Woodmac experts Ed Crooks (Vice Chair - Americas), Ann-Louise Hittle (Head of Macro Oils), Chris Seiple(Power and Renewables), Rob Clarke (Upstream) and Peter Martin (Economics) present their thoughts
They say few US Presidents ever really change a great deal. Certainly, the bolder aspirations of the Democratic campaign – among them tackling the coronavirus pandemic, healthcare, the economy and climate change – may founder on the hard grit of Washington politics. A Republican majority senate could stymie much of President-elect Biden’s plans. We won’t know what power he wields until the Georgia run-off in January.
So, what can a Biden administration do that affects energy markets in the years ahead? Our experts Ed Crooks (Vice Chair Americas), Ann-Louise Hittle (Head of Macro Oils), Chris Seiple (Power and Renewables), Rob Clarke (Upstream) and Peter Martin (Economics) present their thoughts.
The US has been an active and intrusive player in the geopolitics of oil these last four years. President Trump notably pressured OPEC and its partners to make capacity available in Q4 2018 when Brent threatened to soar to US$100/bbl; and worked with OPEC+ to ‘do a deal’ on production cuts in the demand crisis of 2020.
The global oil market today is in a fragile state, the OPEC+ producers actively managing oversupply and awaiting a recovery in demand. Joe Biden comes to office with the US the world’s biggest oil producer. But we’d expect a Biden administration will be more Obama-style, influencing oil market geopolitics more discretely.
Iran is the elephant in the room. The Biden administration could return the US into the international deal over Iran nuclear sanctions by Executive Order, without going through the Senate but has indicated that Iran must comply with the JCPOA terms – a potential stumbling block. The new President will also need to weigh up the balance of interest domestically, and with key allies including the EU. We don’t expect any negotiations about a renewed deal to begin until June 2021 at the earliest, after Iran’s presidential election.
Venezuela is an altogether different challenge for Biden with tough Trump administration oil sanctions in place in an effort to force President Maduro from power.
Climate change, decarbonisation, power and renewables
Putting the US back into the Paris Agreement is likely under Executive Order. The Biden ‘Green Deal’ – a US$2 trillion plan to eliminate carbon emissions from the US power sector by 2035, and a massive nation-wide integrated zero-carbon value chain and infrastructure build-out – looks at the very least likely to be heavily watered down.
Executive orders can work here too – offshore wind permitting and obtaining of leases (developers are queuing up to build out a nascent industry); and the government will likely become a bigger buyer of renewable energy and electric cars. The Administration will also look to shape a more renewables-friendly Federal Energy Regulatory Commission that could reverse decisions that have challenged the industry such as the recent Minimum Offer Price Rule (MOPR) in PJM.
The devolved nature of decision-making to the states means the strong growth of the last four years in renewables – now competitive with fossil fuel alternatives – can accelerate, particularly if tax credits are extended. The Trump administration’s pressure on California to abandon its zero emissions policies will be eased.
A priority will be rebuilding US relationships with international allies. As well as taking the US back into the Paris climate agreement, and reviving the international deal over Iran’s nuclear programme, Biden will seek to defuse trade tensions with the EU.
The Trump administration’s strategy to boost US manufacturing by curbing imports from China will be modified rather than abandoned. 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.” But Biden has said he will seek to work with allies around the world to “modernise” the rules of international trade.
One relationship that is likely to be cooler than under Trump is the one with Saudi Arabia. Biden said last year: “America’s priorities in the Middle East should be set in Washington, not Riyadh.” His campaign has said the US should ‘cancel the blank check the Trump administration has given Saudi Arabia’ over the war in Yemen. However, the shared strategic interests of Saudi Arabia and the US mean that there is likely still to be an effective working relationship.
US upstream oil and gas
A Biden Administration inherits an industry that’s boomed this last decade but has hit bust with the collapse in oil and global gas prices. It’s still an important source of tax revenue for certain states and a big employer – not least in New Mexico and Pennsylvania, key Democratic wins. There’s a delicate balance to be struck between nursing oil and gas through its current crisis and tightening the screws to align with the Democratic fossil fuel goals. We don’t expect the President-elect to stand in the way of the wave of necessary consolidation that’s underway.
Methane reduction from oil and gas facilities and a ban on new leases on federal lands and waters are central to the Biden manifesto on climate change. These can be enacted without Senate support, although the methane regulations will face a tough battle in the courts. The ban on new federal leases would have a minimal impact on oil and gas production onshore. Offshore it would be much more significant but would not materially affect US production until next decade. Any attempt to change the terms of existing leases would be challenged in the courts, and it’s important to note that the companies now controlling federal acreage are among the biggest US producers.
One third of voters saw the economy as the most important matter in deciding the Presidency. With the HEROES Act, a proposed US$3 trillion stimulus package, held up in Congress, there is lingering uncertainty about additional fiscal support for the economy. Biden’s victory does little to expedite passing the HEROES Act; we think the chance of a reaching a deal before the end of the year is low. With GDP growth momentum slowing and new Covid-19 cases rising, an absence of stimulus will stall the economy in Q4 – GDP growth slumping to -3.8% year on year for 2020.
Can Biden deliver stronger stimulus in 2021? If the Senate is under Republican control, it will be difficult to impose Biden’s economic agenda. Prior to the election, we assumed a slimmed down deal in 2021 – including stimulus checks to households totaling US$350 billion. That helps to deliver economic growth of 2.8% in 2021, annually. Risks are to the upside should Biden manage to push through his bumper economic recovery plan.