What will the 2020 elections mean for US energy?
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The 2020 elections present American voters with a choice between two radically different visions for the future of energy. President Donald Trump rejects the idea of using government policy to cut greenhouse gas emissions, and talks about energy in terms of prices and jobs. Joe Biden says he would create jobs through a “clean energy revolution” to set the US on a path to net zero emissions by 2050.
Trump offers continuity, with some further easing of regulations on the oil, gas and coal industries. Biden offers a return to the Obama administration’s strategy of using regulation to cut emissions, and more ambitious moves if the Democrats win control of Congress.
Trump has not been able to realise all of his ambitions for energy, which included reviving the US coal industry. The same would be true of Biden. The US system of checks and balances means that Congress and the courts can make it difficult for presidents to achieve their goals. Market forces can ultimately be more powerful than any of them.
The need to win over swing voters has pushed both candidates towards the centre ground, with Biden reiterating that he would not try to ban hydraulic fracturing, and Trump closing off parts of the eastern Gulf of Mexico and the Atlantic coast for oil and gas development.
Nevertheless, the election results will have profound implications. Most of the changes will take years to work through, but over time the two candidates imply very different paths for energy in the US and around the world.
Wood Mackenzie analysts have been publishing a series of insights about what the election might mean for the energy industry and commodity markets. Read on for their 10 most significant conclusions.
1. Decarbonising the power industry
Biden wants to put the US on a path to a carbon-free electricity system by 2035, a hugely ambitious goal that would entail one of the most radical infrastructure overhauls in US history. The plan creates enormous opportunities: it could mean a seven-fold expansion of US onshore wind and utility-scale solar generation capacity, coupled with steep growth in offshore wind and battery storage. It would lead to the emergence of a new generation of energy majors, with total investments in new renewable energy generation and storage of over US$2.2 trillion.
The plan also faces daunting challenges. Grid reliability will weaken under high renewables penetration unless market reforms incentivise the deployment of enough carbon-free balancing power. “Made in America” requirements will be very difficult to meet. Demand for solar modules could exceed 100 GW a year, but US-based solar module manufacturing capacity is only about 4.7 GW a year in 2020.
If Trump secures a second term, the US power sector is likely to continue along the path it has followed in his first. Although he campaigned on a pledge to “bring back coal”, and his administration has taken actions to support the coal industry, unfavourable economics and state policies have meant it has continued to decline, with output dropping 30% during his time in office. In a second term, decisions by the private sector and state governments will mean continued growth in renewables and retirements of coal-fired plants.
2. Oil demand
In the short term, a Biden victory, if combined with Democratic control of the Senate, is likely to result in greater fiscal stimulus for the economy, which is likely to translate to stronger economic growth and higher fuel demand.
In the longer term, the election result is likely to have a small effect on US fuel consumption, but only at the margin. The overall efficiency of the US light vehicle fleet is driven more by consumer preferences and technological progress than by regulation, and Wood Mackenzie’s base case forecast is for US gasoline fleet fuel economy to increase steadily from 21.2 miles per gallon in 2019 to 28 mpg in 2040, regardless of policy decisions.
If President Trump wins a second term, the continuation of his attempt to ease fuel economy standards, and of the administration’s legal challenge to California’s autonomy to set its own more stringent rules, could provide some small upside for US gasoline demand.
Biden has said he wants new fuel economy standards to ensure that “100% of new sales for light- and medium-duty vehicles will be zero emissions”, but he has not set a date for achieving that goal, and for the rest of this decade at least, the vast majority of the cars sold in the US will continue to use gasoline. We estimate that tighter fuel economy standards introduced by a Biden administration could cut just 150,000 barrels a day — about 2% — from US gasoline demand in 2030. Most of that impact is a result of increased sales of EVs (see below).
It is worth noting, however, that US gasoline consumption appears to have already passed its peak in 2018 and entered a long-term decline that will be driven by rising efficiency and EV sales, irrespective of government policy.
3. Electric vehicles
Biden’s planned fuel economy standards are part of a wider strategy for electric vehicles. He has pledged to restore the full EV tax credit, which is currently capped by manufacturers’ sales, and has already been cut for General Motors and Tesla. He has also set a target of deploying 500,000 new public charging outlets.
Of those measures, the promise of 500,000 charging outlets adds little to the current momentum. Wood Mackenzie’s base case already projects 800,000 new outlets by 2030. Restoring the full tax credit would give EV manufacturers some cushion in pricing and help with adoption in the near term.
In the longer term, vehicle fuel economy targets are the policy that can have the most impact on EV adoption. In Wood Mackenzie’s base case forecast, we project 2.3 million EVs on US roads in 2030. Tougher fuel economy standards could raise that by almost 60%, to 4 million. Even at that higher level, however, they would still be only about 1.5% of the total of 275 million vehicles we expect on US roads by then.
4. Onshore oil and gas
The Biden campaign has said that if he is elected, the first day of his presidency would include “banning new oil and gas leasing on public lands and waters”. While this might seem like a step in limiting oil and gas activity, its impact on onshore production would be negligible. Most federal acreage in key unconventional oil producing regions such as the Permian and Bakken has already been leased. Federal leases are held by production or other qualifying drilling activities, and operators count on automatic extensions when they are complying with those terms. Any effort to limit producing activities or extensions would be challenged in the courts.
A Trump administration would be expected to continue the pattern of his first term, with a steady rate of lease sales. There is no apparent correlation between production from federal lands and the area leased, however. In fiscal year 2018, oil production on federal lands hit a record high, even though the total area leased was at a record low, since comparable date were first collected back in 1985.
