Rove Ruminates

The 2012 U.S. elections may prove to be a turning point for the country on a number of issues, not the least of which is energy. While the economy and health care dominated much of the political debate between President Barack Obama and GOP challenger Mitt Romney in the weeks leading up to the November elections, it is energy that could be the focus of the administration’s boldest actions in the coming years.

Karl Rove, former deputy chief of staff and senior advisor to President George W. Bush, provided a post-election outlook for the oil and gas industry at Hart Energy’s DUG East conference in Pittsburgh in mid-November. During a break in the conference activities, “the architect,” so-called for the role he played in President Bush’s 2000 and 2004 campaigns, delved deeper into the election’s impact.

“There’s a deep conflict between the president’s stated objective of weaning the country off dependence on Middle Eastern oil, and at the same time making it less attractive to develop our resources…,” says Karl Rove.

Investor Why do you think that the presidential and U.S. Senate election results turned out as they did?

Rove President Obama’s campaign ran a very effective effort, which his campaign manager called a “grand bet,” by spending 20% of their budget on ads that ran throughout the summer that sought to undermine Mitt Romney’s credibility, values and record on economic issues. These ads ultimately made it difficult to sway undecided voters to Romney.

It didn’t look like it during the summer, because the race was so close, but this tactic succeeded. It laid the firmament so that a lot of people who could not bring themselves to vote for President Obama because of his economic policies could not bring themselves to vote for Romney. We had over 8 million fewer voters in this election than in 2008. (At press time, votes were still being tallied.)

The House and Senate races were different, because there were structural advantages that Republicans had because of redistricting, money and incumbency in the House, and the Democrats had those same advantages in the Senate. The Democrats had an $80-million spending advantage in the Senate race. This was offset somewhat by the super PACs, such as American Crossroads, with which I was involved.

The problem was that every dollar they spent was more efficient, as candidates are allowed by law to get the lowest cost for television ads, along with cheaper postage rates. The Democrats had a very good year in recruiting candidates and backing them up with a lot of money.

Investor Will the EPA work to be more activist in a second Obama term by seeking to further regulate the oil and gas industry?

Rove I think the answer is pretty obviously yes. We now know they had a series of rule-makers behind the scenes set to quickly dump out rules regulating oil and gas on the books if President Obama lost. Now that he’s been reelected, the pace will likely slow.

Over the past few years, we’ve seen the White House from a political perspective reining in EPA Administrator Lisa Jackson, knowing full well some of these prospective rules and regulations would have hugely adverse impacts (on the economy and the country). Now she’s going to be let loose.

We already got a taste of this the first week after President Obama was re-elected. The Secretary of the Interior took 1.6 million acres in the Intermountain West and closed them to unconventional development. We can expect to see more of this from the EPA, Interior and any other group that has a chance to rein in the development of America’s hydrocarbon resources.

Investor Will these steps include a cutback in oil and gas tax advantages and subsidies?

Rove In my opinion, that is something the president is going to attempt to do. He has a pretty radical viewpoint on this subject. Remember that one of his big moves, which had no chance of happening, was to no longer treat oil and gas as part of the manufacturing sector. It shows his mindset, so I think the president will go after intangible drilling costs and the depletion allowance.

There’s a deep conflict between the president’s stated objective of weaning the country off dependence on Middle Eastern oil and at the same time making it less attractive to develop our resources within the U.S., by taking these long-standing tax provisions and repealing them.

Investor How would such actions impact the country’s ability to reach energy independence?

Rove Attempts to change the tax code to penalize the oil and gas industry will have a deleterious effect on our ability to be energy independent. You cannot make it more difficult, expensive and problematic to develop our natural resources and expect to get more of them.

We have prospered in recent years because we have had a reasonably favorable and fair climate for oil and gas exploration and production. We’ve also had technological advantages that have allowed us to develop resources that heretofore were not attractive to develop.

Why, when we’ve had such a huge revolution in energy and its huge impact on the job market, would you seek to disrupt this? There seems to be a broad consensus that it is in our best national and economic interests to become less dependent upon Middle Eastern oil and become more dependent on our hemispheric resources, so why we would do something like this is beyond me.

Investor Is there a “war” against hydrocarbons in order to favor alternative and renewable fuel sources?

Rove Absolutely. The administration came in with hostility toward reliance on hydrocarbons. We have a Secretary of Energy who wants to establish energy prices that reflect Europe. Why? Because he wants the revenue and he wants to discourage people from driving cars.

We have a president who basically said we need to get America to stop using hydrocarbons and replace oil and gas with wind and solar and all kinds of other exotics.

