Energy Hot Buttons for Voters

With less than 3 weeks to go before the 2024 election, energy issues, having become part of the culture war, still affect swing voters’ decisions.  While stump speeches are now designed to win over those swing voters, questions about actual policy differences remain.

The discussion about energy policy often reflects confusion about a President’s advocacy for legislation with Congress’ sole power over passing legislation.  The President does have some limited discretion in how the executive branch – through its regulatory agencies – interprets and implements laws passed by Congress, but those agencies must follow strict and lengthy procedures to change the rules under which they apply the law, or they will be challenged in the D.C. Circuit Court.  Moreover, a series of Supreme Court cases over the last two years have dramatically reduced the power of the federal agencies that report to the President. These rulings have overturned the “Chevron Doctrine”, which gave deference to regulatory agencies when the law is not clear, introduced a “Major Questions” test for interpreting Congressional intent, and eliminated the iron grip that the administrative law judges of these federal agencies had over the companies they regulate.

Let’s take these one at a time:

1. 1. DOE LNG Permitting Pause – The ill-advised pause only affects LNG projects not already permitted and not selling to countries with which the U.S. has a free-trade agreement. Therefore, we believe it will have no effect on the 10-12 Bcf/day of capacity already permitted, financed and under construction through 2028. These projects will double U.S. LNG export capacity to 22 Bcf per day representing over 20% of demand for U.S. natural gas.[i]
   2. Could Trump repeal the Inflation Reduction Act (IRA)?  The IRA was passed as a budget reconciliation bill and so did not need to clear the 60-vote filibuster-proof hurdle in the Senate. It passed by one vote cast by Kamala Harris in her role as President of the Senate. So, in that regard, changing the law would be relatively easy. However, the vast majority of the expected $1 trillion of IRA expenditures over the next ten years accrues to red districts and so there is already a lot of resistance from Republicans to making any dramatic cuts.  Even the oil industry has recently come out in favor of keeping parts of it. Which parts? The part that benefits them, of course! It’s important to point out that the IRA actually made clean energy less profitable by subsidizing clean energy supply with tax credits (as opposed to policies that would encourage demand), reducing margins for producers of solar panels, wind turbines, batteries and fuel cells. These companies trade at P/E multiples approaching 100x while earnings growth estimates are declining.[ii] Not exactly a formula for good stock price performance.
   3. Banning Fracking. Because safety and environmental oversight of oil and gas drilling is primarily the domain of the 50 states, and in fact, five states have banned fracking. But the president cannot, without an act of Congress, ban fracking. The President does have authority on federal lands which affects only about 10% of U.S. oil and gas production. While Harris had previously advocated for a fracking ban, she has reversed this position to appeal to swing voters.  Recall that when Biden was running, he promised to throw oil company executives in jail and Trump promised to repeal and replace Obamacare and help the coal industry.  Campaigning and governing are two different things.
   4. Drilling Permits and leasing on Federal lands. Biden has leased far less new onshore and offshore land than any of his predecessors but is constantly being challenged in court because Congressional legislation determines the rate at which these lands are to be leased. For existing leases, Biden had issued roughly the same number of permits as his predecessors.  The long lead times between a lease sale and subsequent permit and actual production of oil and gas can take ten years so the impact in the near term is negligible.  In addition, only 10% of U.S. oil and gas production derives from Federal lands and more importantly, any change in available drilling opportunities on federal lands would be met by reduced spending oil company spending elsewhere.
   5. Electric vehicle mandate. Again, without Congressional legislation, the President and the EPA can only work within existing legislation which does not give the President the power to issue an EV mandate. But existing legislation does give the EPA power over tailpipe emissions and the Transportation Department power over Corporate Average Fuel Economy standards (CAFÉ). Standards on each of these issued earlier this year were so high, only a large shift towards battery electric vehicles and hybrids would meet the new standards, so it was reported in the press as an “EV mandate.” The new rules have been challenged already by 25 states in the D.C. circuit court[iii] and the Biden Administration has reduced the standards somewhat.  Congressional Republicans are threatening to use the Congressional Review Act (CRA), which allows Congress to negate a new rule promulgated by a federal agency. Even if these standards survive a CRA challenge and the DC circuit court, the Supreme Court could very well consider this whole issue a “Major Question” which would bar the EPA from resolving questions of “vast economic and political significance” without clear statutory authorization.

Finally, it should go without saying that policy and regulation are not the only things that drive investment outcomes.  Industry dynamics of supply, demand, technology, costs, etc., and how the management teams address those dynamics usually matter more.  This is driven home by what happened to investment returns for both clean and conventional energy over the last two presidential administrations: When Trump was President (up until June of 2020 when polls showed Biden likely to win), conventional energy stocks (as measured by Standard and Poor’s Global Energy Index, (S5ENRS)) underperformed the S&P 500 by 93% – while clean energy (as measured by Standard and Poor’s 500 Global Clean Energy Index, (SPGTCED)) performed in line with the S&P 500 (11/1/2016 and 6/30/2020).[iv]   Conversely, during the Biden Presidency, clean energy stocks (SPGTCED) fell by over 50% while the conventional energy (S5ENRS) rose 120% and the S&P 500 rose 50% (1/2021 through 9/2024).[v]

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This information presented contains EIP’s opinion which may change at any time and without notice. The information provided above is based on data obtained from third party publicly available sources that EIP believes to be reliable, but EIP has not independently verified and cannot warrant the accuracy of such information. In providing the information, EIP has made several assumptions that if changed, materially affect the information and conclusions provided.

Standard & Poor’s Global Clean Energy Index (SPGTCED) provides liquid and tradable exposure to 30 companies from around the world that are involved in clean energy related businesses. The index is a modified market cap weighted mix of Clean Energy Production and Clean Energy Technology and Equipment Providers companies.

Standard and Poor’s 500 Energy Index (S5ENRS) is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period. The parent index is SPXL1. This is a GICS Level 1 Sector group. Intraday values are calculated by Bloomberg and not supported by S&P DJI, however the close price in HP is the official close price calculated by S&P DJI.

S&P 500 Index: A capitalization-weighted index of 500 stocks. This Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Indices are provided for informational purposes only, Investments cannot be made in an index.

[i] U.S. Energy Information Administration  – EIA expected by end of 2027.
[ii] Bloomberg using the following companies (ENPH, BE, FLNC) as a proxy as of October 14, 2024.
[iii] https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/041824-twenty-five-us-states-launch-legal-challenge-to-biden-tailpipe-emissions-rule
[iv] source: Bloomberg.
[v] source: Bloomberg as of September 30, 2024 using the PHLX Utility Sector Index.