The U.S. presidential election of 2020 was a hotly-contested battle between two candidates with very different ideologies. Among the key areas of contrast were views toward climate change and energy production. Accordingly, the electoral cycle was defined by conflicting policies from pro-energy incumbent President of the United States (POTUS) Donald Trump and environment-friendly challenger Joe Biden. Upon Biden securing a 306 to 232 victory in the Electoral College, U.S policies toward drilling, exploration and carbon emissions were due to make a 180-degree shift.
Initially, the impact of Biden's 2020 win on the world's energy markets was unclear. Underpinnings such as a lagging United States dollar (USD) and the coronavirus (COVID-19) pandemic remained the primary drivers of the global oil and natural gas complex. However, upon entering the White House, a series of Biden executive orders (EOs) appeared to fundamentally change the energy market landscape. Although prices remained relatively stable during January 2021, the potential long-term implications weren't being ignored by traders and investors worldwide.
Campaign 2020: Build Back Better
Under the slogan "Build Back Better," Democratic candidate Joe Biden pledged to reduce the environmental impact of U.S. commerce and industry. Key talking points were centered around tackling the climate emergency, crafting a clean energy future and promoting environmental justice.
As it pertained to the energy markets, the increased regulations, transitioning to a net-zero carbon economy and targeted infrastructure spending were inclined to impact pricing. To accomplish these objectives, Biden outlined a series of policy changes in his 2020 campaign's official mission statement.
Tackling The Climate Emergency
On the campaign trail, Biden repeatedly emphasized the importance of the "Green New Deal" to the future of American commerce. Guiding tenets of the Green New Deal state that the U.S. must aggressively address the topic of climate change and that the environment and American economy are completely interconnected.
With respect to the Green New Deal, Biden proposed a comprehensive plan for addressing climate change. Below are the proposed actions:
- Ensure that the U.S. transitions to a 100% clean energy economy with net-zero emissions by 2050
- Invest in infrastructure designed to withstand the impacts of climate change
- Rally the world to address the threat of climate change and rejoin the Paris Climate Accords
- Invest in clean energy and environmental justice
Build A Modern Infrastructure And Equitable Clean Energy Future
Lauding the need for a science-first approach to environmental stewardship, Biden outlined a collection of mandates aimed at building a clean energy future. In the first term, Biden pledges to commit US$2 trillion to "set us (United States) on an irreversible course to meet the ambitious climate progress that science demands." This objective is set to be accomplished via the following policies:
- Create millions of infrastructure-oriented union jobs
- Create 1 million new jobs in the auto industry, centered on electric vehicles
- Provide zero-emissions public transportation to cities with at least 100,000 residents
- Achieve a carbon pollution-free U.S. power sector by 2035
- Promote environmental justice for negatively impacted communities
- Create 250,000 jobs in plugging abandoned oil and natural gas wells and reclaiming abandoned mines
Secure Environmental Justice And Equitable Economic Opportunity
One of the key talking points of Biden's environmental plan involves the promotion of justice and economic opportunity. Pointing to the adoption of an "all-of-government" approach, new policies were aimed at cleaning up polluted areas, prosecuting violators and diversifying opportunity. Below are Biden's proposed actions to satisfy this objective:
- Create an Environmental and Climate Justice Division within the U.S. Department of Justice
- Modernise the all-of-government approach by elevating the White House Environmental Justice Advisory Council and Environmental Justice Interagency Council
- Revamp the Environmental Protection Agency (EPA) civil rights compliance office
Immediately upon taking the oath-of-office, the new POTUS began signing a vast array of executive orders (EOs). An EO is a written directive signed by the POTUS that manages the operations of the federal government. Within a week of being in office, Biden signed a record 42 EOs. Several of the issues addressed were health care, equity, economic development, immigration, COVID-19 and climate change.
In the environmental arena, Biden wasted no time in living up to campaign promises. Initial EOs directed a collection of actions intended to address climate change. The following objectives were accomplished, each potentially impacting energy-sensitive markets and sectors:
- Made the climate crisis a primary driver of U.S. foreign policy
- Halted all new oil and natural gas leases on public lands or offshore waters
- Established the National Climate Task Force and the Special Envoy for Climate on the National Security Council (NSC)
- Rejoined the Paris Climate Accords
- Cancelled permits for construction of the Keystone XL pipeline
- Ordered review and possible reversal of more than 100 Trump-era environmental directives
This collection of EOs exhibited Biden's commitment to transitioning from fossil fuels to clean energy. Orders to halt construction of the Keystone XL pipeline and ceasing the issuance of new oil and gas leases on federal lands/waters were aimed at limiting U.S. energy production. Critics contended that hydraulic fracturing, also known as "fracking," was being banned. On 27 January 2021, Biden publicly addressed this concern:
"Let me be clear, and I know this always comes up: We're not going to ban fracking. We'll protect jobs and grow jobs, including through stronger standards, like controls from methane leaks."
