Should The U.S. Oil Industry Fear The Midterms?

The U.S. midterm elections are only a few weeks away and a lot is at stake for the energy industry.

It isn't just the fate of the U.S. Congress that is up for grabs, although that is incredibly important. There are also 36 governor's races, state legislature races, and a raft of ballot initiatives that will have a direct impact on oil and gas. The results will have enormous implications going forward.

The Republicans currently control 33 governor's mansions, but that could soon change as most polls indicate significant wins for the Democrats are in the offing. For instance, as InsideClimate News points out, Nevada, New Hampshire and Maine all saw their legislatures pass renewable energy initiatives over the past year, only to have them vetoed by their Republican Governors. Those policies could quickly move forward if the Democrats take over in those states. The same could be true in a series of other states if power changes hands.

Then there will be questions related to the energy industry that will be directly decided by voters. Perhaps the most consequential ballot initiative affecting the oil and gas industry is in Colorado, where voters will decide on greater setback distances for oil and gas drilling. Initiative 97 will require drillers to stay a minimum of 2,500 feet away from "occupied structures," including houses and parks, up from just 500 feet currently. Because so much drilling in the state takes place in densely populated areas, the industry is decrying the initiative as one that could potentially kill off the drilling.

But a house explosion from a residential gas line in 2017 that killed two people has galvanized drilling opponents, who have called for stricter regulations.

To top it off, the governor's race in Colorado pits a Democrat who is in favor of policies to transition to 100 percent clean energy (although he notably does not support Initiative 97 requiring greater setback distances, in a sign of how much the shale industry has sway in the state) versus a Republican candidate who has promised to expand oil and gas development. Related: Underwhelming OPEC Fuels Oil Price Rally

The choices are also stark in New Mexico, which hosts part of the Permian basin and has seen oil production more than double over the past four years to 670,000 bpd as of July 2018. As InsideClimate News points out, the Democrat running is promising a "renewable energy economy" while the Republican is heavily backed by the oil and gas industry. Indeed, he actually owned an oilfield services company.

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Then there is the carbon tax in Washington State, which seems to have sparked somewhat of a panic from the oil and gas industry. Texas oil companies have reportedly mustered more than $17 million in spending to oppose the measure, according to the Houston Chronicle. Phillips 66, Andeavor and the U.S. subsidiary of BP have marshalled resources to defeat what could be the first carbon tax in the United States.

The tax would amount to $15 per metric ton of carbon placed on large emitters beginning in 2020, a levy that would increase by $2 each year and would be adjusted for inflation. It would impact fossil fuels sold or used within the state. It would also apply to electricity generated in Washington as well from sources imported from neighboring states. State officials believe the tax will raise $2.2 billion in revenue in the first five years, which will be reinvested in public transit, energy efficiency and renewable energy. Related: How Much Spare Capacity Does Saudi Arabia Really Have?

Meanwhile, the federal races are also not to be overlooked, although the impact will be a little more ambiguous. The U.S. House and Senate are on the line, and while Democratic wins would not likely translate into a major shift in policies, given that Donald Trump would still occupy the White House, it could slow the deregulatory effort underway in Washington.

If the Democrats took majorities, they could launch investigations into the agencies that oversee regulatory policy for oil and gas (namely the EPA and the Interior Department), they could block Trump's nominees to agencies, as well as his future judicial appointments. At the risk of venturing even further into speculative territory, the results of the 2018 midterms could have an enormous impact on future environmental and energy policy following the 2020 electoral cycle, especially with the 2020 Census and redistricting taking place. Democratic majorities sealed this year could even pave the way for clean energy legislation and attacks on oil and gas should the next president be a Democrat. In other words, the impact of the November elections could be profound, but hard to predict from the vantage point of today.

Thus, the oil and gas industry has its sights set on damage control at the state level, where there are a series of elections and ballot initiatives that could have a direct and immediate impact.

By Nick Cunningham of Oilprice.com

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