Published on
Monday, December 30 2019
Authors :
Robert Auers and John Auers
As we say goodbye to 2019 for the last time tonight, the petroleum industry heads into the new decade with a lot of uncertainties and challenges. With the two parties offering energy policies that are almost 180 degrees apart from each other, the 2020 U.S. Presidential election will be one of the biggest and most immediate of these uncertainties and depending on the outcome, could lead to some of the largest challenges. The Trump Administration has generally been a friend to all segments of the Oil and Gas industry, while most of the leading Democratic primary contenders have taken a strong stance against hydrocarbons, mostly on environmental grounds (with climate change at the center of the issue). Most of these candidates have made some very bold and quite frankly, scary, statements in regards to energy policy – including banning hydraulic fracturing, ending new oil & gas leases on federal lands, a complete opposition to new pipelines and potentially shutting down some currently in operation, a target of 100% zero emissions vehicle (ZEV) sales by 2030, and a 100% renewable power grid by 2030. Some of these (particularly, the last two) could be considered merely primary campaign bluster and impossible to actually put in place, while others do present real and potentially immediate threats to the industry. In the end, regardless of what happens in the 2020 election, the U.S. Oil and Gas industry will have to continue to take the advice of those four “mop heads” from Liverpool and “work it out” with the victorious policymakers in Washington.
“Try to see it my way” – Where the Democratic primary candidates stand
Warren and Sanders have (naturally) proposed the most radical policies with regards to oil and gas, but even the “so called” moderates among the lead pack, Buttigieg and Biden, have adopted a platform that would, from a historical perspective, be considered radically anti-oil. Newcomer Bloomberg, who certainly could break his way into the top tier considering his financial resources, has generally espoused policies that remain more centrist. He does not necessarily oppose “fracking” nor new pipeline construction and is not a supporter of the “Green New Deal,” which all four of the other current poll leaders have gotten behind (at least publicly).
Sanders’ proposals include banning all imports and exports of fossil fuels, banning fracking, banning all offshore drilling, banning drilling on public lands, shutting down DAPL, denying all future 401 permits for new fossil fuel infrastructure, bringing civil and criminal cases against the fossil fuel industry, overhauling the tax code to increase taxes on oil and gas extraction and transportation, building zero-emission electric grid and transportation system by 2030, and achieving zero carbon emissions for the entire country by 2050. In summary – he wants to get rid of hydrocarbons immediately and regardless of economics.
Warren has adopted similar positions. Notable differences include that she does not oppose all fossil fuel imports and exports (although she did oppose lifting the crude oil export ban), would not oppose ALL new fossil fuel pipelines, and sets a 2035 (as opposed to 2030) target date for a 100% renewable electricity grid.
Biden and Buttigieg are, again, less extreme than Sanders and Warren, but have still taken fairly comprehensive anti-fossil fuel stances on a variety of key issues. Their policies are somewhat similar to Warren, but they target a slower (though still rapid) switch to EVs and a renewable electric grid; and they do not support a complete fracking ban (though they do want much stricter regulation opposing fracking from a philosophical standpoint). Biden and Buttigieg also oppose new leasing on federal lands (including offshore), but do not want to immediately ban all drilling on federal lands and neither has taken a strong position on fossil fuel imports or exports. In general, these two talk much less about energy policy than Sanders or Warren and do not appear nearly as enthusiastic about the issue and generally try to “walk the line” between the party moderates and progressives. As a result, some of their energy policies are still a bit unclear as they appear to not want to lose support from either side. Nonetheless, both have publicly backed the Green New Deal, and if elected would be pressured by their supporters to at least push for some of anti-oil policies for which they campaigned.
Bloomberg’s policies that are not particularly radical are likely more in-line with those of the Obama administration when it comes to Oil and Gas, and possibly even friendlier in some regards (he has actually expressed support for Keystone XL). Bloomberg has been very vocal in his opposition to coal (even taking undue credit for helping to shutter significant coal capacity through his financial support of an anti-coal Sierra Club campaign) and, notably, has advocated for nuclear (unlike the other Democratic candidates) as a way to reduce greenhouse gas emission from the electricity sector. Unfortunately, he has also been an opponent of natural gas usage in power generation (which, of course, has been the real driving force for the decline in coal), proposing rules for new gas plants that are so tough that power producers could not justify their construction.
“Think of what you’re saying” – Many proposed policies really can’t be implemented.
