The 2020 election may prove pivotal for the global energy industry. A victory in November by Democrat Joe Biden would bring about a decisive shift in the United States’ approach to climate policy and fossil energy.
The change in administration represents more than just a turn back to Biden’s vice presidential days under President Barack Obama. The coalition of progressive organizations and causes that have come to dominate the left in recent years has moved the goalposts quite a bit further downfield – with significant implications for energy producers.
Biden’s stance against hydraulic fracturing, which turned the United States into the world’s top oil and gas producer, is well-publicized. Biden’s campaign has tried to distance itself from the candidate’s anti-fracking statements. Still, Biden has also said he wouldn’t allow new oil and gas development on federal land or waters, and has vowed to support lawsuits by state and local governments to sue oil companies over climate change.
It is Biden’s foreign policy positions, however, that could prove the most disruptive to global energy markets and U.S. energy companies in the long run.
President Donald Trump became a major player in the oil markets during his first term, not only by nurturing the domestic oil and gas industry with his deregulatory plan but also through his foreign policies.
Trump’s sanctions on the anti-U.S. regime in Iran wiped out some 2 million barrels a day of oil production from the OPEC member, making room for U.S. shale to seize a more significant share of the export market – at the expense of the oil cartel. The president’s withdrawal from the Paris Climate Accord, an agreement forged under the Obama-Biden administration in 2015, signaled investors that President Trump was not interested in sacrificing economic growth in exchange for a non-binding climate agreement.
Biden has indicated he would revert to the policies the Obama administration enacted during the eight years he was vice president (2008 to 2016). That likely means re-engaging with Iran and resurrecting a nuclear deal that Trump abandoned. Reengagement would potentially include sanctions relief for Tehran, which might allow it to resume exporting its oil supply in exchange for hard currency.
Recall that Iran increased its oil production to roughly 2.5 million barrels a day before Trump pulled out of the nuclear deal and enacted his “zero-tolerance” sanctions policy in May 2019. Iran’s oil exports today are around 250,000 barrels a day.
U.S. producers have filled the gap left by Iran and other failing OPEC countries under U.S. sanctions. A friendlier U.S. relationship with Iran would poke not only Saudi Arabia but also increase competition with shale.
Trump made repairing the U.S.-Saudi relationship a priority. That relationship suffered under Obama and Biden because of Washington’s nuclear deal with Tehran, Riyadh’s bitter enemy.
Trump’s detente with Riyadh has paid dividends to the United States. Trump was able to leverage his relationship with Saudi Arabia to get OPEC to act in U.S. energy interests. The benefits of closer relations with Riyadh was most evident in April of this year when Trump helped broker a supply cut deal between OPEC and its allies, lead by Russia. That deal ended an oil-price war between Russia and Saudi Arabia and pulled markets back from the brink of collapse in the face of Covid-19. Oil prices have since stabilized at around $40 a barrel — a level that has allowed many U.S. producers to stay afloat during the downturn.
If Washington shifts its focus to Iran under Biden, you can bet it will lose influence with Riyadh and OPEC. It might even induce Riyadh to pursue a strategy of increasing its market share to push out higher-cost U.S. shale production. After all, that’s what Saudi Arabia did when Russia opposed a new round of price-supportive OPEC-plus supply cuts in March.
Trump has also sought to open new markets for U.S. oil and liquefied natural gas (LNG) exports. In Europe, sanctions on Russia’s Nord Stream 2 pipeline are seen by Moscow as an attempt to force more U.S. LNG into the EU — still Russia’s biggest and most important market. Trump administration officials have openly urged EU members to diversify their gas supply. In Asia, Trump’s hardline with China over trade has pushed Beijing to commit to purchasing billions of dollars worth of U.S. oil and gas — though those sales now appear in doubt.
Biden, on the other hand, views America’s energy superpower status very differently. In his “Plan for a Clean Energy Revolution and Environmental Justice,” which was released July 14, he makes clear that he would reorient the United States away from fossil energy.
A Biden victory could herald a new era for U.S. energy policy, accelerating low-carbon transition efforts while curtailing oil and gas activity.
The scope and scale of any change would depend on the Senate’s level of support, where Republicans now hold a majority. Without explicit Congressional control, progress would likely be slow, contested, and — as with key Obama policies — reversible. But even without Congressional support, the oil industry would suffer under Biden as investor sentiment would swing negatively under an “anti-fossil fuels” president.
In Trump, investors know they have an ally. In Biden, investors aren’t sure who they will get. Will Biden be the moderate who was tough on crime and supportive of economic development or the new progressive Joe who has embraced the culture wars. The truth is that it doesn’t matter which Biden shows up for work on day one. That’s because his cabinet will likely be far more progressive than even President Obama’s.
Under Biden, the United States would resume its March toward decarbonization. Biden has indicated that he intends to set a new tone on climate by rejoining the Paris Agreement on day one while looking to reverse Trump’s moves to relax emission targets for the power sector and transportation.
Without Senate support, though, the latter efforts are likely to progress slowly, primarily through executive action — as they did under Obama. Should Democrats win control of both the House and Senate, Biden would likely pursue accelerated efforts toward achieving net-zero emissions by 2050, through measures like phasing out the internal combustion engine — potentially as early as 2035 — and net-zero power generation targets by 2040 or earlier.
Biden may ultimately shun the more radical demands of the left, such as blanket fracking bans. Still, he’s more likely to place new limits on drilling in public lands and offshore, enact aggressive methane reduction targets, and intensify scrutiny of pipeline projects that are already nearly impossible to build due to environmental opposition in the courts.
Such regulations could push an already weakened U.S. oil production down toward 10 million barrels a day from 13 million barrels a day in late 2019. If the Covid-19 pandemic does not permanently set back the U.S. oil and gas boom, a Biden presidency could do it.