These EOs and environmental policy shifts were viewed by many as being detrimental to U.S. energy independence. According to the American Petroleum Institute (API), the drilling ban on federal lands alone would reduce American crude oil output by 22% and natural gas by 12%. Given the new restrictions, experts at the API suggested that the ban was to increase U.S. reliance on foreign imports and cause supply shortages.
On the surface, Biden's environmental policies are likely to have a profound, long-term impact on the energy sector. Prices of energy-oriented companies, natural gas, crude oil and refined fuels may all see significant volatility. From a macro perspective, the supply/demand ramifications could be significant:
- Decreased Supply: Reduced supplies stemming from lagging U.S. output may foster higher prices for crude oil and natural gas commodities.
- Demand: Reduced U.S. output is likely to boost dependence on foreign oil and gas imports until viable green energy is up and running on a large scale. Thus, global supplies may decrease for a period due to increased U.S. consumption.
- Inflation: If sustained, higher crude oil prices will lead to increased costs for gasoline and diesel refiners. In turn, refined fuel prices rise, driving up the cost of producing and delivering goods and services.
Although measuring the long-term impacts of Biden's policies is largely theoretical, energy-centric assets did react to the initial EOs. From 18-29 January 2021, the markets saw considerable action:
- West Texas Intermediate (WTI) crude oil and North Sea Brent (Brent) entered consolidation as traders evaluated the impact of Biden's EOs. For the period, the USOIL (+0.06, +0.1%) and UKOIL (+0.08, +0.1%) CFDs were non-committal and range bound.
- Compared to WTI and Brent, Henry Hub natural gas traded with enhanced volatility. Over the two weeks, the Natural Gas CFD fell by 0.058, a loss of 2.2%.
- In addition to commodities, RBOB gasoline (RBOB) and Heating Oil (Platts) futures listed on the Chicago Mercantile Exchange (CME) experienced consistent participation. Amid Biden's inauguration and EOs, March RBOB gasoline (+0.0354, +2.3%) rallied and February Heating Oil (+0.0010, +0.06%) came in flat.
- The new policies toward fracking proved to be negative market drivers for oil field services stocks. Prices of Halliburton (HAL) and Schlumberger (SLB) shares dropped by (-US$3.48, -16.46%) and (-US$2.99, -11.86%), respectively.
- Energy producers and drillers didn't fare much better than their oil-services counterparts. For the period, shares of Texas-based driller Apache (APA) (-US$3.99, -22.14%) plummeted. Large scale producers Hess (HES) (-US$7.86, -12.71%) and Exxonmobil (XOM) (-US$3.61, -7.45%) also exhibited bearish action.
Past performance is not indicative of future results.
The implementation of Biden's climate-oriented EOs had a largely negative impact on the energy sector. Participants in the North American fracking industry saw major pullbacks in value, as did natural gas. Conversely, both WTI and Brent crude oil prices held firm. At least initially, it appeared as though the markets began pricing-in a long-term decline in U.S. oil output―a phenomenon likely to boost oil and refined fuel pricing. As for energy businesses, negative sentiment stemming from a projected industry contraction hurt valuations.
It's always difficult to accurately project energy market behaviour. A wide variety of underpinnings can influence oil and natural gas prices, as well as refined fuels. The drivers of these markets often arise unexpectedly and include armed conflict, terrorism or Black Swan events such as the COVID-19 pandemic.
As of 2019, U.S. oil output grew by 11% year-over-year, exceeding 12 million barrels per day. Additionally, U.S. natural gas output grew by 10% in 2019, largely due to the expansion of fracking enterprises. The gains made the U.S. the world's leading producer of oil and natural gas, boosting both domestic and global supplies.
However, judging by the first set of environmental EOs, the Biden administration appears committed to aggressively addressing the issue of climate change. Halting construction of the Keystone XL pipeline and the issuance of new fracking permits are likely to vastly reduce U.S. energy output.
At their core, the Biden-era environmental policies are designed to shift the U.S. economy from dependence on fossil fuels to green energy. Initial EOs are aimed at restricting crude oil and natural gas production, prompting a contraction in North American fracking. These policies will have a profound impact on the energy markets, likely driving crude oil and natural gas prices higher over the long-term. Subsequently, refined fuel pricing is due to rise in concert with the boost in commodity values. As a result, extreme uncertainty faces the energy markets as the U.S. begins a wide-scale transition from fossil fuels to alternative energy sources.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…