A complete fracking ban would take an Act of Congress, which we don’t think is likely. A President could potentially ban fracking on federal lands through executive order, but even if this were upheld as constitutional there would be significant opposition from several key Democratic and swing states, including New Mexico, Pennsylvania, Ohio and West Virginia. As an example of that potential opposition, New Mexico, which has an all-Democratic congressional delegation, currently has the largest amount of oil production on federal lands, with much of that made possible by fracking. A President could also set stricter emissions standards, making all drilling less economically viable. Trump has rolled-back many Obama-era methane emission rules, which a Democrat would be likely to not only bring back, but would likely go even farther.
All this being said, in the end we feel that U.S. crude production will be much more impacted by market developments as opposed to political edicts. It’s useful to note that while the Trump Administration has certainly been good for the industry in many ways, the resurgence in U.S. production actually started and accelerated during the Obama Administration, not due to government actions, but rather market forces and the technology breakthroughs they incentivized. Perhaps the biggest potential negative impacts of a Democratic Administration would not be energy policy directly, but rather the impacts of fiscal and other economic policies which could potentially lead to the slowdown of economic activity and demand.
Similarly, many of the renewable energy and EV targets set by the candidates are not plausible, regardless of policies enacted by Washington. Most of Sanders’ and Warren’s proposed lawsuits do not appear (at first glance) to have merit and Sanders’ complete ban on fossil fuel imports and exports would be doubtful to make it past the legislative branch and (if passed) would likely have devastating effects of the economy, making it unworkable.
“We can work it out and get it straight, or say good night” – Long-Haul Pipeline policy differences
Trump has been a strong supporter of new pipeline construction and notably signed executive orders in support DAPL and Keystone XL early in his presidency. Still, as evidence by Keystone XL, Enbridge Line 3 and several East Coast natural gas pipelines, this support from the Oval Office has not made new pipeline construction “easy.” Nonetheless, hope for many of these projects stuck in “limbo” remains, as least as long as Trump remains in the Oval Office. A Democratic Administration (ex. Bloomberg), however, would likely spell the final death knell for Keystone XL and the construction of new interstate crude oil and gas pipelines will become much more difficult. As a result, we would expect the number of serious new interstate pipeline proposals under such an Administration to decline as the odds of success will likely become incredibly low. We would also expect to see more investment in Crude-by-Rail in places where new pipeline capacity will be needed, particularly Western Canada (which of course will also be impacted by Canadian politics). Warren and Sanders have also noted plans to attempt to shut down already operating pipelines (like DAPL and Line 5, for instance). While we seriously doubt they would be successful in those efforts, they certainly could cause significant “angst” for the industry.
“So I will ask you once again” – The confusing mess of RFS policy
The situation surrounding RFS policy is a bit different in that the battle lines are not necessarily partisan, but more influenced by geography. Overall, though we would expect a Democratic Administration to be more favorable to an expansion of RFS volumes and less favorable to granting waivers, leading to higher RIN prices vs. if we see a second term for Trump.
However, given that the support of farm-state voters is critical for Trump in the general election, he is unlikely to oppose RFS expansion, especially as it relates to conventional corn-ethanol. Furthermore, given that Trump likely already has strong support from the Energy industry; he may not have a lot to lose pushing for increased ethanol volumes in American transportation fuels, especially through policies that encourage the use of E15. Still, Trump is unlikely to push for large increases in the advanced biofuels mandates as these are typically less important to farm-state swing voters. He is also likely to continue to adjust policy to try to avoid large spikes in RIN prices. A Democrat on the other hand, is likely to care much less about spikes in RIN prices.
In short, while Trump is likely to continue to push for increased volumes of corn ethanol, he will also be sensitive to refiners’ concerns regarding RIN prices and is unlikely to prioritize advanced biofuels, especially cellulosic ethanol. Any Democrat would likely push for a larger scale expansion of RFS with little care given to refiner’s concerns and would likely prioritize the expansion of advanced biofuels along with traditional corn ethanol.
Policy analysis is certainly a very important input in our overall assessment of industry prospects. Together with our analysis of market developments, regional and global economic growth, technology advancements, investment activity, and other relevant factors and events, they inform our forecasts for supply and demand for both crude oil and products, as well as resulting market prices. These forecasts, along with our assessments of all the relevant inputs, will be included in the next edition of our biannual Crude and Refined Products Outlook (C&RPO), which is scheduled for release in February 2020. We also use our analyses and forecasts in our other studies and in ongoing work supporting industry participants. For more information about the C&RPO, our other studies and publications and any other consulting services TM&C can provide, please visit our website or give us a call.
