“He’s going to destroy the oil industry.” When Biden reiterated that he would gradually move away from the oil industry at last week’s presidential debate, Trump’s reaction was as strong as ever. Oil traders and observers, however, do not see Biden’s approach as problematic.
At first glance, it seems like a black and white issue. Trump, the climate change denier and champion of oil and gas, vs Biden, who wants to focus on renewable energy. One appears to be good for the industry, one bad. But the reality is complex.
We have seen this all before – reminiscing about Obama’s and Bush’s presidencies gives us a good taste of just how many grey stages there are in the oil market. Bush was blamed for tumbling prices, then increased prices became part of his legacy. Whilst his policies are commonly deemed neither positive nor negative towards oil, US crude oil production reached a 44-year high during his second term.
But let us return to the present. Trump has spent the past four years trying to boost the oil and gas industry. Deregulation, an improved relationship with Saudi Arabia following the abandonment of the Iran nuclear deal, cuts to taxes, rebates, and land royalties during Covid-19. All these policy approaches were designed to increase profits and help the US oil industry thrive despite the global push towards clean energy.
But his approach appears to have failed. So far, at least 40 US oil companies have filed for bankruptcy this year, and spending has been dramatically cut and tens of thousands of jobs have been lost. Inconsistent policies around offshore drilling, legal issues with regulatory rollbacks and Trump’s handling of the Covid-19 crisis have resulted in a rollercoaster ride for crude oil prices.
Biden’s planned policies are a stark contrast to Trump’s: increased regulation, a new Iran deal, and prioritising renewables. As Trump sees it, this puts Biden in a precarious political situation as well as causing economic difficulties. Not only does this not impact Biden’s chances in the election, but it might be beneficial to oil prices. Destruction of the oil industry in the foreseeable future is unlikely.
Tighter regulations and associated higher production costs are likely to increase crude oil prices – by up to $5 per barrel, according to the Goldman Sachs commodities research team. Potential restrictions on drilling and fracking would increase the rarity of crude oil and a new focus on renewables is likely to decrease private investment into the oil industry. All these factors would reduce supply – whereas demand is likely to keep growing in the coming years. Prices would go up and, as we have seen in the past, consumers would continue to pay.
A new Iran nuclear deal may slow down this development. The country has one of the largest oil supplies in the world and a repaired Iran-US relationship would allow for increased export from the OPEC country. “New” oil would flood the market, but the following price reduction is expected to be short-term as the market adjusts and comes to factor in Iranian oil once more.
Further, despite Trump’s policies and personal preferences, the shift to renewables is well underway in the US. Oil giant BP has welcomed the transition to renewables and, especially since the start of Covid-19, the job market has shifted. More Americans are now employed in the sustainable energy sector than in oil and gas.
And as the rest of the world slowly transitions to clean energy, the US cannot afford to be left behind. Continued reliance on oil is likely to eventually cause economic difficulties as its relevance in the global economy shrinks and climate change and environmental protection increasingly affect foreign-policy and trade. Trump’s cries of Biden losing the election due to his stance on the oil industry thereby become irrelevant.
A final, but valid, point is time. No matter what his end-goals are, Biden will not be able to reform policies overnight. Ongoing legal procedure against the deregulations pushed through by the Trump administration may help him, but a Biden administration would need to be patient.
The oil industry is an unpredictable beast – but both the Goldman Sachs commodities team and RBC Capital Markets’ global head of commodity strategy Helima Croft have recently seemed positive about Biden’s potential presidency and its impact on oil prices. Overall, policies would be in line with the national and global trend which sees a shift towards renewables – despite Trump’s opposition to them.
Biden’s plans are therefore not exactly radical. When oil companies themselves are pledging to retract from oil, corresponding policies should no longer be a shock or interpreted as dangerous.
That Trump has understood and depicted them as such therefore only shows that he has a limited understanding of what the US energy sector needs. This becomes even more obvious when considering how much the industry is struggling, even though Trump is desperately trying to keep it afloat.
Eventually, the oil industry will no longer play a significant role in the US economy, whether Biden is in office or not. A transition to renewables will soften this blow significantly – so whilst the oil industry may end under Biden, the energy industry is likely to thrive.