Tuesday, February 27, 2007

Shifting Trades

Trade associations are extremely useful barometers of industry sentiment on key issues. When a cluster of energy trade associations shifts their positions on climate change, it's noteworthy. Today's Wall Street Journal reports that three of the big energy trade groups have recently expressed their support for mandatory federal regulation of greenhouse gases. Since the energy industry sits at the heart of the global warming challenge, it's important to understand just what these decisions are saying about the overall posture of the industry on the issue. The industry's value chain provides the right context for assessing this.

The three trade associations in question, the American Gas Association (AGA), Edison Electric Institute (EEI) and Electric Power Supply Association (EPSA) represent a large portion of the industry's mid-stream. At least with respect to the fossil fuels most associated with greenhouse gas emissions, the members of these groups are neither the primary producers of energy nor its end-users, but rather convert it from fuel into electricity, or transport it from producer to consumer. That doesn't mean their operations and profitability wouldn't be affected by a cap-and-trade system for CO2, or a carbon tax. But most of the utilities and pipeline companies belonging to these groups could reasonably expect to be able to pass along most of the economic impact of these regulations, in higher prices or tariffs. This is a very different position from that of the primary producers of oil, gas and coal.

Looking at the main oil, gas and coal trade associations confirms that view. The American Petroleum Institute (API) represents most of the big upstream and integrated players, the household-name companies that consumers associate with energy. The Independent Petroleum Association of America (IPAA) covers the smaller producers. The National Mining Association includes most of the country's coal producers. The National Petrochemical and Refiners Association (NPRA) is self-explanatory. None of these groups has come out in favor of carbon limits, nor should we expect to see that soon.

For most of the members of these groups--with the exception of companies with a big stake in natural gas--limits on carbon translate into lower future demand, less growth, and lower profits. Petroleum refiners, in particular, have experienced decades of environmental regulations that added significantly to their capital and operating costs, without providing an opportunity to recoup these costs. Because trade associations generally work on the basis of a consensus of their membership, the bigger changes in this sector will occur first at the company level, rather than by the trades. In fact, when we look at the positions of the big oil and gas firms, we see a diversity of viewpoints, including the recent clarification of ExxonMobil's position and the alignment of BP and Shell with groups such as the Pew Center on Global Climate Change, a big supporter of emissions trading.

At the same time, through their contacts in Congress and the Administration, all of the energy trade associations must be seeing the sea change on this issue since the last election, and reporting to their members on the likelihood of federal carbon controls being enacted within the next three years. These groups may find it increasingly difficult to ensure their participation in the shaping of emissions legislation--and the opportunity to inject important considerations such as the relationship between domestic energy production and energy security--as long as they are seen opposing a US carbon cap in principle. While today's story on the move by AGA, EEI and EPSA is an important signpost, the bigger milestone, in which the API, NPRA, IPAA and NMA would throw their support behind emissions trading, depends on the recognition by most of the nation's producers of primary energy that it's better for them and their shareholders to be seen as part of the solution, rather than part of the problem.

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