The presidential election is just a few weeks away, and the outcome will have enormous implications for oil and gas markets, regulation and potential fiscal stimulus.
A change in administration could mark a dramatic shift away from an unabashed pro-industry agenda. But there are also caveats to that binary result, and there will likely be some continuity regardless of the winner. Still, the election is shaping up to be the most consequential for the energy industry in recent memory.
What’s at stake
The 2008 presidential campaign took place during a historic oil boom, sparking calls for a gas tax “holiday” and the memorable “drill, baby, drill” slogan. Over the ensuing 12 years, the U.S. did just that: the country drilled its way to record oil and gas production levels. But the fracking revolution also led to huge financial losses and contributed to two historic market downturns. Now there is deep uncertainty over what happens next.
To be sure, energy is not even in the top 10 in terms of issues of concern for voters in this year’s election. Nevertheless, given the differences between the two candidates, the election will have serious consequences for the industry.
Top of mind is the pledge by former Vice President Joe Biden to pursue a far-reaching $2 trillion green stimulus program, with policy options aimed at building 500,000 electric vehicle recharging stations, expanding mass transit, incentives for green manufacturing, and an ambitious pledge to pursue 100 percent clean electricity by 2035, which would require a Herculean buildout of renewable energy. Coal’s demise is already assured; an aggressive suite of policies aimed at zeroing out carbon in the electricity sector would seal the fate of natural gas to some extent.
Much of that will require legislation from Congress, but a potential President Biden can take executive action as well. One of the provisions closely watched by the oil and gas industry is his pledge to suspend new drilling on federally-owned lands. While Biden has repeatedly vowed not to prohibit fracking, he has said that he will curtail drilling on federal lands going forward.
Only about 6 percent of onshore oil production comes from federal lands.
Notwithstanding potential legal hurdles through the Bureau of Land Management’s lease sales and rulemaking process, the impact of this may be more modest than might seem at first glance. Only about 6 percent of onshore oil production comes from federal lands. The impacts would be concentrated in the New Mexico side of the Permian basin. Anticipating change, drillers have amassed drilling permits this year, with permits issued up 25 percent in the first nine months of the year. One other caveat to keep in mind is that to the extent this new policy curtails oil supply growth and raises crude oil prices, all producers not focused on New Mexico may stand to benefit. Drillers in Texas, for instance, operate on private lands.
More consequential could be reversing the last four years of environmental deregulation. The Trump administration has rolled back at least 100 environmental regulations in pursuit of what it calls “energy dominance.” Many of those can be reversed. For instance, a potential Biden administration could reinstate limits on methane emissions from oil and gas operations. Moreover, if the Democrats take the Senate, they can immediately repeal the methane rollback and other recently finalized rules using the rather obscure Congressional Review Act, rather than going through the lengthy rulemaking process.
Another substantial avenue for executive action would be fuel economy standards. President Biden would likely tighten the standards again, after Trump rolled them back.
A Biden victory could also spell trouble for some high-profile pipelines. He vowed to block the construction of the Keystone XL pipeline. He could, in theory, do the same with the Dakota Access pipeline, which is already facing litigation risk, handing the Biden administration leverage in the fate of the pipeline’s ongoing operations.
One policy option not under consideration at this point is the potential for a carbon tax. For years, this was the favorite policy tool of economists and think tanks, but it has had very little appeal outside of those circles. Climate policy has shifted away from this route as a result of the political baggage, and going forward preferred policy options will focus on standards, mandates, incentives and fiscal stimulus.
Some things will stay the same regardless of the winner.
Some continuity either way
It is difficult to overstate the impact of the election. However, some things will stay the same regardless of the winner. Aside from the potential impact on federal lands, the U.S. shale industry will still be able to drill on private lands, where the bulk of the country’s oil and gas is produced.
More importantly, the bigger shifts in the energy sector are the result of market forces, rather than government policy. Even with a Trump victory – and indeed, even with four years of help from the Trump administration – the decline of coal has only accelerated. Signs of the same trajectory for oil and gas industry continue to mount. Unconventional oil and gas drilling has largely been unprofitable since its inception. A Biden administration could throw up new hurdles, but four more years of Trump may not change the trajectory either.
Standing at a crossroads, the largest oil companies are undergoing a transformation. Peak demand looms, and investors are abandoning the sector. NextEra Energy, a builder of renewable energy, recently surpassed ExxonMobil in terms of market capitalization. The oil and gas sector is decidedly out of favor, and renewables are increasingly taking center stage. This has unfolded under an administration very friendly to fossil fuels, which demonstrates that the forces of change are to a great extent much more powerful than the man in the White House.