Biden wins – U.S. green future imminent, oil demand likely to rise

After several days of counting and anticipation, the United States of America have a brand-new President-elect – the Democratic Party candidate Joe Biden. With the White House now waiting for him, it is important to look at what a Biden win could mean to the oil and gas industry and the U.S. energy industry as a whole.

Although all votes have not been fully counted, Joe Biden has an unattainable lead over current U.S. President Donald Trump. As of 10 November, Biden has summed up 290 electoral votes while Trump has 214 – with 270 being the magic number needed to win.

But it is worth noting that the popular vote was closer than expected with Biden gaining 50.8 per cent of the votes – or 76,343,332 – and Trump wining 47.5 per cent – or 71,444,567. Not a landslide victory by any stretch of the imagination. But at least a candidate won both the electoral college and the popular vote unlike 2016 when Hillary Clinton won the popular vote but lost the electoral college by almost 80 votes.

We will not dwell on the complicated voting system in the U.S. too much, nor the fact that Trump and his supporters are still refusing to concede as is customary, but we will look at what the candidates had in store when it comes to oil, gas, and energy in general and what is the most likely scenario moving forward.

We are all well aware of Trump’s start to the Presidency. Hiring (and subsequent firing) of Rex Tillerson, chairman and chief executive officer of U.S. energy major ExxonMobil, as his Secretary of State as well as the hiring of Texas governor Rick Perry as the new energy secretary, followed Scott Pruitt’s appointment as the head of the Environmental Protection Agency.

With all three having a history of questioning the science behind climate change, this raised red flags with all environmentalists. And sure enough, Trump doubled down immediately.

On April 28, 2017, he issued Executive Order 13795 focused on opening more areas in the U.S. for offshore oil and gas exploration which negated President Barack Obama’s order, signed in his final days in the office, which withdrew millions of acres in the Arctic and the Atlantic Ocean from future oil and gas activity.

If this made the oil companies rub their hands with glee, it was certainly short-lived as the Order was deemed illegal and invalid by a federal judge in Alaska in late March 2019.

Trump did do two more things. One of them was signing into law a bipartisan bill which would direct royalties from offshore oil and gas drilling operations to fund maintenance of public lands, national parks, and Native American schools. The other was much more impressive.

During Trump’s administration, the U.S. became the world’s largest energy producer, surpassing Russia and Saudi Arabia in oil production. It also became a net exporter of oil, when including refined products like diesel, jet fuel, and gasoline.

Being energy independent was a target for every president since Nixon, and after nine presidents came and went, Donald Trump was able to say that the country was energy independent.

Government data showed that U.S. oil production peaked at 13.1 million barrels a day in 2020, before declining as Covid-19 hit the world economy hard and decreased oil demand. Oil production in the country fell below 10 million barrels a day but was again averaging 10.6 million barrels a day from last month.

It must be said that the Obama administration was the one that presided over the rapid expansion of U.S. oil and gas. As every other president, it tried to tackle energy independence but the Trump administration took it a lot further than anyone thought with Trump attempting to “weaponize” oil production by making it a heavy-handed policy lever.

To put it more into context, when Obama won the White House in 2008, the U.S. was producing just 5 million barrels a day, and he was able to lift the country’s production to 9.5 million barrels in 2015 before falling off in 2016.

All of this points us to one simple conclusion – Trump likes oil (and coal) and has decided to protect the industry and the industry’s interests as much as he can.

This brings us to a single U-turn which happened during his campaign when Trump signed an order to extend an offshore oil drilling ban in the eastern Gulf of Mexico off Florida until 2032. The executive order also expanded the ban to Florida’s Atlantic coast and the coasts of Georgia and South Carolina.

But it is widely known that this was a simple political move as the political reality in Florida is that even Republican governors opposed oil exploration off their shores, fearing it could imperil beaches and harm the tourism-dependent economy of the state.

Now that he is not the old-new President, but is on his way out we must look at the person coming in and the questions and differences he will most certainly have with Trump.

Although not an ‘offshore thing’ it has to be mentioned right off the bat. A topic during every debate and Trump rally – the claim that Biden would ban fracking.

To be clear, it was always a false accusation. Biden repeatedly knocked down the claim that he opposed fracking. Instead, Biden plans to end permitting fracking and other oil and gas drilling only on federal lands in the West — not on state or private lands such as those in Pennsylvania.

The state is a known swing state that both candidates were fighting for, albeit with different means, and voters in the state went with Biden on this topic but narrowly – with a difference of only 0.7 per cent in favour of the President-elect.

We must be clear on U.S. law here – oil production is regulated by states. So, a ban on fracking would not be possible either way – if a state wants it to happen on its land. But there is a lot more of federal land to be had for such endeavours, especially in the western third of the country.

This is where the two have a completely different outlook on matters. During the Trump administration, the U.S. has become a big exporter of oil, following a reversal of a long-running ban on exports during the final weeks of the Obama administration.

When the world had more oil than it could handle, back in 2016, Saudi Arabia, OPEC, and Russia formed OPEC + which regulated oil production from OPEC, Russia, and other non-OPEC producers to tackle the impact of surging U.S. oil output.

When oil demand crashed during the pandemic in early 2020, Russia and Saudi Arabia got into a spat over production goals – something Trump directly involved himself with to help forge a deal to stabilize crashing energy prices.

