2021 Isn’t 2020: Energy’s Outlook Will Change With Biden
The Georgia senate run-off- races will dictate what President-elect Biden can do with energy and climate. An advisor offers some insights and thoughts about the new administration’s future policy goals and challenges.
In contrast to 2020, a year in which the unimaginable became the norm, 2021 will usher in a “return to normalcy” via a new political administration in Washington. With it will come a different view of energy, climate and their politics. The recent U.S. presidential election (still officially undecided) is projected to bring former Vice President Joseph R. Biden, Jr. into office, and with him, a change in the direction of energy and climate change policy. As a result, it will also usher in a changed landscape for energy companies to have to navigate. Just how may the current landscape change?
The future energy landscape will be shaped by an overarching commitment by the Biden administration to aggressive actions designed to rapidly reduce the nation’s carbon emissions. While many pundits foresee a political landscape that will prevent the implementation of the most extreme climate and energy actions backed by the progressive wing of the Democrat Party, we are not so sanguine. We would point out that Mr. Biden and his administration are well-schooled in the intricacies of manipulating the levers of the federal bureaucracy, as well as the legislative machinery. This should be a warning for Washington-watchers trying to anticipate how the energy business will fare under the administration of the 46th President of the United States to not accept what seems like straight forward conclusions.
There are many things about the incoming administration that we do not know, and that will shape its policy agenda. It may not become clear until early 2021 that we can realistically assess how energy and climate policies will change and what the impact may be on our economy and society. We do know some things, and others are becoming clearer by the day. Yes, the Republicans held off the media’s predicted Democrat ‘Blue Wave’ that would have yielded not only a Biden/Harris victory at the top, but would have also seen a larger Democrat majority in the House of Representatives and shifted control of the Senate from the Republicans to the Democrats. So far, neither of the Congressional outcomes have been realized, however, Republican control of the Senate will remain in doubt until the results of the January 5, 2021, Georgia senatorial run-off elections are decided. The defeat of the two Republican incumbents would leave the Senate with a 50/50 split in party affiliations, with the tiebreaking vote resting with Democrat Vice President Kamala Harris. This would assure Democrat control of the Senate, which ensures Democrat leadership for all the Senate committees, as well as the ability to set the political agenda in step with the House and the Biden administration.
Assuming the Republicans win the two Georgia run-off elections, they will control the Senate, giving them the ability to block policy changes that require legislative approval. This assumes moderate Republicans would not support opposition policies. And here is where the experience of Mr. Biden may become a wildcard in projecting outcomes. Given the way Congress works in the modern era, there is seldom a stand-alone bill dealing with a topic. Legislation is a mish-mash of provisions and items buried beneath a bill’s primary thrust. Those items might be structured to appeal to the political calculations of middle-of-the-road Republican senators worried about their upcoming re-election chances, causing them to flip their votes. With 37 years of history in the Senate, Mr. Biden is experienced in the “horse-trading” of legislation.
Does this imply that the highly liberal Green New Deal is going to pass? No. But, brick by brick, much of its plan can be constructed, with only the most radical pieces being left out. In this scenario, we need to watch what can be done and will be done through a President Biden’s executive orders. Not only are these orders significant, albeit not enshrined by law, they often unleash the power of the bureaucracy to enact rules and regulations that can achieve a high percentage of the desired objectives of the Green New Deal. In that regard, expect wind, solar and batteries to be favored targets for investment and mandates under the Biden administration.
Will fracking be banned? Yes, potentially on federal land, as it falls within the realm of bureaucratic power. We fully expect such a move, as Mr. Biden will need to score some political wins to keep the support of the liberal wing of his party before he has to compromise away from some of their goals. Rejoining the Paris Agreement on day one, a campaign pledge of Mr. Biden, will be applauded by the left, but what else will be tied to that move – stricter emissions reduction goals; following through on the requirement to give money to the developing economies; making the Glasgow meeting outcome for global climate policy as meaningful as Copenhagen or Paris? We will be watching to see.
How about nixing the Keystone XL pipeline permit? Will that be merely be an executive order, or will it become a foreign policy event helping to boost the stature of Canada’s leader Justin Trudeau? Some of the answers to these types of questions may depend on the personnel that Mr. Biden brings into his administration, an unknown factor at the moment, although names are being floated in the media and the betting odds are forming.
In thinking about 2021 and thereafter, we thought some of the comments by former Obama administration’s Secretary of Energy Ernest Moniz in a recent fireside chat are insightful guidelines. In his view, Mr. Biden will move to seek a bipartisan agenda that will focus on ramping up our energy innovation effort, while also pushing for a significant infrastructure bill that will include a focus on energy infrastructure. He said the Biden climate change/energy agenda would include not only returning to the Paris Agreement, but increasing emphasis on energy efficiency measures for appliances and elevating the corporate average fuel efficiency (CAFE) standards for vehicles. California will certainly retain its right to institute its own automobile emission requirements, which are followed by a number of other states and the automobile industry.
