From the Financial Post

The New Oil Risk: Peak Regulation

by Terrance Corcoran

The regulatory system totally failed. Let’s try more regulation. We’ve seen this pattern before, and we’re about to see it all again in the oil industry. In the wake of the Gulf of Mexico disaster, governments all over the world, led by U.S. President Barack Obama, are now gearing up thousand-page rule books and new bureaucracies to oversee the global oil industry. Canada and Norway have already imposed curbs on deep water and Arctic exploration.

The result is certain to be declining reserves of oil around the world, reduced supply and messed-up markets. Much as many people would like to believe that fossil fuels are a filthy nuisance that can be replaced by wind, sun and other forms of green energy, the fact is that the world’s people are increasingly dependent on oil and will continue to be for decades to come.

The latest BP statistical review, released Wednesday, put world oil reserves at 1.3 trillion barrels, with consumption currently equal to about 45% of reserves. New reserves must constantly be found to maintain consumption. Peak oil theorists believe the world is approaching a point where consumption is exceeding the world supply of oil, a theory that has many holes, but which could become a reality if governments begin to impose regimes that prevent the finding of new reserves. As Christophe de Margerie, CEO of the French energy giant Total SA, told the Financial Post’s Paul Vieira: “We are not going offshore for pleasure. That’s where the oil is.”

The activists behind the peak oil idea see an opportunity. Jeremy Leggett, a true believer, in a Financial Times column Wednesday, played the Gulf oil crisis as a peak oil benefit. “The disaster in the Gulf of Mexico casts doubt on the viability of the deepwater production on which the industry forecasts depend,” said Mr. Leggett, rubbing his hands in delight that the idea that deepwater risks are now so great that that offshore oil can no longer be counted as useful now or at any time in the future.

The way to make that prospect of peak oil a reality, of course, is to regulate oil in ways that prevent reserve development. Mr. Leggett drew a connection that Mr. Obama also made: “Two industries have failed society,” said Mr. Leggett, the investment banking industry and the oil industry. These industries “corrupted their own regulators” and it is now time to put the regulators and governments back in control.

Mr. Obama seems ready to play the role of peak oil accompanist, although he simultaneously said he supports new oil development.

As the U.S. ass-kicker-in-chief, Mr. Obama also drew parallels to the financial markets in a recent NBC interview. The U.S. housing bubble was the result of free market excess and the alleged fact that there were no government regulators on the job to accurately pin-point exactly where the next one-in-a-million failures and inventing new risks as they go along.

With the auto industry under the government’s wing and the financial markets soon to face the same fate under Washington’s financial reforms, Mr. Obama took aim at the oil industry as his next target. He talked of “corruption” within the U.S. regulatory community and portrayed offshore oil as another bubble in need of major regulation and government control. “The [oil] regulations that were in place were inadequate to prevent against worst-case scenarios and big risks. Everybody was saying that there’s no housing bubble, that the stock market is fine and any attempts at regulation is anti-free market. Until the entire thing broke down. And then the federal government is expected to come in and clean it up and as soon as it’s cleaned up well, “Get off their back, we don’t want to re-regulate.”

Oil and the financial markets are now in the same political doghouse. “The consequences of catastrophe now are much larger than they’ve ever been and you’ve got to have a government that can oversee these folks in a serious way.” Exactly what Mr. Obama has in mind isn’t known, although he seems to have pre-judged BP’s catastrophic failure in the Gulf with unbecoming haste compared with the United Kingdom. Steve Walker, the U.K.’s chief offshore regulator, told the Financial Times it was premature to start talk of new regulation. That would be “shooting in the dark.” He added: “At the moment, the real information of the root causes [of the Gulf disaster] haven’t come out. We are trying not to panic or have a knee-jerk reaction.”

Mr. Walker obviously doesn’t have to answer to CNN and the U.S. news networks, where panic and knee-jerkism are written into the TV anchors’ professional code of conduct. CNN’s Anderson Cooper has spent the last month camped out on the beeches of Louisiana, conducting daily verbal lynchings of BP CEO Tony Hayward and regular humiliating trouncings of Mr. Obama for failing to get down there and take control, get angry and do something.

Now Mr. Obama promises to do something, without knowing what caused the Deepwater Horizon to collapse — and such causes are often not easily pinned on corruption, incompetence, criminal or negligent behaviour. Back in 1982, the world’s largest oil rig, the Ocean Ranger, sank in a storm off the coast of Newfoundland. A U.S. Coast Guard investigation found the cause: a large wave appeared to cause a broken portlight on the rig. The broken light allowed sea water to leak into the ballast control room. The control room panel malfunctioned. The malfunction caused the control system to short-circuit. The Ocean Ranger started to list. Waves washed in and flooded chain lockers. The listing worsened and it sank, killing more than 160 people.

All because a wave knocked out a portlight. Before jumping to conclusions on who and what caused the Deepwater Horizon to sink, at least we should wait to make sure it’s not another similar chain of unpredictable events.