As the US election approaches, discussions are emerging about which sectors might benefit from each presidential candidate. The energy sector is particularly intriguing due to the contrasting approaches of the Trump and Biden administrations. Trump’s "drill baby drill" approach aims to boost US crude oil and shale production, while Biden was focused on moving to renewable energy sources – a stance that his pick for successor Kamala Harris is likely to maintain.
However, the difference between the Republican’s and Democrat’s energy policies might be smaller than expected. Despite Biden's campaign rhetoric, his administration achieved record highs in domestic oil production to combat inflation, driven largely by economic stimulus.
What has changed in the oil industry?
In the 2010s, oil companies drilled unprofitably due to easy capital access in a low-interest rate environment. This changed after 2020 when investors started demanding capital discipline and focusing on balanced drilling, strong balance sheets, and shareholder returns. This shift in industry dynamics is more influential than presidential decisions. While a Republican administration might ease drilling regulations, profitability and return on capital are the main priorities for oil companies.
One potential scenario to watch is if the government weakens the dollar, as it did through 1985’s Plaza Accord. This could boost oil prices by stimulating emerging markets, reducing their debt and increasing global oil demand. The future of shale oil production looks less promising due to resource depletion, which could make offshore oil production more important in the next decade.
If the oil market remains bullish, investors could diversify their positions to mitigate risks like excess profit taxes. US energy companies, though slightly more expensive, benefit from strong balance sheets and profitability. Global energy companies could also be good investments given the positive energy price outlook. Expanding US natural gas export facilities could narrow the price gap between domestic and international gas prices, benefiting US producers.
The role of the SPR
The politicisation of the Strategic Petroleum Reserve (SPR) also remains important. It has been used more flexibly in recent years, but its limited capacity remains a potential concern. Previous reductions helped curb rising energy prices, but with diminished reserves, future administrations may struggle to manage new supply disruptions. This could raise energy prices if the SPR is unavailable as a significant buffer or buyer.
Overall, energy markets could remain complex due to political, economic, and industry factors. However, the outlook for profitability and stability in the energy sector is cautiously optimistic, regardless of who sits in the White House.
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