best suited for solar also tend to be short on fresh water, and Arizona is no exception. Utility-scale solar power works by generating steam that spins turbines. Cooling the system at the end of the process consumes almost twice as much water per megawatt hour as coal-fired power plants that use the same cooling technology, according to a 2009 report from the Congressional Research Service.
At any rate, Arizona is already an electricity exporter, mostly to California, so it isn't as if energy is in short supply. The state's green regulations are effectively a mandate to export water, which is in short supply.
Sort of like the old push toward vast corn fields feeding ethanol plants... until people finally realized the production of ethanol caused more harm than good. And let's see... parts of California are boycotting Arizona, and Arizona provides them (uh... "us") with power... this could get interesting.
Now on to our financial mess where the Dodd-Frank financial bill that was rushed through Congress is already... only a week later... providing evidence of the law of unintended consequences.
If politicians were as accountable as CEOs, half of them would be fired for incompetence. Witness last week's land speed record for unintended consequences, as a liability provision in the Dodd-Frank financial reform brought new issues to a screeching halt in the $1.4 trillion asset-backed securities market. These securities are bonds backed by auto loans, credit-card receivables and the like. Shutting down this entire market to new offerings was an amazing Congressional feat, given that the same federal government has put tens of billions of taxpayer dollars at risk to revive the same market.
The market remained frozen until late on July 22nd when the SEC staff rushed out an announcement that they were suspending enforcement for six months of its rule that ratings information be part of securities offerings. The SEC acted wisely in granting temporary relief, but pushing the uncertainty into late January is no solution.
I guess that's what happens when you craft a bill to clamp down on areas that work, while not touching the parts of the system that creating most of the financial havoc... such as Fannie Mae and Freddie Mac. But of course they're basically government entities, so they must work, right? Yeah, right. CSM has a good perspective on that.
Mr. Obama has put off the issue of whether to reduce the federal role in buying a home, preferring instead to wait until the home market further stabilizes and his Treasury Department devises reforms for Fannie and Freddie.
Americans must be on guard to prevent government from again creating another housing bubble. They must also be wary of again letting government essentially run a business. Both Fannie and Freddie were created by Congress, given implied guarantees of government backing, and then quotas for selling of mortgages.
Federal incentives for homeownership, while creating jobs in that industry, create an artificial market prone to political meddling by lawmakers on the take. And, now we learn all too late, homeownership may not create long-term wealth or retirement kitties. Long-term wealth lies in competitive export industries and services.
Plenty of smart economists are now devising schemes for Fannie-lite institutions, claiming safeguards against previous pitfalls. But any federal institution charged to subsidize homeownership will be prone to political pressures in Congress to lower lending standards so that more people can buy homes. The cycle toward a housing collapse would begin again.
Great... and we already know how our tax policy is conspiring against creating competitive export industries. It's a global economy now, like it or not, and capital and knowledge will flow to the most advantageous locations.
But let's get back to a previous quote that probably made several of you, and me, cringe a bit: "... if politicians were as accountable as CEOs..." Although CEOs seem to lose their jobs more often than politicians, even politicians like Charles Rangel and Maxine Waters, many of them such as BP's Tony Hayward seem to get a rather nice send off.
BP said Hayward will receive a year's salary amounting to $1.6 million but further details of his severance package were not disclosed. According to BP's most recent annual report, Hayward amassed a pension worth nearly $17 million in his 28 years of service, which is expected to be doled out in annual payments of more than $900,000.
And he gets to keep a job, although it literally is banishment to Siberia.
The company also plans to nominate him as a non-executive director of Russian oil and gas venture TNK-BP.
Not too shabby. I should figure out a way to screw up so badly. A multi-million dollar parachute will cushion that fall quite nicely, perhaps even with a nice toasty dacha.
So yes, Mr. Hayward did screw up, which made BP screw up. For all their bluster, they really did not focus on safety - either of employees or the environment. That focus created a culture where poor decisions were made which cost lives and caused severe degredation of the environment. Although it is interesting how oil spilled into warm water baked with high energy sunshine behaves differently than in the colder northern parts of the planet. Fellow chemical engineers know exactly what I'm talking about.
But so far — while it's important to acknowledge that the long-term potential danger is simply unknowable for an underwater event that took place just three months ago — it does not seem to be inflicting severe environmental damage. "The impacts have been much, much less than everyone feared," says geochemist Jacqueline Michel, a federal contractor who is coordinating shoreline assessments in Louisiana.
Yes, the spill killed birds — but so far, less than 1% of the number killed by the Exxon Valdez spill in Alaska 21 years ago. Yes, we've heard horror stories about oiled dolphins — but so far, wildlife-response teams have collected only three visibly oiled carcasses of mammals. Yes, the spill prompted harsh restrictions on fishing and shrimping, but so far, the region's fish and shrimp have tested clean, and the restrictions are gradually being lifted. And yes, scientists have warned that the oil could accelerate the destruction of Louisiana's disintegrating coastal marshes — a real slow-motion ecological calamity — but so far, assessment teams have found only about 350 acres of oiled marshes, when Louisiana was already losing about 15,000 acres of wetlands every year.
Coastal scientist Paul Kemp, a former Louisiana State University professor who is now a National Audubon Society vice president, compares the impact of the spill on the vanishing marshes to "a sunburn on a cancer patient." Marine scientist Ivor van Heerden, another former LSU prof, who's working for a spill-response contractor, says, "There's just no data to suggest this is an environmental disaster. I have no interest in making BP look good — I think they lied about the size of the spill — but we're not seeing catastrophic impacts."
That doesn't mitigate the fact that the spill was severe, and we need to figure out a way to ensure it never happens again. Real root cause analysis, and that's already happening in the form of improved safety requirements developed by industry and government working together. It's not happening via a knee-jerk reaction to simply shut down all offshore drilling. Last time I checked we didn't halt every vehicle for an accident or airplane for a crash. And the unintended consequences continue...
The helicopter passes over the blue waters of the Gulf of Mexico—with surprisingly little oil visible on its surface—when out of the sea rises a skyscraper-like structure nearly 350 feet above the waves. The $600 million rig, nearly 100 miles off Louisiana's coast, has a hull larger than a football field and can drill more than five miles beneath the ocean floor. But the gleaming new rig sits idle, shut down by the government's freeze on drilling at 33 ocean wells.
Interior Secretary Ken Salazar visited the colossal structure this past week while on a tour of three offshore oil rigs. Business groups and Gulf Coast political leaders say the shutdown is crippling the oil and gas industry and costing thousands of jobs, even aboard rigs not operated by BP PLC, which is responsible for the Gulf disaster. The freeze "is like punishing the whole class" when a student does something wrong, oil executive John Breed told Mr. Salazar during a tour of the Noble Danny Adkins, one of the rigs Mr. Salazar visited Wednesday.
Unfortunately decisions are already being made that will impact jobs and a key energy resource over the long haul.
Diamond Offshore Drilling's Ocean Confidence, a semi-submersible deepwater rig, is slowly making its two-month 7,000-mile voyage to the waters of the Congo. Meanwhile, Diamond's Ocean Endeavor, still in the Gulf of Mexico, is being readied for its tow to the Egyptian Mediterranean.
Together, the departures have come to symbolize the potentially devastating impact from the Obama administration's six-month moratorium on deepwater drilling in the Gulf.
Knee-jerk reactions adding to a deepening complex patchwork of regulations causing untold harm and cost. When will we learn to take a step back, investigate the underlying condition and identify the true root cause of issues, and take appropriate action with a long-term perspective? Is it even possible in a political environment? Or are we just destined for more of the same?