The End of Oil Supremacy
If Biden wins, oil prices may fall, setting in motion the reconfiguration of the world energy industry.
Back in May 2016, when he was still an unlikely contestant in that year’s presidential race, Donald Trump declared so-called energy dominance a strategic policy goal for the United States. A few months later, three leading Trump officials, including former Secretary of Energy Rick Perry, defined the concept as “a self-reliant and secure nation, free from the geopolitical turmoil of other nations that seek to use energy as an economic weapon.”
Once in the White House, Trump started an aggressive deregulation campaign to eliminate the rules that had stifled domestic production, opening up more federal land and offshore areas to drilling, while removing environmental regulations. In December 2017, a few months after he announced the U.S. withdrawal from the Paris climate agreement, the president made clear through his National Security Strategy document that energy dominance would not be reconcilable with the fight against global warming, and that the United States would focus instead on countering “an anti-growth energy agenda that is detrimental to US economic and energy security interests.”
Now, if reelected, Trump would continue to be a boon for the domestic oil industry. He would continue the deregulatory efforts that characterized his first term, while retaining some influence over OPEC+ through his solid connections with the Saudi leadership to keep prices from falling below a certain point.
By contrast, a government headed by former Vice President Joe Biden, Trump’s democratic rival, would put climate and the environment at the center of its policy agenda by boosting green investments, reregulating the shale industry, and rejoining the Paris accord. His administration’s drive for a Green New Deal would likely be perceived by investors as marking the end of an energy era dominated by oil, prompting a downward trend for oil prices that would transform the world of energy.
The two candidates’ diverging approaches toward climate change reflect the radically different attitudes of Republican and Democratic voters toward the issue. According to a recent Pew survey, the share of Americans who believe that global climate change is a major threat to the well-being of the United States has grown from 44 percent in 2009 to 60 percent in 2019. But the rise in concern has primarily come from the Democrats. Opinion among Republicans on this issue remain largely unchanged. About nine in ten Democrats (88 percent) consider climate change a major threat to the nation as opposed to just three Republicans (31 percent).
Given the feelings of his base, Trump has been able to live in denial about global warming, assuaging oil producers in key energy-intense constituencies, resisting the push of the international community to control carbon emissions, and denigrating and disqualifying science. He has called climate change “an expensive hoax.” According to the Brookings Institution, since 2017 the Trump administration has adopted 74 deregulatory actions that have weakened environmental protections. Even so, as the latest issue of the IMF’s World Economic Outlook reports, each successive decade since the 1980s has been warmer than the previous one; the years 2015-2019 were the warmest period ever reported; 2019 was likely the second-warmest year on record.
To be fair, the United States’ lack of commitment to decarbonization predates Trump’s presidency. Between 1970 and 2008, U.S. carbon emissions per capita were consistently more than twice as high as those from the European Union. Only over the last decade have emissions declined significantly, but the gap with Europe remains high. The gap would likely grow under a second Trump term, in which energy dominance would remain a guiding principle.
To maximize domestic production, Trump would likely try to complete his deregulation agenda and restrict the right of U.S. states to exceed federal minimum environmental standards. He would prioritize expanded domestic fossil fuel production over renewables and hand out new approvals for liquefied natural gas export infrastructure. Republican control of the Senate would be necessary to push through these initiatives, most notably in the confirmation of key political appointees at the federal agencies in charge of the deregulatory actions.
Should Biden win, his Green New Deal, which aims for the United States to achieve net-zero emissions no later than 2050, would shape his whole presidency beyond energy. On the fiscal front, he has promised to invest $1.7 trillion in projects aiming to decarbonize the U.S. economy. In particular, Biden has called for massive investment in solar and wind capacity to improve energy efficiency and impose clean electricity standards. He has promised to spark the second great railroad revolution, investing in high-speed trains and making trains a better substitute for trucks when it comes to freight transportation. Moreover, Biden has promised to ban issuance of new drilling permits on federal land and in federal waters.
The fight against climate change would likely also become an integral component of Biden’s foreign policy. He has pledged to rejoin the Paris agreement and promises that he will not allow countries like China “to game the system by becoming destination economies for polluters.” In the interim, the implementation of measures such as carbon tariffs would aim to both bolster the global competitiveness of U.S. companies and encourage the rest of the world to transition to cleaner energy sources. Biden has also demanded a worldwide ban on fossil-fuel subsidies and the creation of clean-energy exports and climate investment initiatives to spread best practices and technologies across the world.
Ultimately, Biden’s ability to push for his Green New Deal would strongly depend on whether the Democrats fully control Congress, because much of his plan envisages new public spending that needs congressional approval. However, even assuming a so-called blue wave scenario with the Democrats winning both Congress and the White House, the energy transition would still take several years to materialize—with a lot of uncertainty surrounding its full implementation that would extend well beyond a Biden presidency.
Reregulation of the shale industry would likely not imply a nationwide ban on fracking—as some of the most progressive on the left wing of the Democratic Party might advocate. Biden has repeatedly stated that he would only prohibit these drilling techniques on federal land, which represents a tiny of fraction of overall oil and gas extraction. Furthermore, and a bit paradoxically, in order to green the American economy, oil demand in the United States could receive a significant boost, since oil would still power many of the investment projects that Biden is promising. Building such infrastructure will still require using equipment that runs on oil, for example.
Finally, although Biden’s Green New Deal is heavily focused on government intervention, a successful green transition requires the commitment of Americans to change their way of living. And there is a large fraction of the American population that is resistant to doing so.
As a direct consequence of Trump’s energy-dominance policy framework, domestic crude production would increase while oil prices fall. Trump would probably try to contain downward price pressures by influencing OPEC+ as he did during his first term through his inflammatory Twitter diplomacy. His leverage over the cartel derives primarily from his ability to exert political and economic pressure on the Saudi leadership thanks to his tough stance adopted against Iran. However, this time around his influence might be compromised by the COVID-19 crisis that is creating enormous challenges for energy-dependent countries at a time when demand is struggling to return to normal.
By contrast, Biden’s Green New Deal would weigh on U.S. producers, restricting production and exerting upward price pressure—at least during the transition towards a greener economy when demand for fossil fuels will remain strong. The contraction in oil-related investments recorded in the last few months will further compound the price dynamics. But, in the short term, rising oil prices might be partly offset by Biden’s conciliatory approach toward Iran and Venezuela, which may bring around 3mb/d of additional supply to the global market.
Despite these short-term price fluctuations, a Biden presidency is likely to be perceived as a regime change for the oil industry and would gradually set in motion a secular downward spiral for oil prices. For the first time, peak oil would really be in sight. Investors may price in a structural change in the industry due to a growing shift of demand toward clean energy. Moreover, the Green New Deal would likely affect market conditions beyond the United States, potentially ushering in a green revolution on a global scale (in Europe, it has already started) especially if environmental standards enter the U.S. trade policy.
In other words, Nov. 3 might not only mark the end of the Trump era. If Biden wins, it would mean the end of the oil supremacy, too.