Summary
- Within energy, election-year politics tend to focus on gasoline prices, but the LNG export permit pause provides an example of energy policy that is likely tied to political positioning.
- The impact of elections on the oil and gas sector tends to feel overstated. Energy production generally isn’t impacted, and the status quo tends to prevail as campaign commentary differs from enacted policy.
- The Inflation Reduction Act will probably remain largely intact following the election.
With one presidential debate already in the books, it is timely to discuss the potential impact of the election on the energy sector. Admittedly, the election may be more meaningful for clean energy companies than oil and gas names given a focus on the Inflation Reduction Act (discussed briefly below). Broadly, the impact of elections on oil and gas tends to feel overstated, but energy has been caught up in election-year politics to a degree. This note is intended to be an informative and unbiased review of common topics relevant to the energy sector as the November election approaches.
Election-year politics and energy.
Political positioning ahead of an election can impact the energy space. Politicians tend to be sensitive to gasoline prices, which can be important for voters. In that vein, the current administration announced the sale of 1 million barrels of gasoline from the Northeast Gasoline Supply Reserve in May to help ease prices at the pump. The impact for energy markets is relatively muted, but the sale resulted in media headlines about the White House trying to lower gasoline prices.
Another example of politics impacting the energy sector is arguably the pause on LNG export permits announced in January. The Department of Energy paused the review of applications as it updates the economic and environmental analyses used to determine if projects are in the public interest. Admittedly, these analyses were last updated in 2018 and 2019, respectively, so it is reasonable to update them. However, the timing seems politically motivated given the upcoming election and more recent pushback to LNG projects from environmental groups.
On July 1, a federal judge blocked the pause, saying that it conflicts with the Natural Gas Act as well as the Administrative Procedure Act. The Natural Gas Act mandates the DOE to conduct permit approvals in a timely manner and approve projects that are within the public interest. The Administrative Procedure Act requires advanced notice of rulemakings and opportunity for public comment.
The court struck down the pause, but it does not necessarily mean that the DOE will start approving applications. Export permits may remain in limbo as the DOE considers next steps or slowly reviews pending applications. It is our expectation that export permits will be issued after the election regardless of who wins the White House given the importance of US LNG exports for our allies (read more). Importantly, projects that have already received permits are not impacted, including the handful of facilities under construction that will add ~ 11 billion cubic feet per day of export capacity over the next few years (read more).
The impact of elections on oil and gas tends to feel overstated.
While acknowledging that executive orders can generate headlines and concerns, the overall impact of elections on oil and gas tends to be limited. The status quo generally seems to prevail due to the system of checks and balances, general compromises, or policies with implicit or explicit grandfather clauses. Regulations can cause headaches for the industry but generally seem manageable.
The outcome of the election is unlikely to impact US energy production in the medium term. Production is determined by management teams as they respond to price signals, and for public companies, as they try to build value for shareholders. Over a longer time horizon, onshore or offshore federal lease sales could impact what is available for drilling and eventually production.
Even when energy gets caught in political crosshairs, there is likely to be a big difference between campaign commentary and what ultimately materializes. As an example, in the last presidential election, drilling permits on federal lands and waters were threatened, so the industry stockpiled permits (read more). An executive order paused new leases, instead of permits, in January 2021, but it was struck down by the courts. A slimmed-down onshore lease sale took place in June 2022 with a higher royalty rate and more environmental parameters. Then additional oil and gas lease sales were mandated by the Inflation Reduction Act (IRA) as part of a compromise with Senator Manchin. In the end, the attempted policy was not as severe as feared and resulted in a temporary inconvenience instead of a disruption.
Risks to the Inflation Reduction Act.
Speaking of the IRA, there have been questions about whether the act could potentially be repealed following the election. Even in a Republican sweep, it would probably be undesirable to fully repeal the IRA given significant dollars earmarked for historically Republican-leaning states. That said, the IRA could be watered down or see specific portions repealed if Republicans control the White House and Congress. In a divided government, the IRA likely sees little, if any, meaningful changes.
Bottom Line:
For oil and gas investors, the 2024 election does not seem to pose a significant risk. News out of Washington will bear watching, but election outcomes and resulting policies tend to generally be manageable for the industry.
