By: John Auers
You can probably forgive many in the hydrocarbon industry for going to bed last Tuesday with the lyrics from FDR’s old campaign theme song stuck in their heads. As it became clear that not only would Donald Trump be the next President, but that Republicans would control both houses of Congress, dreams of less onerous regulation, fewer obstacles to project permitting, a move away from subsidies and mandates for alternatives and a generally friendlier attitude toward the industry danced in the heads of energy executives. But will these dreams come true? The Donald certainly has spoken favorably of hydrocarbons and not so favorably of “green energy,” climate change mitigation policies, and excessive regulation in general; however, as in many of his stated plans, the specifics are lacking and often times even the rhetoric is inconsistent. In today’s blog, I will attempt to provide a broad outline of some key issues at stake for oil companies and my thoughts on how the incoming Trump administration might act upon them. We certainly hope the oil campaign ditty is more accurate this time than it was back in 1929.
Blue Skies or Gray Skies?
There has always been a distinct disconnect between campaign promises and actual policy implementation. Certainly one of the more memorable 180 degree shifts was Bush 41’s “Read My Lips, No New Taxes” – a reversal which still stings when April 15th comes around every year. As that example shows, ever-shifting political and market environments tend to cause even very strong and often repeated pledges to go by the wayside when a candidate becomes the actual chief of state. Another more recent example directly impacting the oil industry was the removal of crude oil export restrictions, signed into law December 2015. While candidate/President Obama didn’t spend much if any time outlining a position on that issue, there were very few, if any analysts who would have predicted that the “export ban” would come to an end during his administration. It is also important to note that while government policy and regulations do have important impacts, actual economic and market developments and trends can be far more important. Witness the boom in domestic crude production and record profits by refiners during much of the Obama years, despite its decidedly anti-oil and pro-regulation tilt. Setting aside these disclaimers, and acknowledging that our crystal ball remains cloudy, we will attempt to prophesy what the Trump administration might do regarding several high profile initiatives, which are likely to come across his desk in the next four years.
General Regulatory Policy
This is one area where The Donald has been almost as outspoken on as “building a wall” and “bombing the hell out of ISIS.” He has pledged to “cut unnecessary regulations” and defund the EPA if needed. A clear signal that he means what he says was the appointment of Myron Ebell to head his transition team for the EPA. Mr. Ebell, who hails from the Competitive Enterprise Institute, is a known advocate of free markets and limited regulation. Whether he can be effective in overcoming the significant inertia that an organization as bureaucratic and entrenched as the EPA is, in streamlining regulations, is yet to be seen. But the directions from the top certainly seem clear and drastically different from the policies that the Obama Administration directed his EPA to follow over the past eight years.
Climate Change Policy
Much of the regulatory policy pushed by the Obama Administration’s EPA was directly related to an effort to “decarbonize” U.S. energy supply, driven by the fears of global climate change. This has led to costly regulations and difficulties in getting projects permitted, negatively impacted all segments of the oil industry (upstream, midstream and downstream). Mr. Trump has spoken loudly against these positions during his campaign, vowing to “cancel the Paris Climate Agreement and stop all payment of U.S. dollars to U.N. global warming programs.” He has also said there is no reason to institute “job-killing cap-and-trade,” impose a carbon tax, or to keep supporting alternatives such as wind and solar with government subsidies. The aforementioned Mr. Ebell is also well known as a “climate skeptic,” a clear signal that a “new sheriff” is about to hit town; however, the Democrats in Congress have made it known that fighting a rollback in climate change policy, including support for alternatives, will be a top priority. While they surely will have some successes in slowing down the Trump Administration, their minority status in both Houses of Congress make it very likely that the next four years will see a standstill in new anti-carbon policies.
