A turning point for US energy policy?

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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 Joe Biden’s election win might now 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.

Now, with the election of Democrat Joe Biden as President-elect, the door is open for a U-turn in these policies as the US pursues a more open, multi-lateral agenda.

For Laura Sheehan, energy analyst with Newton, this change of direction could be an abrupt one as government policy aligns with a gathering global consensus in favour of environmental concerns.

“On climate, the Democrats are unlikely to run against the tide and instead will embark on an aggressive push towards decarbonising,” she says. “Depending on how pliant the Senate will be, restrictions on new oil drilling on Federal land, in the Gulf of Mexico and in the Arctic Alaska could well be re-enacted. Progress on building the controversial Keystone XL pipeline could also be stopped in its tracks. Emissions – whether from automobiles or by energy companies – will 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 under Trump, the election of Joe Biden is seen as a negative – but even here, this will have less impact than in any 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 through 2020.

One standout casualty, however, is likely to be the coal industry, says Sheehan. Despite all the sound and fury around Trump’s pledge to “make coal great again” over the four years to November 2020, in the cold light of day, efforts to put fossil fuel front and centre of US energy policy amounted to little more than a series of soundbites. As of Q3 2020, for instance, shares in the country’s largest coal producers were well below their immediate highs following Donald Trump’s 2016 election. 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 a Trump-mandated push for fossil fuels, the fastest-growing electricity source was 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 important 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 under a Biden presidency. 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 regardless.

The same goes for companies in the energy sector with the smaller pure-play exploration and production companies most likely to face headwinds, 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

GE188436 Exp: 10 January 2021

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