Thursday, August 03, 2006

Let's Make a Deal

A regular reader sent me a link describing energy legislation that he thought looked like a page from the Energy Outlook playbook: the "American-Made Energy Freedom Act" would open up the Arctic National Wildlife Refuge (ANWR) for drilling and put the royalties into a trust fund to support next-generation energy, including cellulosic ethanol and coal-to-liquids. When I recently broached a similar concept with a good friend who has spent many years in DC, she assured me that no one in Congress is ready for this kind of deal. She is probably right, though the recent maneuvering over House and Senate versions of offshore drilling reform makes me wonder if this could actually be the ideal time for a grand compromise.

Earlier this week, the Senate passed its limited version of offshore drilling deregulation. This must now be reconciled with the much broader reforms recently passed by the House. The Senate bill carried by a whopping 71 to 25 margin, but Democrats warned that this was the most expansive drilling program they'd go along with. If that's true, you have to wonder what ingredients would be necessary for something as radical as Rep. Nunes's proposal on ANWR to be considered:
  • Proponents would require both a sense of urgency and a concern that the window might be closing on further expansions of supply. The growing impact and voter reaction to high fuel prices provide the former, while the potential for a change in the party leadership of Congress after November ought to furnish the latter. They would also need to recognize that domestic conventional energy supplies will not be sufficient to close our growing energy import gap.
  • Opponents would need to face a real risk that the tactics they've employed to block ANWR and more offshore drilling thus far might be on the verge of failing, and that they could lose with nothing to show for it. They would also need to see that, even if the political tables turn in the next term, the supporters of more drilling might be in a similar position to block legislation on reducing energy demand and increasing environmental protections, as they have been with respect to ANWR.
Election years rarely feature groundbreaking legislation. It's generally too risky for both sides. But with consumers feeling the bite from higher energy prices, at the same time that a succession of hurricanes and heat waves has elevated environmental concerns, it might just be riskier to be seen standing in the way of strong measures to address both. What looks like the perfect recipe for a deadlock may turn out to be the ideal time for compromise.

A large portion of my career in the energy industry was spent in commodities trading, negotiating commercial energy transactions with other companies. My wife likes to remind people of this when she tells the story of how I purchased her engagement ring. That may not be directly relevant to the give-and-take that goes on in our Capitol, but one thing I learned in all those years of trading was that you can't always wait for your ideal time to make a deal. When conditions provide the right combination of market drivers and a motivated counterparty, that's the time to strike. Holding out for a stronger hand later risks encountering an unexpected change in the fundamentals that could make any kind of deal impossible. This could be just such a moment for sweeping energy/environmental legislation.

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