The fact is that we don’t have the capacity to generate enough power that the U.S. needs from wind and solar and other green sources. We need hydrocarbons to power our economy and to use them in as clean a way as possible. Alternatives have powered a small part of the country, and while that may continue to grow, it will continue to be a small part of the energy mix for decades.

Investor Could we see carbon taxes instituted in the next four years?

Rove Definitely not for the next two years, as the House Republicans will provide a bulwark against it. My suspicion is that after 2014 there will be even less chance, as that will be the “six-year itch,” which is the mid-term of a president’s second term. This is rarely a happy time for the party in the White House, and the Democrats are likely to lose seats in the House and Senate. The Democrats weren’t able to pass carbon legislation when they had 60 seats in the Senate, so they won’t be able to pass it when they have 55 seats.

Investor Will there be federal legislation on fracing in this term?

Rove There are two kinds of legislation on fracing. One is to rein in fracing, and that has two chances of passing: slim and none. There are too many states such as Pennsylvania and Louisiana that are experiencing such strong benefits from the practice and that won’t support any measures to regulate it on a federal level. This could lead to some very unusual alliances.

On the other hand, we have legislation from proponents of fracing who want to clarify that this is, and should remain, a state regulatory issue. I’m conflicted on that, because right now we recognize it is on the state level, and I’d hate to have a piece of legislation that fails to pass Congress that will potentially create uncertainty as to whether states have the authority to regulate it.

Investor What should be the policies of the administration and Congress toward the oil and gas industry?

Rove The president says that his energy policy is an “all-in” policy with everything being developed. If he was serious about that, then he would back off the attempts to cut tax and subsidy benefits from the industry.

President Obama is rhetorically correct: We should develop all of our resources, but the actions of his administration are often at odds with this rhetoric. We will see now whether this rhetoric was adopted for the purposes of the campaign.

He should green-light the Keystone XL Pipeline, which would not only help make us hemispherically independent from Middle Eastern oil, but also strengthen our relations with our allies to the north. It would also add jobs in construction and manufacturing by bringing supplies from both Canada and the Bakken shale to petrochemical plants in the Gulf Coast.

This seemed like a pretty easy decision to make: It had been reviewed, it had gone through all of the hoops required, the states involved had been consulted, and changes had been made to deal with objections from states on the pathway. This oil is going to get from the Bakken to the Gulf Coast, it’s just a question of whether it will be by rail, truck or pipeline. The oil from Canada is going to get used, it’s just a question of whether it will be by the U.S. or by China.

Investor Will the president change his mind on Keystone XL?

Rove I think he will. The international pressure is so big, the strategic implications of moving Canada closer to China or keeping Canada close to the U.S. are big and, frankly, it makes good economic sense. It will add jobs and private capital. We’re not talking about taking money from the public treasury, as we did with the stimulus to try and create jobs; this is people putting up capital as an investment to build a gigantic pipeline and at the end of it, expanding refining capacity.

Investor Are we going to continue to see delays in drilling permits for the Gulf of Mexico?

Rove The administration’s attitude toward drilling in the Gulf has been on-again/off-again. I think we’re likely to see plenty of delays and slowdowns in issuing permits in the Gulf of Mexico as well as on federal lands.

When President Obama first took office, one of the first things his administration did was to remove approximately 800,000 acres of federal land from development, which had not only been targeted already but had also been leased for drilling. President (George W.) Bush’s administration had already gone through the process of environmental studies to approve these lands, had gone through auctions in which companies had bid on and secured drilling leases. I think we’ll see more restrictions on drilling leases from this administration going forward.

Investor Once the State Department concludes its study on liquefied natural gas exports early in 2013, do you think these permits will be approved?

Rove I hope so. It makes so much sense. We have this resource. Other countries are refusing to develop their resources, so there is a market there of which we can take advantage. If we do so, it means additional American jobs and a better trade balance. It also makes it more economically attractive to develop these resources, because we will be creating and fostering stable markets for this product abroad.

Investor How frustrating has it been to see this administration do away with some of the policies that the Bush administration enacted?

Rove I don’t take it personally that they took back some of President Bush’s sensible policies and rolled them back, I just think it’s wrong for the country. We were careful stewards of our land and our resources and recognized that America’s economic prosperity required sensible development.

It’s interesting that the Obama administration is quick to take credit for what the previous administration did in expanding oil and gas development on federal lands and waters and what that has done for the country, but it’s not that quick to follow through on the policies that made it possible.

Most of what has occurred in the past few years in oil and gas drilling has occurred on private and state-owned land, but we made it possible for there to be a dramatic increase in the amount of drilling on federally owned land and water. That was good for the country. We don’t want to take our dollars and ship them to the Middle East if we can avoid it. We want to be in a place where if we’re creating jobs, we’re creating them here at home rather than abroad.