Sec. Moniz listed six key aspects of the energy transition that will occur under the new administration. (He was an energy advisor to Mr. Biden during the election campaign and is being touted as a possible cabinet member.) The list includes:
Securing coalition support for the agenda (a political requirement);
Recognize regional solutions to climate change, but coupled with a social justice agenda;
Jobs/Jobs/Jobs;
Secure the supply chains for clean energy technology;
Clean energy innovation on steroids; and
All of the above.
His discussion of a couple of these points was enlightening. Sec. Moniz said that during his term as Energy Secretary, his department documented that energy was responsible for twice the job creation rate compared to the overall economy. While not stating the obvious, this was due to the fracking revolution, which also led to geopolitical changes, including our ability to reshape Middle East politics. Moreover, the fracking revolution was the energy miracle that helped lift the economy out of the Great Recession. Without its success (forget its profitless nature), the U.S. economy’s recovery would have been even slower than it was.
Secure clean technology supply lines will be critical because the U.S. does not have the necessary minerals and metals for this revolution to be on solid footing. This is a point that Benchmark Minerals, a rare-minerals consulting firm, has made. They envision the clean energy future having a totally different supply chain from today’s, if governments are going to feel safe in pushing this technology. That means China will see its power in this sector diminished, but will that actually happen as they control supply and essentially set prices? Sec. Moniz also pointed out that we do not have the clean energy technology to reach net-zero carbon emissions. He figures it will take 2-3 times the current level of R&D investment to achieve such a goal, but he doesn’t know how long that may take.
Sec. Moniz’s sixth point, he said, would upset people. He believes we cannot ignore any solution in any region, which is why everything needs to be on the table. Presumably that includes fossil fuels, but likely tied to carbon capture technology and potentially a carbon tax. He also hailed the advances in nuclear technology, including fission and fusion, that should play a greater role in our clean energy future. In that regard, there are some interesting developments coming out of an effort at Massachusetts Institute of Technology, (MIT) and with its spin-off subsidiary, Commonwealth Fusion Systems, suggesting that technological breakthroughs have occurred that are bringing forward the timetable for fusion energy. His final point about nuclear (Sec. Moniz’s area of research expertise and personal passion) is that “there has never been as much R&D going into nuclear technology as now,” and that all of it is coming from the private sector. Nuclear is often acknowledged as being a critical energy technology if the world truly wishes to be carbon-free, but the fear of nuclear needs to be overcome for it progress.
A final point about the energy transition that will come with the new administration made by Sec. Moniz, was his comment that the court system today is very different from what existed during the Obama administration. As hard as it is to believe, given the long list of court battles over Trump administration policies that it lost, Sec. Moniz believes the courts may become a greater barrier to the implementation of climate and energy policies than political opposition. In hindsight, President Donald Trump’s legacy may be the judges he appointed to the federal courts who are expected to adhere to the words in the laws, rather than seeking ways to bend the laws to facilitate judges’ socially-desirable objectives. In our view, this observation may have been the most significant point Sec. Moniz made, and which may bear heavily on achievements of the Biden administration.
The courts may become critical when industry is forced to fight adverse rules and regulations. If the U.S. Senate remains under Republican control, the avenue for major changes to energy and environmental policies will be limited. Any progress will be tied to how good the Democrats are in drafting legislation and horse-trading the issues included.
Rules and regulations can be implemented easier than many believe. People worried about the staffing of agencies and departments may be overlooking the fact that lower level bureaucrats can temporarily run them, and since the vast majority of those staffs are sympathetic to the liberal agenda (bureaucratic power), this will not be a major hurdle. While some of the changes will require public comment periods, one should remember that the bureaucrats during the Obama administration often ignored or circumvented the Administrative Procedure Act (APA) requirement for implementing rule changes objected to by industry. This happened with offshore regulations, which offshore oil service company executives failed to challenge. It also didn’t matter what the courts ruled, either, as we saw with the Gulf of Mexico moratorium following the Macondo well accident. Despite a court victory against the Obama administration’s offshore moratorium, it immediately reinstituted another moratorium. That last one was eliminated with the capping of the runaway well, ending the oil spill.
This political landscape is what energy companies will have to navigate over the next four years. Will they manage it? Likely, yes. Will it impact activity? Yes. These regulatory battles will come at the same time the industry is attempting to chart a strategy in a world where fossil fuels are a target for elimination, regardless of the physics or reality of energy needs and the state of clean energy technology. As Sec. Moniz’s comments highlight, as a nation, and likely a world, we do not have the clean technology to make the rapid shift in our energy consumption desired by environmentalists. Besides lacking the technology, much of it is uneconomic. Wishing and hoping the technology will scale up while the costs will fall significantly is the plan. But, as one of our old bosses taught us, “wishing and hoping” isn’t a strategy for success.