Let’s assume a likely so called political gridlock scenario in Washington DC with a Biden Presidency and Republican control of the Senate. Conventional Wall Street wisdom is that this type of political gridlock is bullish for stocks. At the same time the Federal Reserve’s Jay Powell just yesterday implied interest rates are on “hold” for the indefinite future. We believe the near term market bullishness reflects an initial, collective sigh of relief that corporate and personal income tax rates are not likely to change meaningfully. And more broadly a Republican Senate would likely continue to block all of the Democrat’s most ambitious legislative initiatives. (We assume the two possible Senate run off elections in Georgia do not change this scenario). But in addition to legislative prerogatives, the US President is the armed forces’ Commander in Chief and also appoints the senior staff of a vast administrative bureaucracy. According to some estimates, if we include federal employees plus contractors, military and the post office the total federal workforce approaches almost ten million. Interestingly this overall number hasn’t changed too much since the Reagan administration. And this is where the potential impact of a Biden administration would likely be felt by the US business community.
Persisting gridlock in Congress will not stop an incoming Biden administration from resurrecting environmental measures abandoned under President Trump or automobile efficiency standards similarly ignored. Neither is good news for oil and gas investors. And restoring the Obama administration’s clean air proposals would further hasten the decline of the domestic coal industry.
And another thing. The US economy, despite the euphoria demonstrated by the stock market, remains badly in need of another economic boost from the Federal government. And now with the prospect of a Democrat at the helm, we assume the Republicans will return to form as advocates of fiscal rectitude and governmental budgetary restraint. We expect Republicans in Congress will now appear loath to pass legislation that will enlarge the deficit. As a result near term US economic activity will likely be more restrained without economic assistance from the federal government, This also means overall lower demand for energy and, for no small number of consumers, less ability to pay energy bills. This is not a positive outlook thus far for energy investors.
A Republican Senate and Democratic House of Representatives probably also dims the legislative prospects of any environmentally Progressive initiatives under the rubric of the so called Green New Deal. Regardless of what we call it, the green new deal is simply and broadly about federal spending on energy and environmental infrastructure. There are literally hundreds of billions of dollars of projects where large amounts of federal money could be well spent. We suspect that just cleaning up the Hanford, WA high level nuclear waste repository and creating an additional site for the considerable amount of existing nuclear waste would by itself probably cost about $100 billion. That represents a lot of construction jobs and economic activity in relatively remote areas.
However, as we have pointed out previously, a “green” strategy implies energy displacement. Battery electric vehicles are eliminating fossil fuel usage while for consumers, natural gas is being replaced in the home with induction cooking and electric hot water heating. This is a process with electrification of major sectors within the economy (substitute electricity for direct combustion of fossil fuels). But as we’ve said before, this requires that US electric companies decarbonize their output first. This would ensure that consumers were not simply switching tailpipe exhaust for coal plant smokestack pollution so to speak. This movement has gained wide corporate acceptance with large corporate accounts requiring their utility provider to certify that their electricity is “green”. The US electric utility industry, in our view, can afford to decarbonize without additional government money but would prefer to be properly “incentivized”. Absent incentives, the electric utility industry will meander down its own slow path to decarbonization. Ironically this path may prove ideal for maximizing shareholder value in the context of a “captured” regulatory environment. But this may also place entire utility franchises at risk if political winds shift and the public becomes unhappy with corporate profits at the expense of public health, especially in light of an ongoing pandemic.
Looking ahead towards likely US energy initiatives, Republicans in the Senate will retain the power to shelter the energy industry from higher taxes. But a restoration of enforcement of environmental restrictions should be seen as a given. At the same time a soft economy typically provides little incentive for industries and consumers to increase demand for energy.
For a long time analysts and economists have minimized the importance of the US electric utility industry since it comprised a meager 2% of the S&P 500 stock index. Given recent dividend cuts and price declines, the US oil and gas sector also now comprises 2% of the S&P index. But the enormous difference between electric utilities and oil and gas is that the former is now positioning itself to gradually displace the latter. The electricity business could see large gains in growth as a result. For us given these trends the politics almost doesn’t matter.
By Leonard Hyman and William Tilles for Oilprice.com
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