Calm returned to the US Capitol yesterday following Wednesday’s attempted coup by Trump supporters. The fallout saw widespread condemnation from opponents and allies alike. Several officials from Trump’s administration resigned over the crisis while Democratic leaders mounted a push to forcibly remove him from office. Social platforms also turned their back on the lame-duck president. Twitter temporarily suspended Donald Trump’s account while Facebook imposed an indefinite ban.
Amid calls for impeachments and desertions, Trump adopted a more reconciliatory tone. He finally conceded that Joe Biden would become the next President of the US and condemned the violence he incited. Yet his belated decision to end a campaign to overturn the election result will not take away from a nightmarish end to a calamitous presidency.
As the rogue US President found himself increasingly isolated, optimism continued to prevail on stock markets. The Dow Jones and Nasdaq closed at fresh record highs as investors cheered confirmation that the Democrats have taken control of the Senate. The “blue sweep” of Congress has lifted hopes that Washington will soon pass further stimulus. The prospect of more economic stimulus prompted Goldman Sachs to upgrade its US growth forecasts. It now expects 2021 GDP growth of 6.4% compared to 5.9% previously.
That is not to say that all is hunky-dory for the US economy. Rising Covid-19 infections are keeping the US labour market under the cosh. The number of Americans filing first-time claims for jobless benefits remained painfully high last week. Today’s closely watched non-farm payroll report will show that the pace of job creation slowed markedly last month.
Oil, meanwhile, took a breather after a run of Saudi-inspired gains. Brent came within a whisker of $55/bbl but ended the day little changed as traders took profits. That said, the surprise Saudi cut is keeping bulls at the helm of the energy complex. The tightening supply backdrop prompted UBS to raise its Brent forecast to $60/bbl by mid-year. This may seem like a tall order given that the coronavirus pandemic rages. But it will take a brave man to bet against the current bullish run of play.
Don’t shoot the messenger
The wait is finally over: Congress has certified Joe Biden as the next president of the United States. One can only hope that this will silence Donald Trump’s violent supporters. Attention should now focus on the peaceful transition in which the self-proclaimed “oil man” gives way to the “climate man”. The incoming Biden administration is seen as a boon for financial markets due to the prospects of more fiscal stimulus for the US economy. The same, however, cannot be said for the US oil industry. The president-elect is no friend of fossil fuels and his arrival in the White House will herald a new period of uncertainty.
Unlike his bigoted predecessor, Joe Biden is a firm believer that climate change poses an existential threat to the planet. Accordingly, he wants to make the climate crisis his top priority. To do this, Biden is poised to reinstate environmental policies that have been gutted by the outgoing administration. One of his first acts as US president will likely be re-joining the Paris Climate Change Agreement. This is part of the president-elect’s broader climate agenda which will see the country launch a $2 trillion Clean Energy plan. The aim of this is to put the US on a pathway to achieving net-zero carbon emissions by 2050. All in all, the soon-to-be most powerful man on Earth is sending signals to the rest of the world that he is serious about dealing with climate change.
For this very reason, Joe Biden’s presidency is certain to reshape the US energy landscape in the years to come. And there is reason to fret for oil and gas producers. The ambitious climate and environmental goals set out by the incoming administration are not conducive to a flourishing fossil fuel industry. Yet rather than cripple the sector, the new US government will slowly and gradually whittle away at the amount of oil and gas that can be produced. The simplest way of achieving this is by raising costs and imposing tougher restrictions.
In his campaign manifesto, Joe Biden pledged to ban new oil and gas leasing and permitting on federal land and water. These make a prime source of fossil fuels, accounting for 22% of total US oil output. The move is unlikely to hit too hard in the short to medium-term. Yet looking further ahead, analysts at S&P Global Platts reckon it could knock up to 2 mbpd from total US oil and gas production by the end of 2024.
Other mooted measures aimed at limiting fresh supply from the fossil fuel industry is ending tax subsidies, which are worth about $20 billion per year. There is also talk of modifying royalties to account for climate costs and introducing a carbon tax to limit greenhouse gases. Couple this with a tightening of the regulatory screws and the key takeaway is that fracking will likely become more expensive under Biden. Indeed, analysts at Goldman Sachs reckon the increase in the cost of production could be between $5 and $6 a barrel.
And it’s not only US shale producers that will likely be worse off from a Biden presidency. States and local governments reliant on tax revenues from oil production will be left with a sizeable hole in their finances. All the while, depressing growth in the domestic US oil and gas business may lead to an increase in reliance on foreign energy. Needless to say, this will quash any lingering hopes of American energy independence.
It is easy to portray Joe Biden as the party pooper of the oil and gas industry. After all, he is poised to propel green energy segments forward at the expense of hydrocarbons. However, it must be noted that other factors are also at play. Market forces are increasingly focused on renewables. A prime example is the growing demand for clean energy adoption of electric vehicles. The transition away from fossil fuels is therefore already under way in America. The Biden presidency will merely reinvigorate this process after being hampered by Trump’s school of science.