More on the Disaster Trade

Capital, as it is often and correctly said, is highly mobile; in our global economy capital moves easily around the world to where it can generate the highest return. The disaster in the Gulf of Mexico shows just how real this maxim can be. Less liquid, physical assets can also move though not so readily, but they will move if the capital moves.

Capital held by the petroleum industry is likely to move from the Gulf and other deep, off-shore fields if new regulations (or proper enforcement of existing regulations) becomes fact in the Gulf and other areas. Questions are already being asked -- loudly -- about whether safety measures are adequate on the Grand Banks, the North Sea and in the Beaufort Sea. The questions are timely if many years too late since it is becoming apparent that safety measures and claims of their efficacy are problematic. The problem is not contained to BP, Transocean and other companies involved with Deepwater Horizon.

In the shadow of the disaster I doubt that many if any owners of SUVs are curtailing their use. This matters since if demand remains steady then petroleum capital and physical assets will be reallocated from the Gulf to other properties where supply, and profit, can be maintained. In fact, they are being re-allocated. Some drilling rigs are moving to Nigeria where, interestingly, the oil companies have decided that the relative risk is favourable. There are also fewer calls to forgo oil sands production.

Lower US domestic production will have two important impacts by year-end: increased imports and higher global oil prices. In the first situation, increased US imports could add to political instability as the US works to secure supply from Iraq and other even less desirable locales. In the second situation, the impact may be more positive since higher prices for petroleum products like gasoline will reduce demand. Indeed, this may be the only real effective consumption control until there is a change in culture and the introduction of new energy technologies, both of which will take some time even with cheerleading by Obama.

Mr. Obama also used his speech to call for legislation to break the U.S. addiction to fossil fuels, and shares of solar groups in Germany, a big supplier of cells, rose on hopes of higher alternative energy uptake by the world’s largest economy.

In Canada's case, the impacts will be a little more nuanced. There will be changes to regulation on the Grand Banks, but I suspect that the cost and delay impacts will be muted. While we don't need that oil for domestic consumption -- we're a net exporter -- it is a badly needed "cash crop" to support our economy. I would also bet that Newfoundland and Labrador's government will do what it can to keep the oil flowing. The same goes for Alberta and the oil sands.

While no one in the energy industry wants to be seen as profiting from the nightmare of BP PLC’s spill, MEG’s debut will benefit from the stability of the oil sands, which stands in contrast to the risks now associated with deepwater drilling. One investment banker working with the Canadian company said: “In the wake of what’s happened to BP’s platform in the Gulf of Mexico, investors are placing a premium on long-life oil properties that can be developed safely.”

It will be interesting to see how the federal government juggles domestic economic and environmental interests along with quiet encouragement from Washington to keep the supply stable and growing. The disaster trade will continue to pay for some time to come.