AEGIS Factor Matrices: Biden Administration

Like many other industries, energy has been much more dependent on the global economy rebounding from Covid-19 than on federal policy. Oil analysts at J.P. Morgan have asserted that "aside from short-term volatility, the electoral outcome was not particularly relevant for oil prices in 2021." In contrast, AEGIS concludes some factors could impact prices in the short-term, notably Iran Sanctions and Pandemic Shutdowns. Our Factor Matrix demonstrates our conclusion that under a Biden administration, we could see downward pressure to prices in the short-term and potentially more bullish effects later on.

• "The impact of a Biden Presidency and Republican Senate at face value is modestly negative for crude in the short term as it reduces the size of potential stimulus and increases the odds of Iranian barrels hitting the market in 2021," CIBC wrote, referring to the deal signed by President Barack Obama that withdrew certain sanctions on Iran as long as that country stopped enriching uranium to weapons-grade levels. Trump pulled out of the agreement, and the resulting sanctions have reduced Iran's oil exports. If Biden reverses that decision, Iran could add millions of barrels of oil to global supplies, depressing prices. (Barrons)

• While Joe Biden has remained adamant that he does not plan to ban fracking, he has said he will stop issuing new permits for drilling on federal land. This is more of a long-term factor because the wells currently producing, and likely those already permitted, would not be affected by the policy.
• The ban would impact less than 10% of potential oil production. If extended to leases in the Gulf of Mexico, it could have a larger impact—perhaps curtailing as much as 25% of future production. (Barrons)
• The U.S. produces 23.7% and 13.0% of the country's oil and gas, respectively, on federal lands.

• Joe Biden has shown less opposition than Donald Trump to government-mandated mass quarantines, or so-called lockdowns. While the impact may not be as detrimental to oil demand as the lockdowns earlier this year, they would still impact fuels/ crude demand. We see this as a short-term issue due to the recent news of the progress on a COVID vaccine.

• Whether they are truly "subsidies" is up for debate, but some tax and regulatory treatment could be changed under Biden. Estimates by the Environmental and Energy Study Institute put U.S. direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20 percent currently allocated to coal and 80 percent to natural gas and crude oil. However, per EESI, these figures do not include indirect subsidies and negative externalities ultimately borne by society or the U.S. government.
• If subsidies for fossil fuels end, the economics of drilling a well could drastically change. Intangible and tangible drilling costs would be eliminated, making it more capital intensive to drill a new well. E&Ps' supply and reserves would be directly affected.

• Biden has stated he would impose stricter regulations on car manufacturers and increase the fuel economy standards for new vehicles, mandating a fuel efficiency rating of 54.5 miles/per gallon for light-duty vehicles by the end of 2025. Furthermore, he intends to subsidize electric vehicles using rebates to incentivize consumers. Biden also plans to have over 500,000 new public charging outlets built by 2030.
• Gasoline demand would decrease under policies that favor a significant increase in fuel efficiency and incentives to transition to electric vehicles. Still, this will take a very long time to implement.

• Biden has indicated that he will sign executive orders instructing federal agencies to develop new methane emissions limits for existing oil and gas operations. If enacted, this could affect U.S. supply in a few drilling basins immediately. According to the EPA, nearly 67% of U.S. methane emissions result from oil and gas production, with 47% coming from gas and 20% coming from oil. If a company nears its methane limit, it could be forced to either shut-in wells or pay additional taxes, which, depending on the amount, could impact wells' operating economics.

• Joe Biden has not formally announced his stance on US-China trade negotiations, but is widely expected to follow President Obama's foreign policy play-book. That would mean a friendlier stance on trade policies compared to President Trump
  • Per the NYTimes, "Biden's Advisors say they want to take a smarter approach that combines working with the Chinese on some issues like global warming and the pandemic, while competing with them on technological leadership and confronting them on other issues like military expansionism, human rights violations or unfair trade."
• If Biden is able to reach a trade deal with China, less tariffs between the US and China would likely support China's demand for energy products. This would likely lead to more US crude and LNG exports to China
• Our view could be wrong if Biden chooses to maintain a tougher stance on trade talks, or if he tries to attach emissions mandates to any trade agreement with China