Oil sees big gains following drilling report

The louder they talk the higher it goes.

Oil prices soared after the release of the final scathing report by the White House oil spill commission. Co-Chairman William Reilly alluded to in a press conference that if you thought that the panel investigating the Deep Water Horizon disaster would fade away, well you have another thing coming. Mr. Reilly says that he plans to make a "lot of noise!"

Well the oil market sure heard him when it soared over a dollar a barrel right after the release of the report. The market already had enough to deal with the continued shutdown of Trans Alaska pipeline yet it was headlines like "Safety Cultures of Entire Oil Industry in Doubt" that created enough noise to send oil prices screaming. The report sends a signal that it is going to be more onerous and expensive to produce oil in the Gulf of Mexico.

Bloomberg News reported that "Crude advanced as much as 2.3 percent after the National Commission on the BP Deepwater Horizon Oil Spill recommended exploration in U.S. deep waters be overseen by an independent agency in the Interior Department. Producers suspended most output from Alaska's North Slope after a Jan. 8 pipeline leak."

One problem is the way the commission said that the 75 million dollar liability cap for offshore accidents should be raised significantly, but they were vague on just how much. And of course this raised fears that this undefined risk could make it more advantageous for oil companies to look for better terms in somebody else's ocean. It also raise fears that smaller producers would be locked out, destined to go out of business or be gobbled up by the huge behemoths.

The Wall Street Journal quoted the American Petroleum Institute as saying that the report, "casts doubt on an entire industry based on its study of a single incident, and does a great disservice to the thousands of men and women who work in the industry and have the highest personal and professional commitment to safety." Reuter's News reports that the commission says that the oil industry should create a self-regulating entity to help to enforce offshore drilling standards and at the same time Congress should create an independent agency in the Interior Department to oversee drilling safety.

This talk of more regulation and red tape is a worse outcome than feared and is impacting prices already. Mr. Reilly also promised a smoking gun by saying that he has in the past week received "significant new information" about what occurred on the doomed oil drilling platform before it sank. He saved those juicy details for another report or perhaps when he goes to testify before Congress. There is nothing like the promise of a smoking gun to get your Congressional testimony ratings up.

All of this will cost money, not only for the oil companies and consumers, but for tax payers as well. These ambitious programs come at a time when the public mood is for less government not more. Dow Jones reported that when asked about potential opposition in Congress, former Sen. Bob Graham of Florida, co-chair of the commission, tried to draw a distinction between regulating oil drilling leases on public waters and regulating other businesses. "This is not government regulating a private enterprise. This is government regulating land that the people of the United States own."

Rising prices put consumers in deep water and the continued rollback of deep water exploration and drilling will mean higher gas and energy prices. Dow Jones reports that the Trans-Alaska pipeline has temporarily restarted at a lower-than-normal rate. Dow says that the news sent oil prices down, ending a run of several days of increases, but shares in troubled oil giant BP PLC (BP), which is the largest shareholder in the pipeline, showed no reaction.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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