A turning point for US energy policy?
Every four years, as the US election rolls around, investors face the uphill task of interpreting the shifting political sands and how they might affect their portfolios. Here, Newton analyst Laura Sheehan considers the question of how a Trump or Biden win could change the outlook for the energy sector.
In 2017, not long after he entered the White House, Donald Trump declared his grand ambition: to make the US self-sufficient in energy. The aim, he said, was to “become, and stay, totally independent of any need to import energy from the OPEC¹ cartel or any nations hostile to our interests”.
In short shrift the President enacted a raft of changes linked to these ambitions: loosening drilling restrictions on Federal lands and parks, increasing support for pipeline infrastructure, downplaying the risks of climate change, and undoing Obama-era regulations on emissions from coal power plants, automobiles and oil and gas wells.
A landmark moment came on 1 June 2017 when President Trump signalled his intent to withdraw the US from the Paris Accord, an internationally brokered treaty to reduce CO2 emissions. “The bottom line is that the Paris accord is very unfair at the highest level to the United States,” he said at the time, claiming that, if implemented, the agreement would cost the country US$3 trillion in lost GDP and 6.5 million jobs. This would “undermine our economy, hamstring our workers,” and “effectively decapitate our coal industry“, he added.
Now, as we enter the final lap in a US election year, investors are asking themselves whether a win for the Democrats would roll back some of the changes brought in on President Trump’s watch. Or, conversely, whether another four years in office would endow the incumbent with the political capital to create an enduring legacy.
For Laura Sheehan, energy analyst with Newton, this latter question is a pertinent one, since – rhetoric aside – many of the initiatives trumpeted by Republicans amount to less than the headlines might lead us to believe.
She observes: “The Trump administration has typically looked to ease regulation across the energy space in its quest to support the ‘energy dominance’ narrative for which it has proudly claimed credit. But, in reality, Trump’s approach has attracted significant resistance from lobbyists and environmental protestors, so it’s not necessarily the case that actions match the words.”
The coal industry is a case in point. Despite all the sound and fury around Trump’s pledge to “make coal great again”, in the cold light of day, efforts to put fossil fuel front and centre of US energy policy have amounted to little more than a series of soundbites. As of Q3 2020, for instance, shares in the country’s largest coal producers had plummeted to a fraction of the immediate post-election highs.
The third and fourth largest producers remain in bankruptcy.² From generating more than half of America’s electricity 10 years ago, coal now accounts for around one fifth – and that level is falling. Even amid the President-mandated push for fossil fuels, the fastest-growing electricity source is wind.³
Partly, says Sheehan, coal’s collapse is the consequence of market forces: an overabundance of supply coupled with its replacement by cleaner, cheaper gas and the slump in demand due to Covid-19. But it also talks to the relative impotence of any sitting president when it comes to enacting lasting change on domestic policy – particularly if that change runs counter to the prevailing mood music.
“The most you can say about Trump and coal is that his actions had an impact at the margin,” says Sheehan. “They likely helped support general positive sentiment towards investment while giving CEOs an excuse to ignore pertinent questions on their environmental actions, such as flaring and methane leakage.”
As in so many spheres of life, she says, it’s market forces that win out over policy – and that’s also likely to be the case if Trump wins a second term. Here, she highlights how the investment community is becoming more environmentally conscious, more alive to transition risks associated with climate change and more likely to push for sustainable investments away from polluting companies. In that sense, CO2 producers in the energy sector will likely experience headwinds irrespective of who comes out on top in the vote.
What, then, of a Biden win in November? Here, says Sheehan, the change of direction could be abrupt as government policy aligns with a gathering global consensus in favour of environmental concerns.
“On climate, the Democrats would likely no longer run against the tide and instead would embark on an aggressive push towards decarbonising,” she says. “Restrictions on new oil drilling on Federal land, in the Gulf of Mexico and in the Arctic Alaska, for instance, would likely be re-enacted. Progress on building the controversial Keystone XL pipeline would likely be stopped in its tracks. Emissions – whether from automobiles or by energy companies – would once again come under the spotlight. These are seen to be key to decarbonising transportation as electric vehicle penetration grows.”
For companies which have benefited from US energy policy over the past four years, the election of Joe Biden would likely be a negative – but even here, this would have less impact than in an ordinary year, given the glut in oil, gas and coal supply, the collapse in demand and the consequent declines in energy company share prices witnessed over the past six months.
“Probably the worst affected would be the smaller pure-play exploration and production companies,” says Sheehan. “Especially the smaller cap ones which are more exposed to risks around activity restrictions and with greater Federal land exposure. Similarly this hurts US services names, particularly domestically focused ones, while refiners would have a higher cost of oil, alongside potential charges for their emissions. The bigger upstream names, including the majors, are more diversified either in the US or internationally, so, again, this could lead to further consolidation, which would be a good thing for the industry,” she concludes.
¹The Organization of Petroleum-Exporting Countries, an intergovernmental organization of 13 nations accounting for an estimated 44% of global oil production.
²The Washington Post: ‘Trump pledged to bring back coal. Like everything under him, it collapsed instead’, 12 June 2020