Trump Wins: Here Are the Implications for the Energy Sector

The Republican’s surprise election sweep (we were surprised, anyway) buoyed the markets. Given the sketchy nature of the policy proposals and the possibility that foreign policy will affect energy supply and demand, we decided to bring in our all round expert for a consultation, the legendary Question Man.

Q. Drill, drill, drill and deregulation is good for oil, right?
A. Well, it will reduce drilling and operating costs (no more pesky regulation) and open up more acreage for drilling. And that will increase oil supply without increasing demand, so draw your own conclusions about where price goes. In addition, if Trump throws Ukraine to the wolves, so to speak, and forges a deal with Russia, that will take Russian oil off the sanctions list. More supply, then? So, who really comes out ahead except the drilling companies?

Q. What about natural gas?
A. More optimistic outlook. The Republicans will kill those inquiries about methane leakage and stop states from restricting usage of natural gas in kitchens. They might be more approving of LNG exports too. GOP hostility to renewables could even increase natural gas sales to electric utilities. But the big increase to watch is sales to power plants. Remember, this industry has always wanted a transition from coal fired power plants to gas fired plants. They have now been given permission to do this by the incoming administration. And watch for those “net zero by 2050” commitments to slowly disappear too. On the negative side, warming weather trends will cut into gas winter heating sales. And a Russian deal on Ukraine could open world markets to Russian gas again, thereby depressing the market for American LNG. Is that a positive enough picture to make a big bet?

Q. How about electricity?
A. Definitely negative. Possible subsidy losses. But, worse, Trump hates electric vehicles (while loving Elon Musk). EVs offer the biggest potential for higher sales than the electric industry has seen in decades (bigger than data centers). In return, there will be a let up in pollution enforcement and encouragement to burn coal. This now looks like we’ll get increasing electrification but without decarbonization—an option I really hadn’t thought likely. Is that a good trade off?

Q. What are the near term prospects for renewables?
A. Are you kidding? You might see a quasi religious crusade to protect Americans from evil ecologists. Get rid of the subsidies. Cut the research. (Let the Chinese do it?) And the tariffs will make renewable equipment so much more expensive, So, is there a silver lining? Well maybe. As bad weather increasingly disrupts electrical service in certain regions for longer and longer periods (just don’t say “climate change”) the need for off grid, resilient energy systems becomes more apparent.

Q. I hear a lot about nuclear?
A. If the Republicans stick to their guns on this, new nuclear power plant construction in the US should be deader than the proverbial doornail. Why? Two reasons. First, if CO2 emissions are now irrelevant in evaluating new power plants, gas and coal are much cheaper to build. Second, many proposed SMRs have foreign components that would be adversely impacted by high import tariffs likely in the new administration.

Q. Anything else to consider?
A. Sure. A significant number of economists (not that they know anything) argue that higher tariffs will cause inflation, which might lead to higher interest rates (again?) and that will not be good news for big borrowers like electric companies or frackers or LNG terminals. On the other hand, a big reduction in corporate taxes would be meaningful because, believe it or not, some of the big energy companies actually do pay taxes.

Q. What did the market say about the election?
A. Here’s a chart of prices, starting with the Friday before election to Wednesday after the election.

Stock market prices for the market as a whole (S&P 500), oil
companies, utilities and clean energy companies as of the close
on November 1 (Friday), November 4 (Monday), November 5 (Tuesday)
and November 6 (Wednesday). (November 1 = 100).

Notice the divergence in the price lines. The market appears to be saying that the Trump victory will be good for business as a whole, maybe marginally better for the oil companies but not by much, probably negative for the utilities and bad for the clean energy stocks. That’s pretty much our argument, right?

Q. Thank you, Mr. Question Man. Your punditry always impresses.
A. Is that a compliment?