Brexit’s Impact on the Energy Industry [Gaille Energy Blog Issue 28]

Brexit’s Impact on the Energy Industry [Gaille Energy Blog Issue 28]

  • Posted by scottgaille
  • On July 1, 2016
  • brexit

“Napoleon, Hitler, various people tried this out, and it ends tragically. The EU is an attempt to do this by different methods . . . [but] there is no underlying loyalty to the idea of Europe.” – Boris Johnson, former Mayor of London and supporter of Brexit

The British people shocked the world when they voted 52% to 48% to secede from the European Union. The Wall Street Journal explained the crux of the British complaint as “edicts and regulations framed at the European level — rules that [the British don’t] want and can’t change. These were rules that no Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they became the law of the land.” (Fraser Nelson). While much has been written about the pros and cons of the British vote, what does it mean for the energy industry?

Wood Mackenzie expects that oil and gas moving between the EU and Britain eventually will become subject to new tariffs, positing that this could create opportunities for LNG from the United States. North Sea development may be postponed too, as operators await clarity on tariff levels and the new legal regime that Britain will eventually adopt for its own waters. New tariffs also may incentivize the development of Britain’s domestic shale resources.

The more pressing question for the industry is that of political risk. The last century witnessed increasing support for international coordination and calls for global governance — most recently, over climate change. Globalization is defined as “a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology” (State University of New York). One of globalization’s champions is Davos’ World Economic Forum. I’ve been to Davos several times, and most of its attendees believe that technology, particularly the Internet, is advancing globalization.

But what if the Internet is also driving fragmentation? The Internet connects people directly to one another, effectively bypassing governments and so-called “thought leaders.” Everyone has the same information, and emerging movements can use social media to rapidly self-organize. Public figures, and what they say or believe, become less important. The vast majority of UK celebrities opposed Brexit — the sitting Prime Minister, soccer stars like David Beckham, Harry Potter author J.K. Rowling, and more than 250 actors and actresses. None of that mattered in the age of the Internet.

Google anything imaginable, and you will find thousands, if not millions of people, organized into virtual communities of shared interest. Supporters of globalization celebrate this as a sign that traditional borders (and national identities) are breaking down. That may be true, but it also carries with it a renewed awareness of self-interest and a hunger for realizing it.

In Adam Smith’s seminal 1776 work The Wealth of Nations, he wrote: “[H]e intends only his own security; and by directing that industry in such a manner . . . he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . . By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” The Internet may be the ultimate invisible hand – billions of self-interested decisions reorganizing the world.

Another lesson of Brexit is the challenge of imposing “majority will” across large geographies. Popular support for the EU varies dramatically across Europe, from a low of 27% in Greece to a high of 72% in Poland. Other European nations may soon follow Britain out the door, including France, where EU support stands at a meager 38%. Global regulations – like the climate change initiative – always sounded utopian, but are even more unrealistic post-Brexit.

Next comes the question of whether Brexit will encourage separatist movements within nations. For example, Scotland may revisit independence from Britain. The United States also is more divided about its direction. In the 2012 election, 26 blue states voted for Obama and 24 red states voted for Romney. Texas Governor Abbott has called for a Constitutional Convention to prevent the blue states from imposing their policies (Obamacare, fracking bans, open immigration, etc.) on the red states via federal laws, executive orders, and judicial decisions. Supporters for Texas secession have even adopted the moniker “Texit” and are organizing on social media (see #texit).

One practical impact of the Internet is that citizens of a nation have fewer shared experiences. To put this in perspective, a remarkable 83% of American households watched The Ed Sullivan Show in the 1950s, and 60% tuned into the M*A*S*H series finale in 1983. The closest we got this decade was 20% for the finale of Everybody Loves Raymond. The Internet’s Netflix now offers a million viewing choices to suit everyone’s particular interests. The ties that used to bind people within nations are loosening somewhat as identities become less about nationality and more about individual lifestyles.

Political, regulatory, and legal regime instability is growing – even in traditionally low risk places. Institutions are more vulnerable, if only because underlying regional and national loyalties are weaker than they once were. The energy industry should expect and be prepared for change. The good news is that behind it all is Adam Smith’s invisible hand. As Nobel Laureate Milton Friedman said, “The world runs on individuals pursuing their self interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.”

London Skyline

About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).



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