Election Impacts on Energy Policy and Prices

The election was a resounding win for President-Elect Trump and provides him with a clear mandate to change federal energy policy. His ability to implement policies is further supported by the fact that the Republican party now controls the Senate and may control the House of Representatives. In light of this historic shift, we have provided a short summary of the likely energy policy changes to be implemented by the Trump Administration and their impact on energy prices. While our position has been that the outcome of the election will not significantly affect near-term prices, there are factors that may influence prices in the long term.

LNG: Immediate removal of the ban on issuing permits for constructing new LNG export facilities.
Sentiment: Neutral to Bullish for long-term natural gas forward prices
Commentary: An increase in LNG export terminals would increase foreign demand on top of an already tight domestic natural gas supply and demand balance. This could force an increase in supply to keep up with higher demand. This is a long-term driver of prices as LNG export projects take time to contract and build (5 years). Alternatively, the global market for LNG might already be saturated, making this closer to neutral in the short-term.

EPA: Expect the EPA to scale back efforts to address emissions from fossil fuel plants (Methane Rule, Good Neighbor Rule, Mercury Rule, Power Plant Emission Rules).
Sentiment: Bearish to Neutral on short to medium-term power prices
Commentary: All of the proposed EPA rules are currently being litigated and had only a limited chance of implementation. Regardless, a new Trump administration will certainly provide additional assurances that older oil, natural gas, and coal plants can run longer without meeting new environmental guidelines. To the extent that the life of these plants is extended, it should increase electricity supply. Alternatively, the decision to retire power plants is highly driven by market conditions and prices. Falling energy prices would increase their probability of early retirement or increased subsidies to maintain operation.

Inflation Reduction Act: President-Elect Trump will likely take steps to repeal or limit the availability of tax credits and other incentives for renewable generation.
Sentiment: Bullish
Commentary: Tax credits and other subsidies for low-carbon generation materially reduce the cost of developing new wind and solar facilities. Eliminating these incentives will increase the cost of renewable electricity which should put upward pressure on all energy prices.

Tariffs: Expect higher tariffs on solar panels, and other goods manufactured in China, Mexico, and other countries.
Sentiment: Bullish
Commentary: The construction of all power generation facilities would be increased by tariffs, although the most significant impact will be on solar panels and other renewable components. Increasing the cost of renewable power generation would put upward pressure on energy prices.

FERC: President-Elect Trump will be able to name the next FERC chairman.
Sentiment: Neutral
Commentary: The composition of FERC, 3 democrats, and 2 republicans will not change for at least 18 months. A new chairman (appointed by the President) will be able to adjust the FERC’s agenda, and it is likely that the new chairman will steer the FERC away from transmission projects that support renewable generation. However, little can be done with the democrats in control of FERC. The Chair of the House Committee on Energy and Commerce sent a letter to the current Chair, Willie Phillips, instructing him to stop work on “any partisan or controversial item under consideration.”
Note that FERC Order 1920 (transmission planning) is already being challenged in the courts. Rep. Commissioner Christie argued in his dissent that this order unfairly promotes renewable resources and that FERC did not have the authority to issue the order.

Offshore Wind: President-Elect Trump has promised to dramatically reduce or eliminate offshore wind.
Sentiment: Bearish to overall consumer costs
Commentary: Offshore wind projects require permits from the federal government, and today, there are about 11 GWs of projects waiting for Interior Department approval. We expect that offshore wind development will be slowed for the next four years. Since offshore wind is very expensive, we think this delay could lower, or at least postpone, the costs passed on to customers to pay for these projects. However, in load pockets like New York City that is depending on offshore wind to meet higher demand, it could create reliability issues and continue the retirement of older, inefficient peaker power plants.

Overall energy commodity prices affected by an administration that decreases barriers of increased domestic energy production are likely not going to have material impacts on short or medium-term oil, natural gas, or gasoline prices.

Crude Oil

As shown in Figure 1, crude oil prices are currently trading around $70 per barrel and are backwardated through the forward curve, trading in the mid to high $60’s for 2025 through 2027. When looking back at spot crude prices, adjusting for inflation using the Consumer Price Index, over the past 20 years there are few instances when prices were below the current price of $70 (about 23% of the time). If you lower that threshold to $60 per barrel, that percentage drops to less than 10% of the time. Given the geopolitical pressure of OPEC and the global nature of crude oil prices, further price declines in crude oil and gasoline are not likely in either probability and magnitude, at least not from current price levels.

One presidential action that had a significant effect on energy prices occurred in 2022 when President Biden tapped into the Strategic Petroleum Reserve (SPR) to stabilize high crude oil prices. This lowered short-term prices by utilizing government actions that ultimately lowered incentives to increase production. This also placed a floor on the price of crude oil by essentially declaring a buy order to refill the reserve when oil prices are near $70 per barrel. The SPR is still short about 120 million barrels after selling around 180 million in 2022, and only refilling about 59 million over the past two years.

Figure 1. WTI & CPI Adjusted WTI, by: 5

Natural Gas

The natural gas equivalent of West Texas Intermediate, the Henry Hub in Louisiana shown in Figure 2, is in a similar situation, with spot prices this year being some of the lowest since natural gas prices were deregulated in the 1990’s. While an administration that supports increasing domestic energy production is helpful, market prices will ultimately determine the growth of supply. And right now, it just isn’t economically practical to incentivize or subsidize any additional growth in energy production. Said another way, even with additional government support, it’s hard to see the price of natural gas going much lower in the near term.

Figure 2. Long-Term Wholesale Spot Natural Gas Prices, by: 5

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