November 3, 2020 at 5:00 am ET
Of all industries that find themselves in politicians’ crosshairs this election year, the U.S. energy industry, specifically fossil fuels and or carbon energy, stands out as being uniquely vulnerable to a Biden victory today.
Although Democratic presidential nominee Joe Biden is leading President Donald Trump by nearly double-digits (+9 percent), according to an Oct. 30 Morning Consult poll, and had an 89 percent chance of winning the election as of Oct. 30, per FiveThirtyEight’s election model, Wall Street financial models still assume business as usual and have not adequately priced into energy securities the global theme of decarbonization that a Biden win would accelerate, even though the negative consequences are obvious.
If the electorate will be voting to give Biden the green light to institute his version of the Green New Deal, why can’t sell-side analysts model the risk to fossil fuel profitability?
Two reasons: First, it is very difficult to quantify the impact of the very real but still sketchily defined policy actions that are likely. Where and when will fracking end? How tight will methane restrictions be? Which tax breaks will be repealed? How many workers will be siphoned off to plug old, leaking wells and then into constructing the new grid? How fast will electric vehicles and fuel-economy standards kill demand? In total, how quickly will the industry lose its social license to make profit? Second, if it were possible to estimate and risk-adjust the negative impacts, an analyst would have to stamp “Sell” on almost every fossil fuel company, given Biden and the Democrats’ probability at this point. No sell-side analyst is going to do this, as it would mean the end of his or her career. As long as there has been hope for business as usual, Wall Street has understandingly clung to it. So have long-time investors in companies like Exxon that continue to pay fat dividends, even though they are borrowing money to do so.
Biden’s tone and expected Day One actions are inherently anti-carbon energy. Back in the summer, he convened a “Climate Dream Team” to flesh out his potential policy actions and to reach consensus among the different factions within the democratic party. This team notably included Alexandria Ocasio-Cortez and Varshini Prakash, the co-founder of the youth-led climate change activist group, Sunrise Movement. Confidants of the Biden camp have been tight-lipped on who may be his climate change czar, but according to a Politico article last month, some names that have been circulated include John Kerry and John Podesta, along with speculation there may be an appointment to the White House National Security Council whose sole focus is climate.
Additionally, Biden turned heads in July when he announced his increasingly aggressive $2 trillion clean energy plan, the second pillar of his flagship economic agenda, “Build Back Better.” This plan emphasizes the requirement of 100 percent clean power production in the United States by 2050, supported by significant government funding and installation of green technology. For Main Street, this means plans to enhance subsidies for buying electric vehicles and to retrofit millions of homes for energy efficiency. And in the final presidential debate, Biden re-emphasized that we must transition away from oil.
Utilizing executive orders to reverse Trump’s deregulation and cronyism in carbon energy is a priority of Biden’s Day One plan, many of which he can do without the Senate. To quote joebiden.com, the Biden administration will “take actions including requiring aggressive methane pollution limits… developing rigorous new fuel economy standards… protecting America’s natural treasures…impacted by President Trump’s attack on federal lands and waters and banning new oil and gas leasing on public lands and waters.”
Vice presidential nominee Sen. Kamala Harris is a climate hawk herself, aligning closely to the fight against climate change. She was one of the Democratic senators who co-sponsored the Green New Deal legislation, mentioning that she is in favor of going as far as abolishing the filibuster to implement climate change measures.
As attorney general of California, Harris won an indictment against a major pipeline operator for the spill of roughly 140,000 gallons of heavy crude near Santa Barbara. Then she famously extracted $86 million from Volkswagen for cheating on emissions tests for its diesel vehicles.
Democratic wins for other branches in the election would further accelerate decarbonization when combined with the Biden administration’s efforts. For example, House Democrats have already published a 547-page climate plan ready to be enacted. Industry tax “goodies” such the deduction for intangible drilling costs and the end of the percentage depletion method can be safely assumed dead through tax reconciliation if the Senate goes to the Democrats.
Although a strong lead in polls is a promising predictor of Biden’s chances of winning the 2020 election, as America learned in 2016, it does not equate to a guaranteed victory. A Trump victory may slow down the ongoing weakening and underperformance of the fossil fuel industry, but the geopolitical, technological and structural forces allied against the industry are too great to be stopped. Should America choose Biden as the 46th president, carbon energy will lose its social license to make profit, and investors will continue to flee.
James Jampel is the founder and Co-CIO of HITE Hedge Asset Management.
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