Another of Biden’s Day 1 actions would be ordering “aggressive methane pollution limits for new and existing oil and gas operations”, his campaign says. The impact of those rules would depend on the precise limits, but might not have a large impact on production. Companies including ExxonMobil have called for industry-wide methane regulations.
A ban on new leases, if permanent, would lead to about 7 billion boe being left under the sea bed.
5. Offshore oil and gas
Offshore, the impact of Biden’s ban on new leases would be more significant than onshore, although the effects would take some time to show up. Wood Mackenzie estimates there are nearly 25 billion barrels of oil equivalent that could be produced from the US Gulf of Mexico and federal areas in Alaska, including future discoveries from exploration. A ban on new leases, if permanent, would lead to more than a quarter of that, about 7 billion boe, being left under the sea bed. Through a Biden first term, there would be no discernable impact on production, but by 2030 US offshore output could be down 7% or about 160,000 boe/d, compared to its level if new leases had been awarded.
During the election campaign, Trump has extended until 2032 the moratorium on drilling off the coasts of Florida, Georgia, the Carolinas and Virginia, but those areas were already assumed to be closed in Wood Mackenzie’s forecasts. The administration is also working to allow drilling in part of the Arctic National Wildlife Refuge in Alaska, but operations there face daunting legal and reputational challenges.
6. Oil and gas infrastructure
Biden has promised to include increased consideration of “the effects of greenhouse gas emissions and climate change” in the federal permitting process, creating new risks for any oil and gas infrastructure projects requiring such approvals. Under a Biden administration, passing environmental review under the National Environmental Policy Act (NEPA) and ultimately achieving FERC approval would become more difficult for large-scale interstate infrastructure projects, and development costs would increase. Oil projects that could be at risk from increased regulatory and legal challenges include the Enbridge Line 3 Replacement, Keystone XL, and the Dakota Access pipeline. Gas projects including LNG export terminals would also face those additional obstacles.
Trump’s first term has highlighted the difficulties of infrastructure investment in the US. An order allowing Keystone XL to proceed was one of his first acts in office in 2017. As of October 2020, the pipeline remains unbuilt.
7. Sanctions on Iran
Biden has been strongly critical of Trump’s decision to take the US out of the international deal over Iran’s nuclear programme, saying “he recklessly tossed away a policy that was working to keep America safe”. He has promised a change in approach if elected However, that does not necessarily mean he would take the US back into the deal quickly and relax the sanctions that were imposed in 2018, allowing a surge in Iran’s oil exports.
Wood Mackenzie’s affiliated company Verisk Maplecroft has argued that if Biden wins, negotiations about a possible renewed deal are not likely to begin until June 2021 at the earliest, and there is no guarantee that the US and Iran will be able to reach an agreement. One issue to watch will be whether Iran is able to increase its oil exports even though the US sanctions remain in place. A Biden administration could be less strict in enforcing the sanctions, and could possibly even award a new round of waivers allowing some countries to buy Iranian oil. Iran has already increased its exports in recent weeks, and its government will hope to sustain that higher level of sales.
8. Corporate tax
Tax and spending in the US is controlled by Congress, not the president, and Biden’s ability to implement his fiscal agenda will depend on whether the Democrats also take control of the Senate. He has proposed reversing part of the corporate tax cut passed in 2017, raising the main rate from 21% to 28%. If passed by Congress, that move would increase the federal government’s implied share of the total net present value of US oil and gas assets by about 4 percentage points.
However, Wood Mackenzie analysts calculate that the breakeven prices of most assets would not change substantially, and there would not be many investments that would be deterred solely by the increase in corporate income tax. Compared to other countries, the fiscal terms for conventional US assets such as fields in the deep water Gulf of Mexico would remain competitive.
9. Carbon tax
With Democratic control of Congress, Biden could also seek to institute a carbon tax: his platform says he wants “legislation [that] must require polluters to bear the full cost of the carbon pollution they are emitting”. Depending on the design and rate of the tax, it could have a greater impact on the US upstream oil and gas industry than raising the corporate income tax rate to 28%. The effect would vary widely between different assets: the deepwater Gulf of Mexio and the Permian Basin would remain highly competitive despite a carbon tax. Most of the reserves that would be stranded would be in the Gulf coast and Rocky Mountain regions.
As well as a potential new carbon tax, Democrats have raised other tax proposals that could threaten asset values in upstream oil in gas. Repealing intangible drilling cost allowances and other tax advantages for oil and gas could cost investors more than US$16 billion. Royalty rates on federal leases could also be increased. Biden’s platform commits him to “modifying royalties to account for climate costs”, potentially eroding the fiscal attractiveness of the US to the point where dollars shift abroad.
10. International relations and trade
Trump’s “America First” stance has been reflected in withdrawal from multilateral structures including the Paris climate agreement and the World Health Organisation. Biden has promised to take the US back into the Paris agreement, and says he wants to work with allies around the world to modernise the rules of international trade.
There is bipartisan support in Washington for taking a tougher line on China.
However, that does not mean that a Biden administration would quickly cut the tariffs that Trump has imposed on imports from China. There is bipartisan support in Washington for taking a tougher line on China, with many Democrats backing trade barriers to protect manufacturing jobs. Biden’s platform says he wants to “ensure the future is ‘made in all of America’ by all of America’s workers”, and he is pledging to spend $400 billion in government procurement of US-made goods, materials and services.
Biden’s economic nationalism and his climate goals come together in his plan for a carbon tax or quotas on imports. His campaign says a Biden administration would “impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations”. With the EU also working towards a similar carbon border adjustment mechanism, such tariffs could become increasingly prevalent over the next few years.