Being a Democrat, Biden could have a completely different outlook on things and his win could have an immediate impact on the outcome of the OPEC+ meeting in December.

Now that the Blue party runs things in the White House, Russia could be subject to more sanctions for several issues – one of them being their involvement in the U.S. election. Also, Saudi Arabia might get the cold shoulder as well as there is the issue of the Saudi government’s human rights record and the yet unsolved disappearance of journalist Jamal Khashoggi.

This is not without merit as Biden pledged in his campaign to reassess ties with the Saudis, demanding more accountability over the killing of Khashoggi and calling for an end to U.S. support for the Yemen war.

To make this an even more awkward transition for Saudi Arabia, Crown Prince Mohammed bin Salman – who had close personal ties with Donald Trump – was ‘late for the party’ and congratulated Joe Biden on his victory in the presidential election more than 24 hours after he defeated Trump.

Another country looking to return to the oil market is Iran with Biden set to re-enter the Joint Comprehensive Plan of Action which Trump abandoned. The Obama era agreement allowed for the removal of sanctions on Iran in exchange for an end to its nuclear program, but Trump drew out the agreement calling it one-sided.

If Biden makes such a move, that will allow for the return of about 1 million barrels a day of Iranian crude by the end of 2021.

Biden released his plan earlier this year to spend $2 trillion over four years to significantly increase the use of clean energy in the transportation, electricity and building sectors.

The first man to oppose this plan was – you guessed it – Trump, who called it “the most extreme platform of any major party nominee, by far, in American history. I think it’s worse than actually Bernie’s [Sanders] platform”.

The plan outlines specific and aggressive targets, including achieving an emissions-free power sector by 2035. When compared to Biden’s original plan, it is even more aggressive since the first plan called for spending $1.7 trillion over 10 years to achieve net-zero emissions before 2050.

One major element of the announcement will include charting a path to zero carbon pollution from the U.S. electricity sector by 2035. Coal and natural gas still account for more than 60 per cent of the sector.

The plan encourages the installation of “millions of new solar panels and tens of thousands of wind turbines”, but also keeping in place existing nuclear energy plants. It will also call for investing in carbon capture and storage technology for natural gas. Research funding and tax incentives for carbon-capture technology were also promised in the plan.

It is obvious that the Biden administration would push greener fuels. The next logical step would be to rejoin the Paris Agreement. Trump pulled the U.S. from the accord back in 2017 calling it “unfair to the U.S. and economically disadvantageous“.

The Paris Accord, committed to tackling climate change, was signed by 195 nations in December 2015. They pledged to try and keep the global warming going over 2 degrees Celsius above pre-industrial levels. Then U.S. President Obama signed the deal as well.

With all this being said, it is clear that the oil and gas industry will be affected by the Biden win but will it be immediate?

The president-elect did little to curry favour with the oil and gas industry during the campaign, other than deny accusations that he would ban fracking outright. It went so far that his campaign refused to accept funds from the industry.

However, the overall impact of the Biden presidency on the industry is likely to be less traumatic than feared. One of the more important reasons for that the entire world, and the U.S., are already engaged in the transition to a low-carbon energy future.

The U.S. Energy Information Administration reported that coal production slumped to a 41-year low in 2019 – down 8.8 per cent since 2017, the first year of the Trump administration. Remember, that was the time when the U.S. president was trying to restore miners’ jobs. The reason behind the drop is quite simple – the power generation market decided for economic reasons to shift from coal to natural gas.

Now that Biden will be in the White House, his policies will accelerate movement on climate change from a policy perspective. The pressure to continue reductions in flaring, carbon footprint and overall environmental impact was already being felt by companies from investors concerned about ESG issues.

And even within the energy space, there will be winners and losers in the Biden era. For example, Texas has no federal leases, so any restrictions on federal land fracking would not affect the state and might gain if producers from neighbouring New Mexico decide to shift operations to the east.

Almost 70,000 Louisiana jobs are riding on the President-elect Joe Biden’s plan for oil and gas. Although his focus is on transition, the oil industry is also responsible for a chunk of Louisiana’s economy. Changes could be coming for thousands live off oil and gas. According to a 2020 report, the industry has a nearly $74 billion economic impact in the state.

If Biden follows through on his green energy campaign, some oil companies would not be allowed to drill new holes in the Gulf of Mexico or get new acreage for fracking on federal land. Also, Biden stated he would roll back the President’s tax cuts, which almost certainly means gas giants would have to cough up more cash.

Some producers like Shell were already headed in this direction before voters decided the election. Last week, Shell announced it would close a plant in Saint James Parish to move to a greener industry. That was a loss of 675 jobs. Other companies with transition plans in place are BP and Equinor among others.

Yet, Biden’s plan aims to clean up the air by 2050, which would keep Louisianans healthier and benefit the state’s solar and wind companies. Eliminating some pollution could slow coastal erosion.

But now we wait. The presidential race is over and the impact of any Biden step is yet to be weighed. All we know is that, in principle, a champion of the fossil fuels industry is leaving and the champion of the green energy industry is coming in.

Will oil and gas feel the drop immediately or will it be a gradual (and relatively painless) transition – it remains to be seen. But either way, the next four years will be an exciting period for the energy industry for one reason or another.