Domestic Oil Production
The Donald has made it clear that he loves oil and fracking and wants to open more federal lands to petroleum exploration and production. He has famously said, “The oil is there for the taking; we just have to take it.” While he has outlined few specifics, he has surrounded himself with prominent industry supporters from the private and public sides. These include Continental’s legendary CEO Harold Hamm and North Dakota representative Kevin Cramer, both of whom have been important energy advisors during the campaign and have even been mentioned as potential Department of Energy Secretaries. Optimism about a more favorable environment for domestic drillers and producers has even sparked talk about oil prospects that have been dormant for years, such as the opening of the Arctic National Wildlife Refuge (ANWR). With all the other issues that will be competing for time on President Trump’s agenda (jobs, tax reform, immigration, national security/terrorism, crime, etc.), it is certainly too early to tell not only whether he attempts to put his pro-drilling rhetoric in action, but also what priority both the Executive Branch and Congress place on moving it forward. In any case, another thing to keep in mind is that however important government policy is, market forces will really be the ultimate determinant of the prospects for domestic production growth. As a result, what happens at the upcoming OPEC meeting at the end of the month is likely to be far more impactful than anything that happens in Washington D.C. during the early stages of Mr. Trump’s presidency.
CAFE Standards
The Corporate Average Fuel Economy (CAFE) auto efficiency program could potentially be a key factor driving gasoline demand down over the next several years. It is currently in a mid-term evaluation process. A draft Technical Assessment Report (TAR) was issued in July jointly by the EPA, California Air Resources Board (CARB) and the National Highway Traffic Safety Administration (NHTSA) as the first step in the process. The draft will be a key input into NHTSA’s final rulemaking, likely in 2018 (depending on EPA final determination). This rulemaking will ultimately set the CAFE standards for 2022 through 2025.
We’re not aware that The Donald has said anything about the CAFE program or even that he knows any more about it than the nuclear triad. In the end, whoever Mr. Trump appoints to the EPA and NHTSA will be key in where the program proceeds post-2022. In that context, given The Donald’s general disdain for regulation it appears very possible that those rules will be relaxed post-2022. The auto industry, through the Alliance of Automotive Manufacturers (AAM) has already “smelled the blood in the water,” and just last week sent a letter to the Trump transition team requesting that the standards be rolled back.
Other Issues
Mr. Trump has been a strong proponent of the Keystone Pipeline and oil transportation infrastructure in general, as have most of the Republicans in Congress. This makes it very likely that approval could come very early in his administration. Unfortunately for TransCanada, market forces have shifted over the last couple of years and as a result we don’t see the likelihood of an imminent buildout of the project. The Dakota Access Pipeline on the other hand, which has been held up by both protests and a delay in a final approval by the Obama Administration, will likely get an immediate boost from a Trump approval (if not even before his inauguration), and could be completed by Spring.
Mr. Trump doesn’t say much about refining specifically, but loves U.S. manufacturing, and we would expect that he would be generally supportive of what is probably the most competitive manufacturing industry in the U.S. One problematic position of his is a trade policy which seems protectionist; not good news for an industry which has recently grown to be the largest exporter of refined products in the world.
We, here at Turner, Mason & Company, will continue to follow the Trump transition to get clues about where energy policy (particularly as it impacts the oil industry) might be headed over the next four years. Certainly, changes in policy focus and resulting regulations will have important impacts on all segments of the industry. Over the next few weeks, we will “drill down” (pardon the pun) into some of the specific issues most impactful to refiners in our weekly blog.
Our policy analysis, combined with similar examination of developments in market conditions, the overall global economic environment, and other relevant events will inform our forecasts on what the future holds for producers, midstream players and refiners. These forecasts of supply and demand for both crude oil and products, as well as resulting market prices, will be included in the next edition of our biannual CRUDE AND REFINED PRODUCTS OUTLOOK, scheduled to be released in early February 2017. We also use this analysis in our other studies and in ongoing work supporting industry participants. For more information about this publication or studies and other consulting services TM&C can provide, please visit our website or give us a call.