How will the Volcker Rule affect oil and gas companies? The Volcker rule is a specific section of the Dodd-Frank Wall Street Reform & Consumer Protection Act intended to restrict certain kinds of speculative investments that do not benefit their customers.
Paul Volcker, 84, served as chairman of the Federal Reserve (1979 to 1987) under Presidents Carter and Reagan, and also chaired President Obama’s Ecopnomic Recovery Advisory Board (Feb. 2009 to January 2011). Volcker argued that such speculative activity played a key role in the financial crisis of 2007-2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's personal accounts, although a number of exceptions to this ban were included in the Dodd-Frank law. The rule’s provisions are scheduled to be implemented as a part of Dodd-Frank on July 21, 2012.
IHS on March 28 issued a new report, “The Volcker Rule: Impact on the US Energy Industry and Economy.” The study looks at the long-term economic contributions of shale gas in terms of jobs, economic value, and government revenues through 2035, as well as the broader macroeconomic impacts on households and businesses.
The report examines the impact on segments of the energy industry if the services that rely on US banks were to be curtailed through the implementation of the Volcker Rule regulations in their current form.
While commodities markets were not the primary focus of the legislation, the specialized nature of much of the commodity risk management and intermediation services that banks provide to companies would nonetheless be seriously affected. The study examined segments of the upstream (independent natural gas producers), power and downstream (US East Coast petroleum market) sectors as a case study.
Among the key findings with respect to the potential impact the energy industry:
· $7.5 billion reduction in natural gas investment resulting in $0.64 per million British thermal units (MMBTU) increase in natural gas prices
· $5.3 billion increase in power costs per year
· Increased likelihood that all currently announced refinery closures on US East Coast would be permanent
· 4 cents per gallon increase in US East Coast gasoline prices, equal to $2 billion per year in additional costs to the end-consumer
The potential overall economic impact:
· Payroll employment more than 200,000 lower, on an annual basis, than the base case for 2012-2016
· $34 billion (2005 dollars) lower US GDP in 2016
· Cumulative nominal federal tax receipts $12 billion lower than the base case for 2012-2016
The report was commissioned by Morgan Stanley. IHS says the analysis, content, and conclusions of the study are entirely its own.